Emotion as a key element of decision making process on the market

The decision-making process consists of 2 components: rational (analytical) and emotional. The more experienced a trader is, the more importance he attaches to the emotional component - but in a specific sense. This does not mean that emotions dictate what to do. Very experienced traders treat their emotional state as an additional source of information, and can stand by and hear the “gut feel” above and beyond the emotional noise.

To quote one experienced trader:

If I am feeling the pressure in this situation it means that others in the market are also feeling it. The one who can withstand it better will win.

In the same situation, inexperienced traders may unwaveringly believe in the high quality of decisions made on the basis of “nose”. That’s how one retail trader I know lost more than €750,000 in a few months.

The best traders use various techniques to objectify their decisions - knowing that emotions can and will get in the way of their sober assessment of the developing situation and their ability to make good decisions. According to a study of institutional traders - in the same situation less experienced traders use strategies to avoid emotions. This makes a difference and a barrier for beginner and intermediate traders. The best traders are able to withstand large, sustained pressure by entering into it consciously, while the less experienced traders will at some point succumb and run away from the same position.

Both groups of traders differ not only in their experience, but also in their strategies of dealing with emotions. Because it turns out that experience is not the only thing that matters. Research shows that traders with a lot of experience (e.g. more than 20 years) who do not use the same strategies for dealing with their emotions as the best traders do, tend to underperform.

The way of dealing with emotions is a clear differentiator for the best traders. It allows you to survive chaos, volatility, uncertainty and panic, it allows you to continue to enter the market when others have long given up, and it opens new doors to results.

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That’s an interesting take on the role of emotions in trading! :blush: If you don’t mind, do you have a personal experience where your emotions played as the key element that ultimately made it a winning trade? :blush:

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its a good post with good information , thanks for your nice post.

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Definitely agree. As with most things though, so much easier said than done. :sob:

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Exactly, sometimes we can’t even tell when the emotions will take over and before you know it what’s done is done.

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Yes, emotion is an important part of decision making. But make sure you are using the right emotion. People who trade based on fear and greed are playing with fire.

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I agree, emotions can dictate a large part of how we react to what happens.

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You explained everything very clearly and answered all of my questions.

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That why i believe trading on a real account will teach you how to handle your emotions much better as trading on demo with fake money won’t make you feel anxious and can make you take much higher risk than you suppose to.

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It’s true that it’s not possible to completely avoid emotions. But one can try to control them and channelise them to make better decisions. Your explanation very well explained the whole play of emotions in trading.

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So true, emotions are part of life. Our ability to control them that is what really counts whether in forex or other areas of life.

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We will need to learn about the Emotions and also do such kind of trading that is profitable for us.

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Emotions inhibit rational decision making. It prevents a trader from making trading decisions based on facts and figures and instead promotes making decisions based on fear or greed. This leads to making wrong trading decisions and losing the trade.

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Emotions inhibit our intellect that is responsible for decision making. This affects our trading decisions and results in making wrong decisions.

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When the bubble “bursts’’, high levels of negatively balanced emotions, such as regret and guilt, further impact investment decisions. Typically promoting risk avoidance. It is vital to control your emotions, rather than let them interfere with your trading decisions. It has often been said that fear and greed are the true motives behind market behaviour, but other emotions, such as anger and disappointment are also powerful emotions that influence our decisions.

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We often hear about controlling our emotions and keeping them away from the decision making process. No one talks about how we can use our emotions to our advantage. Thank you for sharing this interesting take on emotional trading. But trading forex is always about strategy more than sentiments. New traders should stick to their plan until they get enough experience that they can depend on their gut feeling to make profitable decisions.

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“No one talks about how we can use our emotions to our advantage.”

Yes and no :slight_smile:

It’s not a super trendy topic, but awareness of psychology in trading is already at a good level. Many professional traders point it out in their books, services and trainings. I mean big names like for eg those who have won World Cup Trading Championships several times. Some of them traded back in the pre-computer days :slight_smile: I have talked to many of them, they have a lot of great knowledge, it is worth reaching for it.

Yes, when it comes to trading, emotion plays a significant role in decision-making. You can’t be both emotional and overconfident at the same time. While trading, one must have a calm and clear mind.

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Yes! Only a few people talk about this. They say to be emotionless while trading, and that is wrong. I do believe that emotions are important. Most people say to become emotionless while trading, but that does not simply work. Emotions, when applied the right way, make us successful. But too many emotions spoil the game. Therefore, controlling them is the key.

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This was quite an interesting take on emotions and how traders should handle them. It does get difficult to manage emotions during the process when stress levels are high and the mind just stops working. Only through learning from our mistakes, can we grow as traders.