Markets go up; markets go down. It shouldn’t matter much, but many novice traders find that their own personal mood fluctuates with the markets, moving from extreme euphoria as the markets soar to new heights to deep despair when the markets plunge to abysmal lows. Why do market trends have such power over emotions? They don’t need to, but many novice traders have difficulty cultivating an objective mindset. They allow fear and greed to influence their trading decisions. They tend to follow the masses, and when they go with the crowd, they soon find that market trends not only influence their moods but their account balance as well.
There’s a strong tendency to follow the crowd. There is a feeling of safety in numbers. When you see a steady upward trend, you feel secure. Everyone is buying. They are all doing the same thing. When other people offer confirmation of your decisions, you feel safe and assured. In a bull market, it isn’t so bad to follow the crowd. When it’s a strong bull market, the crowd is often right, and it makes sense to follow them. However, when the market turns around, feelings of safety and security can turn instantly into fear and panic.
Why? An obvious reason is that many novice traders don’t have the ability or financial resources to sell short and take advantage of a bear market. But there’s a psychological issue as well. It is difficult to know how to handle falling stock prices. For example, humans tend to be risk-averse. When one is going long and the markets suddenly turn, it’s hard to accept losses and sell off a losing position before more damage is done. Denial and avoidance set in. At that point, a trader with a losing position panics hopes that things will turn around, and waits for events that are unlikely to happen. Usually, the price continues to fall, heavy losses are incurred, and as expected, disappointment and despair set in.
It’s vital for your survival as a trader to stay calm and objective. Don’t let your emotions interfere with your decision-making. How do you stay detached and relaxed? First, it’s important to accept the fact that you’ll likely see many losses as a trader and that you should expect to see the markets turn against you. When that happens, it’s essential to sell off your losing position. Second, it’s important to manage risk. Take precautions. Assume that the markets are likely to go against you occasionally and that you must protect yourself against such events should you encounter them. Only trade money you can afford to lose, and don’t risk too much on a single trade.
Think of the big picture; the long-term profits across a series of trades are all that matters, not the result of a single trade. By risking little, you’ll know you have little to lose and can accept market turns more easily. Third, trade a very detailed trading plan. Know when to enter, and more importantly, know when to exit. And stick with your plan. Fourth, acknowledge your limitations. If you can’t sell short, for example, don’t do it. Stand aside until market conditions are more conducive to your trading style.
Don’t allow your moods to fluctuate with the ups and downs of the markets. By trading in a disciplined, methodical manner, you can cultivate an objective, logical mindset that isn’t overly influenced by market moods. Armed with the right mindset, a disciplined trading approach, and a detailed trading plan, you will be able to realize the huge profits of winning traders.