Psychology & Emotions
Emotions play a significant role in financial markets, influencing both individual investors and market as a whole.
You may ask yourself: Should I buy now? Should I get out? How much should I invest? What if my strategy doesn’t work? I’m scared to lose money! My ROI must be at least 20% this month!
Stop right there. Having goals is one thing, but forcing yourself hitting those goals in a market you don’t control is silly. Since any financial market is not a guaranteed successor, we cannot make the assumption that the market will go up without having solid reasoning.
Take control over these 10 Emotions
Greed can drive investors to chase high returns and take on excessive risks. When stock prices are rising, investors may become overly optimistic and ignore potential downsides. Don’t force yourself making a certain $-amount or percentage of your account value. Set reasonable goals and strategically aim to achieve those.
Fear is a powerful emotion in the stock market. It can lead to panic selling when investors become worried about a market downturn or economic uncertainty. We always tell people to start with a small account that they are ‘okay with’ to lose. That way, risk exposure isn’t as severe and you learn how the market works by making smaller investments. If you’re in a tough spot and can’t afford to lose any money, maybe it’s best to just step away from the market.
Hope can be a double-edged sword. Investors may hold onto losing positions in the hope that they will recover, leading to potential losses. However, hope can also drive positive sentiment and optimism when investors believe in the long-term potential of their investments.
Overconfidence can lead investors to make irrational decisions, such as taking on too much risk or trading too frequently. It can result in losses when investors overestimate their ability to predict market movements.
Panic selling can occur during market crashes or periods of extreme volatility. It’s driven by a fear of further losses and can lead to steep market declines.
Market exuberance is marked by excessive optimism and a belief that stock prices will continue to rise indefinitely. This sentiment can lead to asset bubbles and eventual market corrections.
Regret can influence investor behavior. For example, investors may regret missing out on a particular stock’s gains and buy it at a higher price, or they may regret losses and sell at the worst possible time.
Many investors tend to follow the crowd and make decisions based on what others are doing rather than conducting their own research. This herd mentality can lead to market bubbles and crashes.
Investors often seek information that confirms their existing beliefs and ignore information that contradicts them. This can lead to suboptimal investment decisions.
Various emotional biases, such as anchoring, loss aversion, and recency bias, can affect decision-making in the stock market. These biases can lead to suboptimal investment choices.
Stocks are meant to fluctuate
Stock Development consists of Ups and Downs
No stock, or commodity, or other security will just go up every day of the week, or month, or year.
Example: This is Adobe‘s stock chart for the last ≈ 5 years. Despite a bullish trend between 2020 until late 2021 (soared ≈ $500 per share), we can identify consolidation periods, some ups and downs, and even two major price drops of >$100/share early in 2020 and late 2021. While facing a bearish trend, half way through 2022 $ADBEs stock price experienced a bounce back up by ≈$70/share before it continued to go down. Today, $ADBE seems to aim for its all time high again. Will it continue? Nobody knows.
Moral of the story
$ADBE as well as many other names have had major successes since their IPOs. That doesn’t mean that their stock price never faced any declines because they sure have and will again. This is just an example illustrating that while bullish trends are associated with rising prices, the stock will experience bearish outbreaks every once in a while. The same goes for bearish trends where prices overall decline but the stock experiences a bullish outbreak every here and then.
Note: Past chart performances as well as chart patterns, candlestick patterns, and other strategies illustrated on our website may show the history of the investment associated with those performances, but is not necessarily indicative of future investing results.
Don’t be like this guy…
Everyone gets a little confused in the market, and that’s okay. But if you’re serious about your investing career, you will want to evaluate as to WHY you’re confused!
- Stay informed and conduct thorough research on your investments.
- If you can’t establish a strategy, just stay cash. Just because you have money in a broker account doesn’t mean you have to go in every day.
- Be patient while opportunities arise. Don’t force to purchase a stock just because you’re bored.
- The market doesn’t care about you, or your account balance, or emotions. If you lose money because you were wrong about your idea, don’t be upset with yourself and optimize your strategy.
It’s important to recognize that emotions are a natural part of investing, but successful investors often employ strategies to manage and mitigate their impact. This can include diversification, setting clear investment goals, having a long-term perspective, and avoiding impulsive decisions based solely on emotions.
Disclaimer: This content is for informational purposes only and is not intended as financial advice. We try to provide accurate information on personal finance and investing, but it may not apply directly to your individual situation. We are not financial advisors and we recommend you consult with a financial professional before making any serious financial decisions. There are risks associated with any investment which include but are not limited to stocks, bonds, currencies, cryptocurrencies, as well as any other market or investment vehicle. For more Terms, click here.