Knowledge of financial instruments and indicators is undoubtedly of great importance, but a trader will not succeed without the awareness and control of his own emotions that have a strong influence on the trading process. Investors who guide by emotions drive the markets. Most likely, you have repeatedly heard phrases that the price of oil or gold is decreasing against background of fears of investors. Ultimately, it is important to learn to understand what is behind the movements in the market, and thus, to learn to control their own emotions.
Greed – is a feeling that affects the behavior of a trader, and his actions. The rise of prices attracts close attention to the trend. More and more people are trying to determine the trend. While their attention is focused on market movements, they completely forget about the balance of funds on the trading account. They start thinking about their potential profit as a real income, as something they already have.
There is also another factor, which is often called « the "theory of a big fool" ». Its meaning is that someone buys at a high price from a seller who believes (and not without reason) that the trend will lose its force soon. The trader hopes that there will be someone who will buy after him, even at a higher price, as soon as he decides to become a seller.
Fear – is an emotion that, as a rule, prevails in the market. Every day traders, investors, embrace panic as soon as prices begin to fall. Fear is one of the basic human emotions, and this explains why rising prices are slower than falling. Traders who occupy long positions want to sell faster, and those who are in the short position, motivated by prices falling, add orders. When short positions are covered, the price begins to grow gradually, giving false hope to traders.
Practice is necessary to learn to control emotions. When you learn to understand and see the movements in the market, relying on logical deductions, you will be able to profit in conditions of an unstable situation in the market.
Pay attention to how emotions drive the market
Level of support and resistance characterize the market best of all. In the case when the level of resistance is directed downward, it means that the position of those who raise the price is stronger than those who are interested in the lower price. If the resistance level goes up, we can determine that the bears defeat the bulls. Similarly, if the level of support does not change, we can expect that any price depreciation will trigger. « a "take-profit" reaction».
Another indicator is the index of technical growth (momentum). Pessimism is reflected in the chart in the form of successive periods of decrease in the growth rate of the market. Both types of indicators (trend indicators and oscillators) can show how the trend will change its direction.
Another factor that gives an idea of the movements in the market is the volume of exchange trades. If the volume of exchange trades suddenly falls, this is a clear signal that the trend may change or, at least, you need to be prepared for turbulence in the market.
Keep your emotions under control
To become a successful trader, you must learn to be disciplined and control your emotions. This is easy to do if you can listen to yourself and learn to determine your emotions in specific situations.
When emotions are changeable, and they influence decision-making, we advise you to analyze your strategy and, more importantly, your line of conduct. Often, emotions have a stronger impact on your actions during trading than a pre-prepared plan.
Exemplary situations will help you determine whether emotions drive you during trading. Carefully read, maybe you will find yourself in these examples.
- Fear – is a situation when you left the position to make sure that you were right about the direction of the trend;
- Greed – is a situation when you stayed in position for too long, not paying attention to signs of a decline in the trend;
- Fear – is a situation when you left the position with losses, only to return later, when the trend will constantly grow;
- Greed –is a situation when you are in a position and bear big losses, hoping that the trend will change its direction in your favor (which is unlikely);
- Fear – is a situation when you go into the trend too late, just because you were not sure about its direction and were afraid of incurring losses;
- Greed – is a situation where you enter the trend too early, even without knowing the direction of the market.
If you find yourself in one of the above situations, you need to review carefully your strategy. It is recommended before assuming any position, to pre-establish goals and objectives and follow-up and follow them. As soon as fear, panic or excitement takes you above, you lose the ability to think critically, as a result of which you are losing.