In This Chapter
- Mindset of an investor
- Most prominent emotions in trading
Mindset of an Investor
Any investor’s first and foremost objective is to make money from the investment. Rather the investment is made with the mindset of earning additional besides the regular income. Whether a business-class investor or a middle-class investor, all share the same mindset of gaining more and more profit on investment.
Since the money is involved, the investor is in a constant mode of skepticism. He is investing his hard-earned money, so he wants assurance that his money is safe and will yield good returns. Whether a first-time investor or an experienced one, it is difficult to understand the market and become an expert because the market is dynamic and volatile. Sometimes, such a situation arises in markets that are the first time in the market’s history and not under the control of even an expert.
Hence, an investor needs a lot of patience, time, and thorough knowledge about the investment options available in the market before expecting win-win results on them in the market. Naturally, every investor desires profit, and no one wants to face a loss. But the investor also needs to accept that win or loss is the different sides of the same coin and go hand-in-hand while trading in the market. They must accept the trading result, learn from it, and make a strategy for the next move.
Most Prominent Emotions in Trading
Despite having a lot of patience and understanding, an investor is human, and certain emotions affect his wise decision-making.
- Fear – In the world of trading, fear is inevitable. No matter how experienced a trader or an investor is, any unfavourable price move triggers fear in them. Overcoming fear is difficult; it affects decision-making ability and results in the loss of good opportunities. Fear instils doubt or lack of trust in the investor or trader that whatever trade he has executed or has planned to execute will bear him a good return. Due to this, the investor starts questioning his own experience and market knowledge. The investor starts to have a risk-averse attitude and loses to good investment opportunities that otherwise would have to bear him good profit if he had overtaken his fear of loss. Sometimes, the continuous loss that occurred in the last five to six trades also boils down the confidence of a trader to zero, due to which he is hesitant to take the next trade move.
- Greed – Being a trader, having some greed traits is fine. It is necessary while trading, but a trader must know when to stop. Greed is such an emotion that triggers the trader to take more and more risks and make a profit even when his risk-taking capability is low, and his trading system generates a warning regarding stop-loss. Sometimes, a string of winning trades makes the trader overconfident, and this overconfidence significantly affects their reasoning power. A greedy trader continues to hold on to his position for a long time and wants to take full profit on the trade, ignoring that his system suggests he exit the move as soon as possible. Where fear is an emotion that pulls back the trader to take no risk, greed pushes the trader forward to take more risk.
- Fear of missing out (FOMO) – FOMO is a type of fear that encompasses the whole market, especially when the market is in a strong bull or bear phase. Here, a trader or an investor does not perform an action out of his own wit. Rather, he performs (executes the trade) so that he may not be left out of the rally. For example, if the stock prices of a particular company are reviving day by day and everybody starts buying shares of that company, but according to your knowledge, it won’t last, and even the stock is not worth investing in. Still, looking around in the market where everyone is investing in that stock, you also finally buy that stock because you fear missing out.
- Hope – Hope is an emotion that boosts our confidence. Due to hope, a trader believes in himself and executes the trade. But here, a point that needs to be noted is that just by hope, things won’t work out. Just by hoping a successful trade cannot be executed. It needs a sound understanding of the market platform and trading strategy for the same. Many times a trader, out of hope, keeps on long to hold a position believing that the prices will turn out in his favour. But the prices don’t move on hope. This is something a big mistake that a trader commits while trading.
- Regret – In trading, regret is such an emotion that a trader or an investor faces every now and then. The most important aspect here is that this emotion must not influence future trade setups. Traders, when facing regret, blame, and doubt themselves for keeping the position too short or too long, eventually keep this in mind and execute the next trade just not to face regret once more. This is wrong; the future trade move should base on a logical and rational approach rather than based on any emotion. Usually, traders regret when they exit too early from a profitable position, and after exiting, they see the prices recovering in their favour.
- Frustration – Frustration at the workplace is normal unless it starts overtaking your reasoning. A trader faces frustration when he commits trading mistakes like taking too much risk and some of his previous trades going wrong, due to which he has to bear the loss. It becomes difficult for a trader to rebuild that confidence in them again and restart trading. Once frustration overcomes, all the decisions seem to be wrong; fear of losing overcomes all trade setups and many negative thoughts start flooding a trader’s mind.