The Psychology of Trading: The Stages of Emotions Investors Experience

Efficient markets, such as the BSE, are based on the idea the rational individuals will enter transaction with the intention of making maximal gains and minimal losses. This theory is great, but the truth is that most investors are not rational robots efficient markets should rely on. Instead, emotions tend to cloud decision-making and prevent you from acting in a rational manner.

Since it is next to impossible to conquer the inherent emotion bias of human beings, it is advisable to seek an understanding of the different emotions investors experience and how each affects the interactions with the market. In fact, emotion, not rational logic, determines the stock market, explains Psychology Today website. However, a common cycle of emotions exists and one that will shed light on how they evolve and affect your decisions. Once you understand these emotions, you are in a better position to tame the emotional roller coaster, possibly avoiding a myriad of related health issues. The emotional stages are listed below.

  1. Optimism – At this stage, you have a positive outlook that tells you everything will be ok, this leads you to buying stocks.
  2. Excitement – Once some of your initial ideas seem to be working, you begin thinking about what you would accomplish considering your recent market success.
  3. The Thrill – At this stage, you are literary walking on air since you cannot believe your success and even start commenting on how smart you were in getting in a few successful trades.
  4. Euphoria – This is the beginning of making maximum financial risk. Your past investment decisions have been resulting in quick, easy profits, you start ignoring the fact that there is a risk element involved and expect every trade to give you a profit.
  5. Anxiety – For the first time since you started trading, the market suddenly moves, but against you. Since you have never been in such a position, you tell yourself that you are a long-term investor and that all your investment ideas eventually work, at some point.
  6. Denial – As the markets have not yet rebounded, you have no clue how you should respond and you begin denying that you may have made a poor decision or that things are not likely to improve any time soon.
  7. Fear – The realities of the market suddenly dawn on you and everything is confusing. You start believing that the stocks you own will never move in your favor.
  8. Desperation – You have no idea how to respond, you are now susceptible to grasping at any idea that offers you an easy way to breakeven point.
  9. Panic – You have exhausted all your ideas and at a loss of what your next move should be.
  10. Capitulation – You decide that your portfolio will never increase at any point in future and sell all your stock options to reduce your losses.
  11. Despondency – Once you exit the stock market, you do not want anything to do with buying stocks ever again…but what you don’t know is that this is the moment of the greatest financial opportunity.
  12. Depression – You do not understand how you could have been fooled by the market as you try to figure out what just happened.
  13. Hope – In the course of studying the market, you realize that it moves in cycles and you start looking for the next opportunity.
  14. Relief – Once you buy stock that turns profitable, your faith is renewed in the future of investing.
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