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Emotional trading is a fundamental part of trading psychology. Also known as emotional investing, it pertains to the evocation of different behaviours as a result of bumpy markets, leading to the emotional buying or selling of assets.
Factors that act as triggers are varied but typically include feelings of panic, excitement, fear, greed, arrogance, etc.
Understanding the impact of these emotions is important in the context of emotional trading as they help us understand what powerful motivators they can become when dealing with capital.
Investor behaviour has become the focal point of considerable emotional trading research. It’s an attempt to explain the emotions buyers or sellers feel when it comes to money and how they drive financial decisions.
And by gaining an understanding of behavioural impulses while navigating unpredictable markets, one is better able to mitigate poor decision making. After all, it is both feelings of euphoria and depression that have the potential to drive negative trading outcomes, despite falling on opposite sides of the spectrum.
Knowing how to handle your emotions, be they happy or sad, is key to maintaining a balanced and strategic approach to trading. It also requires overcoming cognitive biases to cut your losses when necessary and prevent emotional attachments from clouding judgement. Examples of popular biases include herd behaviour, emotional gap, self-attribution, mental accounting and anchoring which we discuss in more detail here
Emotional trading is an inherent challenge in the financial markets, regardless of your expertise. By building a resilient and disciplined trading approach, you’ll likely be able to maintain objectivity and keep your emotions in check. There are many ways to do this.
For one, consider following a pre-established plan that provides arational framework for trading activities. Ensure the plan outlines sensible entry and exit points and profit targets. Also make use of effective risk management tools to protect your wealth and limit losses.
Diversification is another way of staying the course. It spreads risk and avoids emotional attachment to specific investments. Gain a robust understanding of the markets and the factors that drive bullish and bearish trends. Knowledge and data are vital in making decisions based on fact rather than subjective rationale.
Taking the time to acknowledge your behaviours and understand your own risk tolerance forms a vital foundation for effectively managing the adverse impact of emotional trading.
T4Trade, with registered address of F20, 1st Floor, Eden Plaza, Eden Island, Seychelles, is a trade name of Tradeco Limited.
The Group includes Damadah Holding Limited with registered address at 365, Agiou Andreou, Efstathiou Court, 2nd Floor, Flat 201, 3035 Limassol, Cyprus.
Tradeco Limited is authorised and regulated by the Seychelles Financial Services Authority with licence number SD029.
Risk Warning:
Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.
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Thank you for visiting T4Trade
This website is not directed at UK residents and falls outside the European and MiFID II regulatory framework, as well as the rules, guidance and protections set out in the UK Financial Conduct Authority Handbook.
Please click below if you wish to continue to T4Trade anyway.
