What is emotional trading?
Emotional trading is when a trader or investor lets personal feelings and emotions impact their decision- making. Sometimes it can be helpful, but usually bringing emotion into trading is a bad idea.
Where have you heard about emotional trading?
You might know this quote from famous trader Victor Sperandeo: "The key to trading success is emotional discipline". Most traders would agree that having control of your emotions is one of the most important traits in the investment world.
What you need to know about emotional trading...
The first thing a trader or investor needs to know is how to identify signs of it. Panic selling a share because it has lost a few points is one sign; hanging on to a falling stock because it "owes" the trader a return is another. Hiding from price updates because of a fear of loss is a third sign. Trading without a sotp-loss is a fourth.
Emotional trading usually involves breaking away from strategy.
Removing emotion from trading is not easy. Emotional trading is similar to confirmation bias, a psychological tendency that impacts trading, sometimes without you even realising, and is an aspect of behavioural finance, the tendency to make irrational financial decisions.
Someone with an investment strategy should follow it, and never make an investment decision based on immediate emotion or 'gut-feeling'.