Emotions in trading: a complete guide

Understanding how emotions can impact your trading decisions is one of the most important lessons a trader can learn.

Read on to find out how emotions such as fear and greed can affect your trading activities, and how to control these emotions, so you can make more reasoned decisions in the markets.

Emotions in trading

How do emotions affect trading?

Trading can be an emotionally-charged experience. It’s easy to become overwhelmed by feelings of excitement, fear and greed – any of which can have a negative impact on your decision-making. 

Here are some of the things that can be triggered if you base your trading decisions on emotions rather than objective market analysis.

• Cognitive biases: overconfidence and excessive risk-taking, or conversely, underconfidence and hesitancy, are just a handful of the cognitive biases that can be triggered by emotional trading.

• Impulsive decision-making: this can arise from a lack of discipline and oversight, leaving traders potentially exposed to greater losses. 

• Loss aversion: this can cause traders to become fixated on short-term losses and avoid trading altogether. 

Common emotions in trading

While the emotional spectrum of each trader is unique, there are 14 emotions most traders typically experience. These may come in cycles, from excitement and euphoria, to fear and panic, and then despondency and depression.

Let’s take a look at some of the key emotions in trading in more detail. 

• Euphoria: if feelings of intense excitement are triggered by a profitable trade or winning streak, this could distort your perception of the potential for significant gains. In this state, you could become more self-assured and fall prey to the overconfidence bias, taking more risk than you normally would.

• Fear: in trading, fear can be triggered by unexpected market volatility. It could cause you to base your decisions on anxious thoughts rather than sound analysis. This could lead to a panic-driven sell-off, where you close your positions early, or not open positions at all. 

• Despondency: this can be caused by a significant loss or series of losses. In this state, you may become fixated on failures and lose self-belief, become more prone to the loss-aversion bias, or give up trading altogether.  

How to control emotions in trading

There are no one-size-fits-all lessons on how to control emotions in trading, as every person is unique. However, there are steps you can take to better understand, and mitigate the negative effects that emotions in trading could have on your decisions in the markets.

• Practice mindfulness: practising mindfulness can help you cultivate an increased awareness of your thoughts and emotions. This could make you more likely to trade based on rational decisions as opposed to emotions.

• Try journaling: documenting your trading decisions, strategies, and emotional states could help you evaluate your performance, identify patterns, and rectify emotional biases going forwards.

• Engage in positive self-talk: consciously replacing negative thought patterns with constructive, affirming statements could help you boost your confidence, maintain composure, and minimise the impact of emotional biases in decision-making.

• Take breaks: it may sound simple, but remembering to take breaks could help you step back, recalibrate your focus, and gain some perspective on how your trades are unfolding amidst market events.

• Seek support: exchanging insights, discussing strategies, and sharing experiences with your fellow traders can help to bolster your emotional resilience.

Learn how the Fear and Greed Index works, what it measures, and how it can help you better understand market behavior.

Frequently asked questions