Investor psychology – learning to control your feelings when trading

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By Andrey Dashin

It is a common misconception that the key to successful trading is simply a sharp mind and a deep understanding of the industry. Sure enough these qualities are of great significance, but being able to control your feelings when trading is just as fundamental, if not more. The decision making process, not only in trading but in most areas of life, is complicated by emotions. Emotions tend to blur one’s judgment as they take over rationale. To avoid as much risk as possible, a trader should remain calm and collected and maintain discipline. In order to manage to act in a calm and sensible way, the best thing to do is to make a trading plan well in advance and to stick to this plan. Having said this, each plan must be flexible enough to adapt to the current economic environment, which will always dictate some changes.
The first rule that I learned about trading is that nerves are the biggest obstacle in a trader’s path and the root of bad decision making. The only way to tackle these nerves and rid yourself of any emotions which may blur your judgment is to come up with a trading strategy based on experience and rationale, incorporate it into your very own personal trading plan and try to be as faithful to this plan as you can. Acting on impulse will almost always work against a trader, because acting on impulse is either a result of fear, impatience or over-optimism. If a trader has a solid and reliable set of rules they can always fall back on when these dangerous feelings kick in, they will be able to safeguard themselves. I recognize that this is easier said than done, because part of our nature as human beings is to be greedy and often this greed to gain more and more becomes a recipe for destruction. When a trader finds themselves in a winning position it is very hard to let go of this position; it is very rare for someone to ‘quit while they’re ahead’. Of course, it is up to each individual trader to decide how risky their strategy will be, but becoming overexcited when experiencing a winning streak is most definitely dangerous. When one truly sets a trading plan in action and they know that they must beware of their feelings ahead of time, they can replace these feelings with logic when the time calls for it.
Having a trading plan is imperative for more reasons than the ones discussed already. For one, without a plan there can be no stability and no coherence in one’s trading activity. The absence of a plan is also inevitably bound to slow down the decision making process and opportunities are likely to be missed; or the opposite scenario is just as likely to happen and a trader may make quick and rash decisions in fear of missing an opportunity. Lastly, one of the biggest benefits of having a plan is that it can be tested; once put into action a few times it will prove to be either weak or successful, helping the trader decide if they should change it.
An investor’s psychology is complex and it can be affected by a great deal of factors, so when placing a trade, just ask yourself a few questions: Have I given this decision careful consideration? Is it a sensible decision? Am I happy with the decision I’ve made? This brief self-reflection will help clarify a few things. The answer to those questions is likely to be ‘Yes’ if your decision has been based on previous estimations and if it is suitable for the current economic environment.
One thing is for certain: impulsiveness is not the best guide for investing. Controlling your emotions and establishing discipline is key.

Note: The content in this article comprises personal opinions and ideas and should not be interpreted as investment advice.