Master Trader Joe Ross – Emotional Decisions
Featured Trading Article: EMOTIONAL DECISIONS
My sincere thanks to everyone who responded in regards to the trader who had lost everything but his life. Your letters are very valuable, and the response was truly significant. Besides my profuse thanks, all I can say is that you are the greatest bunch of people in the world, and I am honored to be acquainted with all of you. Thank you, thank you for your participation.
Trading and investing decisions are often driven by fear and greed. When we are afraid of potential losses, we are eager to sell. When we are greedy, we tend towards buying. However, it’s a little more complicated than that. Regret and hope also come into play. We may buy and sell to avoid feelings of regret, or may hold on to a losing position out of denial and a fruitless hope that a loser will turn around.
Emotions play a powerful role in decision making.
Other emotions have a more indirect influence. Due to inattention, we may make a trading error. For example, when we are tired or frustrated, we may act too soon or too late. Similarly, during a serious drawdown, it’s hard not to feel a little depressed and frustrated to the point that we just want to give up the whole business of trading or investing altogether.
These examples of the influence of emotions on trading and investing decisions are relatively obvious, but there are clues that suggest emotional states may also have an extremely subtle effect on economic decisions.
Over the years I’ve noticed that people who are prone to experience intense levels of anger tend to be willing to take greater risks. Anger is experienced when we feel slighted or when we believe that we were unfairly treated. If we take things a little too personally, it’s easy to feel slighted by the markets when events don’t go our way. To gain a sense of control, we get angry. We tend to want to fight back and enact our revenge. At these times, we may act out of desperation and take risks that we shouldn’t.
Emotional states that have nothing to do with financial issues might have a subtle impact on a subsequent economic decision. For example, we might hold a position and determine how much the price of the stock or commodity needs to move before we would be willing to sell, but if we are sad and disgusted, we will tend to undervalue the stock or commodity.
Ideally, it would be nice if we could trade with a Spock-like, purely logical mindset, but we are merely humans. We experience a variety of emotions before and during the trading day. The impact of common emotions of fear, greed, hope, and regret may seem obvious to many. But it’s possible that incidental emotions elicited by events that have nothing to do with the markets may bias our decisions. It just goes to show that trading is a psychological endeavor. Keeping extreme emotions at bay is paramount. The more we can stay logical and objective, the more we’ll trade profitably.
© by Joe Ross. Re-transmission or reproduction of any part of this material is strictly prohibited without the prior written consent of Trading Educators, Inc.
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