In 2012, the University of Bologna in Italy conducted a study on how emotions affect stock trading.[1]
The study showed that there was a definite correlation between anger, anxiety and how even experienced traders behave. Traders tend to invest more and more rapidly when they get angry, and less and more slowly when they become afraid.
Anger Management
It’s an almost classic trading pattern. You lose on a trade, then on another, then on another. Now you’re angry: What’s with the market today! So you jump in again fast, and now you hold the trade too long, and it goes sour. Now you’re really mad, and you keep on making hasty decisions.
This is where your trading journal should be of great help. A good trader keeps a thorough journal, and as the anger builds up inside you, you call up your journaling software and review similar trades to the one you’re about to make, spurred by anger. You see that the trading setup doesn’t really follow the logic of your strategy. And you don’t lose money on the bad trade – instead you wait to make a good one.
We all get angry. No matter how patient or calm we are, there are times when we just lose it. For a trader, these are the dangerous times, and that is where the trading journal can make a vast difference for you.
Anxiety Control
The effect of anxiety, on the other hand, on your trading can be just as destructive as anger.
You’ve had a short winning streak. But it’s not quite clear what’s driving it. Your trades are working, but it’s difficult to choose an exit point, because your analysis isn’t close enough to the market.
You want to keep making winning trades, but, with each new trade, it becomes harder and harder to pull the trigger to start or to press the stop button. The lack of logic is making you nervous, anxious, and, filled with anxiety, you can’t keep making decisions. Finally you pull the plug on a trade that you see would have gone a lot farther if you had had the strength to wait.
This is how anxiety builds, and wrecks your trading. The one sure way to fall into this trap is to trade more money than you can afford. Trading requires detachment, and you can’t stay detached if there’s too much risk riding on each trade. But, at times, every trader suffers from anxiety, as stock trading involves risk, and the market does not behave according to any man’s plan.
Again, the trading journal is the solution. As your anxiety builds, you call up your high quality journaling software and you look back at both the good decisions you made, and the bad ones in which you let anxiety stop you too soon. You compare these trades with the market, and you determine a new strategy that fits the current conditions better. Once again, the trading journal is your friend, because it enables you to escape from emotion, and find the trend.
The Greed Trap
Greed is the other destructive emotion that can ruin a trader. Greed is a kind of lust for money – you want more, more, more…
So you keep winning trades alive even after they have reached a logical exit point, because you want to squeeze every last penny out of them. It’s a recipe for disaster; sooner or later, the trade goes wrong, and you lose all the potential gains you could have received from it.
The trading journal is a sure-fire antidote to greed. When you feel that lust for lucre coming on, you call up your high-quality trading software, and remind yourself of all the times you’ve made the same mistake. And you end the trade in time.
Count on your trading journal to keep you safe from the effects of anger, anxiety and greed. You’ll be a much better trader as a result.
[1] https://www.researchgate.net/publication/271194697_The_effect_of_anger_and_anxiety_traits_on_investment_decisions