However, according to trading psychology, human emotions play a crucial role in determining whether or not someone will make money from trading securities. Fear and greed interfere with discipline and risk-taking, which are two critical aspects that influence the success of one’s trading plan.
While there are other emotions involved in the process (such as hope and regret), fear and greed are the main trading behavior drivers.
Greed motivates investors to make risky decisions without considering the consequences, and fear keeps investors away from any type of risk which translates to low return.
However, you can get a hold of these emotions and even learn to use them to your advantage. Here are a few tips to get you started on the road to becoming a smart and successful investor:
Understand Your Process
It may sound anticlimactic to send you back to the process you devised, but there is a method to our madness, so please be patient.
We had a chat with Ken, an expert at AIS-CPA, who told us that human beings in general, tend to go head-first into most situations.
Furthermore, if we feel overwhelmed by the situation (as it happens when we have a huge load of work or study), we tend to procrastinate and forgo logic and reason.
According to Ken, only by taking a step back and analyzing your process, you can understand your mistakes and take corrective actions.
So take a step back and understand what makes you want to be cautious in investing (fear of losing money, or fear of underperforming) and what drives you to take risks (you want more money, fast).
Once you understand the factors that trigger either the flight-or-fight instinct or your greed, it’s easier to take action and avoid those triggers.
For instance, the famous Warren Buffet once said he prefers to stay away from the noise of a big city like New York because it may influence his decisions in a manner he may not even be aware of before it’s too late. So, he knows what may interfere with his judgment and keeps away from it.
Get Rich Quick Doesn’t Work
Everyone knows the story of a friend’s acquaintance who got filthy rich due to lucking out on the stock market. However, every “overnight success” that lasts is always built on years of experience and knowledge.
The stock market is not a place where someone can get lucky. It is, however, a place to grow your wealth in the long run by making smart and logic-driven decisions. You also need a well-devised plan that keeps you away from making impulse decisions and allows you to follow through with the steps you’ve laid ahead.
Side note: Fear and greed will try to determine investors to change their initial plan. Therefore, it’s best to ask for specialized help if you are not 100% of your trading skills. If you trust the plan, it’s easier to manage your emotions and follow the plan.
Never Act on Impulse
Most novices make one of two mistakes:
Withdraw their trading position ahead of time, as soon as they start to lose money
Extend their reach on multiple fronts out of fear of mission out (FOMO)
As you can see, both mistakes are motivated by fear or greed and the move is usually impulsive. The market fluctuates and, without a solid investment strategy, it is very difficult to know when it’s best to make a move. That’s why it’s important to learn how to choose the right platform for trading stocks since each one provides slightly different insights into the market.
Plus, it helps to have predetermined limits for both loss and the number of investments you want to make in a specific period of time.
Success in the stock market is highly influenced by your behavior and knowledge. So if you are not yet sure you can handle the pressure and excitement of trading securities, it’s best to learn from the ones who have a proven record of solid and healthy investments. They will teach you how to grow and put those pesky emotions to good use.