The share market is highly volatile. Stock prices change every second, and the market can quickly turn unexpectedly. This volatility is responsible for the equity market’s return potential. It is natural to feel happy when your trade is successful and sad when you face a loss. 

Share market emotions are a rollercoaster because you deal with both wins and losses. With every trade, you hope to make a profit. Despite your meticulous calculations and impeccable timing, losses are unavoidable. But how do you stay level-headed when you go through such emotions? To understand trading psychology, let’s explore the intricate relationship between emotions and the share market. 

Emotions in the Share Market

Trading psychology explains the different emotions a share market investor goes through while making crucial investment decisions. It is impossible to avoid emotions during trading. However, learning the various types of emotions and how they can impact your trading decisions will help you be more aware of how you feel so that you prioritise rational choices. 

  • Optimism – Investors tend to be more optimistic after reading success stories before entering the share market. They believe they will not lose because they have gathered the required knowledge. Optimism is a crucial emotion that encourages investors to invest in the share market. 
  • Excitement – As you start trading and enjoy a few profitable trades, you will get excited. You might think your life will change dramatically after a big win in the share market. This excitement will enable you to stay invested in the equity market. 
  • Thrill – When you continue to make good trades during profitable market conditions, you will feel thrilled about the possibilities. It makes you feel proud of yourself and more confident in your decisions. 
  • Euphoria – A streak of profitable trades will heighten your optimism, and you might even think you have become a professional trader. The quick and easy profits will make you feel like a financial wizard. At this stage, some investors may develop overconfidence and believe every trade they make will be profitable. 
  • Anxiety – Traders must also deal with losses in the share market. Your first significant loss will make you anxious and agitated. You cannot believe that you can incur such a loss. This anxiety can motivate you to stay invested in the market for the long term, waiting for the market to pick up in the future. 
  • Denial – During market downturns, you might face heavy losses regardless of what you do. If the market doesn’t rebound within your expected time, you may feel in denial as you could not have made poor choices that eventually led to a loss. You might hope the market turns around to convert your investments into profits. 
  • Fear – When market downturns continue, you might fear the condition will not become favourable. You will fear that you will not make profits if the market continues to fall. Sometimes, this emotion may even push you to quit the market altogether. 
  • Desperation – As the market continues to fall, you may become desperate to protect your investments. You might look for anyone who can make your trades profitable again. You don’t want to lose any more money in the market. 
  • Panic – After trying every strategy you know of, you face losses. Then, you question yourself and panic that the share market will ruin your financial health. You doubt yourself and curse the market for causing these losses. 
  • Hopeful – When the market picks up again, you return to your trading game, hoping to start making profits again. This emotion will motivate you to stay invested, but the cycle you experienced earlier will teach you to be careful with your trading decisions. 
  • Relief – Once you start making profits again, you will feel relieved that market volatility will benefit you when you are careful enough. This will restore your faith and interest in the share market.  

Interplay between Emotions and Trading 

Expert traders first master trading psychology because it is as important as stock analysis. Keeping your emotions away while making crucial trading decisions is vital because you only want to make rational trading decisions. However, it is not always possible to separate yourself from your emotions. In fact, for many traders, emotions drive their trading decisions. 

For example, if you feel euphoric after a few winning trades, you are more likely to take a higher risk because you believe your winning streak will never end. When you have experienced a significant loss and feel panicked, you may want to sell all your stocks and exit the market when possible. However, with patience and informed trading decisions, staying invested in the share market will yield better returns in the long term. 

Being aware of your emotions is essential to understand how you make your trading decisions. It will also steer you towards the importance of detailed research and stock analysis because data-driven decisions are better.

Strategies To Avoid Emotions

The key is to invest non-emotionally; that’s when better results fall into place. Here are some of the strategies that can assist you:

  • Create an Investment Plan:
    1. Define Goals: Establish long-term financial objectives that are measurable.
    2. Make a few Rules: Establish and keep a close program.
  • Make Use of Mechanical Tools
    1. Robo-Advisors: Automate portfolio management.
    2. Auto Contributions: Do it habitually.
  • Think in the long-term
    1. Check Monitoring: Discourage the number of portfolio checks.
    2. Stay in the loop, but not by reacting to them.
  • Make Your Portfolio More Valuable
    1. Spread Risk: Investment is diversified among a portfolio of assets.
    2. Strike the right balance between managing risk and rewards in each investment.
  • Selling Criteria Definition:
    1. Rules-based: Specifies under what predetermined conditions selling should be done.
    2. Avoid Panic Selling: Stick to your criteria during downturns.
  • Make aware
    1. Recognise Triggers: Identify the cause of emotional reactions.
    2. Techniques: Stay composed with mindfulness.
  • Be Guided by Professionals
    1. Financial Advisers: Receive unbiased advice.
    2. Peer Support: Reach out and engage with investment communities.
  • Write everything down
    1. Track Decisions: Write down your investment decisions and feelings.

Conclusion

 

Emotional trading is pretty common, but once you know your risk tolerance, you can stop yourself from chasing futile gains or overselling in panic. Make rational decisions by educating yourself to recognise the bullish market from the bear market. Remember: On both trends, you can make profits, while under differing market conditions, different strategies need to be applied. Indeed, experience and education familiarise you with the market and how to leave emotions out of investing in stocks.

FAQs

Can I completely eliminate emotions while trading?

You cannot completely eliminate emotions while trading unless you are a robot. It is an inherent part of being human. However, recognising your feelings will help you avoid rash decisions

Do the emotions of traders and investors influence the market?

Yes, emotions and the share market are closely related. Emotions often rule the share market rallies. The collective emotions of traders and investors are called market sentiment. Emotions like fear and greed often accelerate bearish and bullish markets. It can also drive share prices of companies with no immediate profit potential.

How can I learn trading psychology and train my brain for trading?

Recognising your emotions and actively mitigating their effects is a crucial aspect of trading psychology. You can establish a disciplined trading routine and an objective trading strategy based on facts to ensure your emotions don’t drive your decisions.