Markets are witnessing an exhilarating run, with both the Sensex and Nifty touching new highs. The raging bull run has added to investors' wealth, and though valuations appear frothy, current times are proving to be one of the best for most market participants. Markets have handsomely rewarded those who have been patient and remained committed to their investments. Even traders who got their calls right have been able to make significant gains.
However, there's one essential thing that you need to control while trading, which in itself is a deft art - emotions. Controlling emotions while trading can prove to be the difference between success and failure. So why should you reign control over your emotions during trading? Let’s find out.
Non-alignment with goals
Irrespective of whether you are trading or investing, the objective is to address the said goals. However, when you trade out of emotions, you are acting either under fear or greed. In such a frame of mind, there are chances of non-alignment with your goals that can prove detrimental to wealth creation.
You end up picking stocks without due diligence and the risk they carry. In the long run, you will fall short of your goals, and there’s little time for corrective actions. Hence, it’s paramount to keep emotions under check.
Forces you to take high risks
More often than not, emotional trading forces you to take high risks, making you vulnerable to losing a large amount of money. The situation further aggravates if you are a newcomer as you don’t know the strategy to handle the situation.
Also, sour experience initially may force you to quit the market altogether and devoid you of leveraging the potential of equities for long-term wealth creation and gaining inflation-beating returns. On the other hand, if you trade unemotionally, you are well aware of the associated risks and devise your strategy accordingly.
Results in overtrading
This is another bane of emotional trading. It forces you to overtrade. For instance, the current bull run may result in the feeling of Fear of Missing Out (FOMO), resulting in overtrading. With overtrading, your costs increase significantly, which makes it difficult to protect capital and trade for a long time. It also increases stress levels that elevate the risk of bad calls piling up.
On the other hand, when you trade unemotionally, it prevents you from going overboard as you know when to stop. This protects capital erosion and helps you spend more time in the market as you can trade for longer periods.
Elevates chances of revenge trading
When you suffer a loss because of acting under emotions, it elevates chances of indulging in revenge trading. In this type of trading, you try to force a trade to overcome a previous loss.
Revenge trading can further dent your finances as the idea to recover from a loss immediately can result in taking wrong calls. This type of trading renders the entire activity irrational and irrelevant and enhances chances of suffering capital loss.
The final word
As evident, trading under emotions is a gateway to self-harm and wealth loss. It’s prudent to adopt a rational approach and base your judgment on facts and figures. Breach the web of fear and greed and seek professional help if required.
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First Published: Oct 23, 2021 5:19 PM IST
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