Traders enter the market with the intent to maximize gains and minimize losses. But most of them are not purely rational robots and emotions often cloud their decision-making process preventing them from acting in a rational manner.
Knowing you can never be 100% rational, you should try to understand the range of emotions you may experience and how it may affect your interactions with the market. Here are the stages of a psychological cycle of trading:
Optimism – It all starts with a positive outlook that encourages us to make a buying decision.
Excitement – Things start to move in our favor and we get excited seeing that our ideas work and start considering what we can accomplish in the market.
Thrill – We are thrilled from success and start considering ourselves as smart creations.
Euphoria – We reach to the point of maximum financial risk. Having seen that each of our decisions has resulted in quick and easy profits, we start ignoring the risk and expect that every trade will be profitable.
Anxiety –The market moves against us for the first time. We got anxious but having never experienced unrealized losses we tell ourselves that we are long-term investors and that eventually all our ideas will work for us.
Denial – The markets have not rebounded and not knowing how to respond we start denying that we made poor choices or assume that things will improve shortly.
Fear – Reality makes us realize that we are not as smart as we thought and get confused and frightened.
Desperation – Not knowing what to do, we catch any idea that we think will allow us to win back to breakeven.
Panic – We have no idea, no clues, no hope, no control and get into panic.
Capitulation – Being sure that our portfolio will never increase again, we sell all we have to avoid any future losses.
Despondency – After exiting the markets we do not want to enter again and start avoiding it just at the point of the greatest financial opportunity.
Depression – Some traders go to drink and/or cry saying how they could be so foolish. Some just pray and others start to look back and understand what went wrong.
Hope – We realize that markets move in cycles, and we start looking for our next opportunity.
Relief – Markets turn positive again and we regain our faith in our trading abilities as we see our prior investment come back around.
Knowing you can never be 100% rational, you should try to understand the range of emotions you may experience and how it may affect your interactions with the market. Here are the stages of a psychological cycle of trading:
Optimism – It all starts with a positive outlook that encourages us to make a buying decision.
Excitement – Things start to move in our favor and we get excited seeing that our ideas work and start considering what we can accomplish in the market.
Thrill – We are thrilled from success and start considering ourselves as smart creations.
Euphoria – We reach to the point of maximum financial risk. Having seen that each of our decisions has resulted in quick and easy profits, we start ignoring the risk and expect that every trade will be profitable.
Anxiety –The market moves against us for the first time. We got anxious but having never experienced unrealized losses we tell ourselves that we are long-term investors and that eventually all our ideas will work for us.
Denial – The markets have not rebounded and not knowing how to respond we start denying that we made poor choices or assume that things will improve shortly.
Fear – Reality makes us realize that we are not as smart as we thought and get confused and frightened.
Desperation – Not knowing what to do, we catch any idea that we think will allow us to win back to breakeven.
Panic – We have no idea, no clues, no hope, no control and get into panic.
Capitulation – Being sure that our portfolio will never increase again, we sell all we have to avoid any future losses.
Despondency – After exiting the markets we do not want to enter again and start avoiding it just at the point of the greatest financial opportunity.
Depression – Some traders go to drink and/or cry saying how they could be so foolish. Some just pray and others start to look back and understand what went wrong.
Hope – We realize that markets move in cycles, and we start looking for our next opportunity.
Relief – Markets turn positive again and we regain our faith in our trading abilities as we see our prior investment come back around.
