Many people consider investing in the stock market one of the subjects that is often omitted or overlooked is the emotional impact of trading. With the looking at investing in penny stocks or large blue-chip companies, one thing will always remain the same and that is emotion factor.
Investing on your own is a balance in its own right. There is much to consider when deciding to ‘do it yourself.’ When people don’t have any direct experience with something they may miss many subtle nuances that can have significant impacts on their performance. When exploring the emotional side of investing in the stock market, the very first thing to consider is your emotional temperament. How do you react to surprises? When things don’t go your way are you more inclined to fight or flight? If you invest in a stock with the intention of a stock going up and it suddenly moves the other way, how will you realistically deal with that emotionally? Looking at your past and how you have dealt with shock or surprise can be a good indicator. Did you freeze? Did you tell yourself that everything was going to work out? Or did you become enraged and express yourself externally?
Emotion is something that has a very large impact on how well you will do in investing. Many don’t consider their emotional temperament and it can really cloud their judgement. Emotions are one of the biggest things that are over looked and can cost you dearly. One of the most basic mistakes in investing is not know when to get out. This can often become a real challenge with less liquid markets like penny stocks. Some beginners will stay with an investment because they are convinced it will come back. In some cases this can be true, but unfortunately this has wiped out more people than it has saved. One reason is that staying in an investment that indeed may rebound is a very emotionally driven decision if it’s not based on something.
On the other side, if one is rewarded and being overemotional in investing then there’s a reinforcement of a bad habit. It’s often suggested that before you start trading your own money in the market it’s better to ‘paper trade’. This is when trading decisions are made with fictitious funds rather than real hard cash. One challenge with this is it’s less likely to become emotional about ‘fake money’ and very easy to become emotional when you’re putting your real hard-earned cash on the line. A possible alternative is to use a small portion of the money allotted for the market and treat that like you to your whole trading account. This will help you to build confidence and also a real track record which can save you from bad habits and large losses. Nothing replaces a balance of research and practical experience.
The best way to deal with emotions and trading stocks is to use or develop a trading system that makes the decisions for you. This removes the possibility of making decisions not only at the wrong time but also in reaction to a recent loss. Using any trading system, whether it’s established or whether you’re developing at your own self, always use a way to test it without risking a trading account. Professional advice is always recommended and will help you avoid possible pitfalls.