Introduction:
You will often hear that investors are subjects to emotions and that it is emotions that are often the basis of their failure. Let's talk a little more about these emotions.
We will look at some of the most common emotions we experience while trading on the stock markets and Forex, by looking at which emotions are healthy and good, and which are the ones that will fail us and "kill" us as investors.
Full confidence:
We start, of course, with the state of full confidence when we open a position.
This is an emotion that is generally healthy. In order to successfully identify positions, a necessary condition to trade in the stock markets is to have confidence. Confidence based on our trading experience, historical results, the feeling that we have found the "Trade of the Year".
As not one or two experts are advising that we need confidence in order to trade on the market. This feeling, however, should not be illusionary. We should not be constantly confident that things can’t happen in a different way. Our confidence shouldn’t get us to overtrade as this is another major mistake and distorted interpretation of this emotion.
Usually overtrading is precisely a consequence of "false" confidence. How can you be confident, for example, that an asset will move in the opposite direction to that of yesterday, when just two days ago you were willing to "swear" in the opposite?
Once you enter one position, there are two options - your position to go in the direction you have chosen, or to go against you. The first option may lead to a sense of confidence, and the second may start to cast doubt on how well your choice has been.
Overconfidence can lead you to an error - to become too self-conscious, and your underlying ego to create a feeling that you can’t be wrong, which makes you "blind" to changes in the environment and the conditions of the market. As an example I can give the famous investor Bill Akman and his position at Valeant. We all know how things finished there...
Feel doubts:
When moving in the opposite direction of your direction, you are most likely to start doubting.
These doubts may cause you to close your position prematurely (before reaching your initial stop) if you succumb to fear. The other mistake when starting to have doubts is to trust your ego and add to your losing position. For such an action, investors are often driven by their ego, a blurred judgment and a desire to overcome the doubts and prove their own thesis that they have not mistaken themselves.
Both actions, however, are not particularly advisable. The first because you can prematurely close a position that still has a chance to go the way you want, and the second because one of the safest ways for investors to lose money is "averaging losing positions" driven by their investment ego.
Euphoria or panic...
We continue on. Your position is now a fairly decent profit or a corresponding loss.
Here the errors in the first option can occur in two directions. The first is - you close your position even though your target is not reached and you are confident that it will continue in your direction. Here, the negative emotions that investors can experience are significant. Researches show that the pain that investors experience from "unrealized gain" due to fear is greater than what they experience when their position is closed by reaching a stop loss.
The second mistake investors can make is to remove their "take profits," or the order that will take their winnings off the table. With euphoria, investors are beginning to lose touch with reality and see things that are mildly impossible.
This error often results in a "deletion" of the "paper" profits and, accordingly, the total resistance of investors to close their position, even if it has already come to a loss. Here the emotion of not closing the profit positions is also becoming painful and hindering investors.
When our position is a serious loss, we can make two mistakes again. One, of course, is to remove the stop that is limiting the loss. This is one of the worst things you can do when you trade, it is better to not do it. So in practice, you are unlocking your capital to "infinite and insurmountable loss."
The other mistake we can make is to panic and play "All in" - ie. all or nothing. Here, the investors, once again led by their ego, despair and the presumption that they can’t be mistaken are putting everything in the losing position. We go to the "gambling" column where nothing is up to your skills. Even if you guess once, two or three times, with this trading style, you'll only need to mistake one and then you will have everything lost.
Conclusion:
In conclusion, we can say that panic or extreme euphoria are not good advisors. Investors are well advised to have a pre-defined trading plan that includes clear entry-level rules and levels at which they will limit their losses and materialize profits to follow without change.
Therefore, almost all market experts recommend that investors always have stop-loss and take-profits. Not that you can’t without them, but when they are "black on white", you will not be subject to emotional decisions that will bring you serious and insurmountable losses.
