When your hard earned money is on the line, being completely rational isn’t easy.
In an ideal scenario, an investor should always "buy low and sell high", but things don’t always work that way and market dynamics often prove to be far more complicated than we expect them to be.
An average trader’s day is burdened with several emotional highs and lows – confidence and insecurities. With portfolio investments fluctuating in price constantly, there’s rarely a time when you don’t have a particular emotion hovering over you. And controlling these emotions is exactly what’s needed to avoid making decisions that steer you in the wrong direction.
Here are 4 exercises to help you keep your emotional pendulum from swaying too much during your trading day.
1. Acknowledge and Isolate
The first and most important thing to do is to acknowledge the emotions you’re experiencing.
You just made a significant profit on a sale and it is tempting you to go for more, or the daily loss amount has gotten over your head and you want to make just one profit for the day – STOP! Don’t let the emotions overpower you. Identify and acknowledge them, and once you do, try and detach yourself from them. Here’s what you can do:
- Recollect on past mistakes made by investing emotionally
- Divert your attention to the facts and figures of the investment in question and determine whether it is actually worth the hype.
- Leave your desk and go out for a walk. This will give you time to recompose yourself and clear your head.
2. Discipline Yourself
It is important to have goals and a subsequent plan to achieve them. These goals might change overtime with the fluctuations in market dynamics, and the plan may need adjustments accordingly, but one thing remains constant throughout – you DO NOT waver from your plan. If your plan says your allowed 10 trades throughout the day, try not to exceed that. If the plan says you stop trading after 3 consecutive losses, make sure you do. This will help you keep the temptation and the usual emotional surges under control, and help you gain more authority over your decisions.
3. Do Not React Immediately
Most often an immediate reaction stems from an impulsive feeling. It is important to allow enough time to pass and have a clear mind, and be capable of making an educated decision. “Revenge Trading” is one of the most common reactions to a loss; like many others, this will lead to regret and could lead to further impulsive reactions.
Try removing yourself from your work environment (my favorite is to step outside for fresh air and open surroundings) for at least 5 minutes. During that time do your best to think about something completely unrelated to investing. When you are feeling less impulsive, return with a clear head to approach the situation. Remember, this overwhelming feeling is temporary!
4. Stay Away from the Media
It is natural to feel excited about a potential profitable investment and hasten into the decision of buying it even at higher prices just because the media says it will perform well. However, it often proves to have the opposite outcome for investors. To make sure you don’t let the “follow the leader” mentality ruin you, look for solid facts, figures and analysis that provides solid reasoning for the investment. Don’t rely on the word of the media!
While we may think it is easy to overcome emotions during the course of investing – it’s easier said than done. You need to keep reminding yourself about the fact that emotional investing often leads to wrong decisions at the wrong time. You’re here to look for high probability ways to make money, not lose out on potential returns due to impulsive decisions.