The most ignored and yet the most powerful X-factor in the stock market is ‘Emotion’. Initially, this comes as a surprise to most investors and traders. Isn’t the stock market all about balance sheets and number crunching? Where is the space for something as unpredictable and human as ‘emotions’ to enter the picture and become an important factor for controlling the stock price?
This is where the catch lies. Any investor or trader who ignores emotions and does not attempt to control them will soon lose out to the human tendency to ‘feel’. To watch CNBC and think you understand stocks is one thing, but to actually put your money into the market is a completely different ballgame. The raw emotions that play roller-coaster inside your mind and heart can lead you to make unprofitable decisions, and eventually run into losses.
Which are the human emotions that affect you most when you trade the stock markets? Let’s look at the most important ones:
You make a trade, and the market moves in the opposite direction. You stare at your computer screen in disgust, and scream at the monitor, even cursing it loudly. This is Anger. You feel that the market is conspiring against you and watching others book profits drives you to insanity. Once you are angry, you might try to ‘get back’ at the market in a series of emotionally charged decisions and end up losing even more money. Anger is a great confidence destroyer as it encourages you to fight a losing battle. This single emotion can make or break your trading or investing career.
When anger results in a series of losing trades and erosion of confidence, it can lead to frustration and disparity. This is the common human response when you see no light at the end of the tunnel. This stage can often lead the trader or investor to hang up their boots, or in a worse case scenario, they might make another series of failed trades because their thinking is clouded and pessimistic.
Sometimes, investors can succumb to fear or greed. This dual set of emotions makes up for the pitfalls that you see at the end of any bullish or bearish rally. The average trader and investor rushes in due to fear or greed when the market has the least opportunity because it is already peaking or bottoming, and ends up falling prey to the financial ‘big dogs’ who then move the market in the opposite direction, wiping out big portions of the average investor’s or trader’s capital
Another important emotion is pain. It is well known that the tendency to avoid pain is one of the primary reason for all human decisions. Pain is felt when the market moves in an unfavorable direction and burns your capital into ashes. The tendency to avoid pain could lead to missing out on some excellent opportunities as the trader or investor waits for a ‘better timing’ when the market has already moved quickly and the opportunity to enter or exit at the right time is gone.
These emotions are the enemy of a trader or investor. However, they could also be his best friends if he learns how to control them an use them in his favor.