Article

Psychology of trading and the 14 stages of investor emotions

10 Apr 2018

Most investors fail to be rational when it comes to making decisions while trading. Not everyone takes a sound and efficient investment decision every time. Instead, most decisions are based on the sentiments and emotions of traders. This, more often than not, leads them to incur massive losses while indulging in the stock markets.

The psychology of trading defines a specified range of emotions that an investor can go through while making an investment decision. Explained below are the 14 stages of investor emotions:

1. Optimism: This is the primary emotion of investors even before they enter the share market. The will to make money and the optimism that they will not incur losses encourages them to enter the market and buy stocks.

2. Excitement: As your ideas and decisions start to prove profitable, you begin to get excited and start considering what your life would be if you make it big in the share market. This motivates you to further invest in the market.

3. Thrill: As your investments begin to prove successful, you feel thrilled. You had never imagined you would be making such good profits. This emotion makes you feel proud of yourself, and take the first step towards overconfidence.

4. Euphoria: After making quick and easy profits, you begin to feel like a financial wizard and start to ignore the risks in your investment decisions. You expect that every trade you make from now on will be profitable no matter what.

5. Anxiety: This is the first time the market goes against you. Having made good profits until now, you feel agitated as you realize that you are also susceptible to loss. This emotion is the primary reason why investors identify themselves as long-term investors and wait until the market goes up again in the future.

6. Denial: When the market has still not rebounded even after waiting for a long time, you begin to go in the denial phase. You start to think that you have made poor choices and that it is time to sell your stocks and incur a loss. At this time, you still think that the market will go your way and that you will make profits on your investments.

7. Fear: You begin to worry as the market has still not risen and you now know that there is no way you are going to make a profit on your investment now. This is the emotion that demotivates most investors, making them think they should quit the market.

8. Desperation: You cannot believe that this is happening to you and you start to become desperate to seek any ideas from anyone and everyone. You look for ways to become profitable again so that you don't lose your money in the market.

9. Panic: Having exhausted every idea, you are at a loss of what to do next. This is the emotion that forces investors to question his/her knowledge and whether he/she should have researched before investing.

10. Capitulation: You understand at this point that you have made a bad investment decision and your portfolio will not increase again. This emotion enables the investor to consider selling his/her stocks to avoid further losses.

11. Despondency: Having incurred massive losses on your investments, you have decided to exit the market. You make up your mind about never buying stocks of any company. This emotion becomes the main reason why investors miss out on great financial opportunities as they are unwilling to trade irrespective of how good the opportunity is.

12. Depression: When you realize that you passed on an opportunity that could have gotten you great profits, you feel depressed and ask yourself: How could I be so foolish? This emotion gives you the required motivation that the market is still profitable for the ones who are careful enough.

13. Hope: As the market returns to its former glory, you revert to the market in the hope of making profits once again. This is the emotion that makes the investor more careful and eventually leads to profits.

14. Relief: Having made a profit once again, you feel relieved that you can still make profits in the market if you are careful enough. This emotion re-establishes the faith of the investor in trading and leads the investor to buy stocks once again.

While it is true that we can never fully avoid/control our emotions, knowing what emotions affect our decisions can go a long way in avoiding losses. Eventually, you will become a rational and successful investor.

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Psychology of trading and the 14 stages of investor emotions

10 Apr 2018

Most investors fail to be rational when it comes to making decisions while trading. Not everyone takes a sound and efficient investment decision every time. Instead, most decisions are based on the sentiments and emotions of traders. This, more often than not, leads them to incur massive losses while indulging in the stock markets.

The psychology of trading defines a specified range of emotions that an investor can go through while making an investment decision. Explained below are the 14 stages of investor emotions:

1. Optimism: This is the primary emotion of investors even before they enter the share market. The will to make money and the optimism that they will not incur losses encourages them to enter the market and buy stocks.

2. Excitement: As your ideas and decisions start to prove profitable, you begin to get excited and start considering what your life would be if you make it big in the share market. This motivates you to further invest in the market.

3. Thrill: As your investments begin to prove successful, you feel thrilled. You had never imagined you would be making such good profits. This emotion makes you feel proud of yourself, and take the first step towards overconfidence.

4. Euphoria: After making quick and easy profits, you begin to feel like a financial wizard and start to ignore the risks in your investment decisions. You expect that every trade you make from now on will be profitable no matter what.

5. Anxiety: This is the first time the market goes against you. Having made good profits until now, you feel agitated as you realize that you are also susceptible to loss. This emotion is the primary reason why investors identify themselves as long-term investors and wait until the market goes up again in the future.

6. Denial: When the market has still not rebounded even after waiting for a long time, you begin to go in the denial phase. You start to think that you have made poor choices and that it is time to sell your stocks and incur a loss. At this time, you still think that the market will go your way and that you will make profits on your investments.

7. Fear: You begin to worry as the market has still not risen and you now know that there is no way you are going to make a profit on your investment now. This is the emotion that demotivates most investors, making them think they should quit the market.

8. Desperation: You cannot believe that this is happening to you and you start to become desperate to seek any ideas from anyone and everyone. You look for ways to become profitable again so that you don't lose your money in the market.

9. Panic: Having exhausted every idea, you are at a loss of what to do next. This is the emotion that forces investors to question his/her knowledge and whether he/she should have researched before investing.

10. Capitulation: You understand at this point that you have made a bad investment decision and your portfolio will not increase again. This emotion enables the investor to consider selling his/her stocks to avoid further losses.

11. Despondency: Having incurred massive losses on your investments, you have decided to exit the market. You make up your mind about never buying stocks of any company. This emotion becomes the main reason why investors miss out on great financial opportunities as they are unwilling to trade irrespective of how good the opportunity is.

12. Depression: When you realize that you passed on an opportunity that could have gotten you great profits, you feel depressed and ask yourself: How could I be so foolish? This emotion gives you the required motivation that the market is still profitable for the ones who are careful enough.

13. Hope: As the market returns to its former glory, you revert to the market in the hope of making profits once again. This is the emotion that makes the investor more careful and eventually leads to profits.

14. Relief: Having made a profit once again, you feel relieved that you can still make profits in the market if you are careful enough. This emotion re-establishes the faith of the investor in trading and leads the investor to buy stocks once again.

While it is true that we can never fully avoid/control our emotions, knowing what emotions affect our decisions can go a long way in avoiding losses. Eventually, you will become a rational and successful investor.