Search for: Search... The Greatest Danger to a Trader Lies Within!

Online stock trading always has a risk associated with it. The greatest traders have all had their bad periods, and even the gambler can go through periods of profit. Discount brokers in India have further lowered the costs of entry and failure. While this has given lakhs of people access to the wealth of the stock market, it has also unearthed investors not fully apprised of the risks.

Ironically, the greatest risk of the stock market isn’t external. As the cliché goes, the enemy very much lies within.

The greatest risk of online stock trading is letting your emotions obstruct your judgment, and being unaware of the limitations of your mind.

Here are the major mental risks that one will encounter while trading:

1) Fear of Loss:

This one stops you before you even get started. Fear of loss might prevent an investor from investing too much, and diversifying your portfolio by staying away from trading in other domains such as futures and options trading.

Solution:

Look at your financial status carefully, and objectively decide the amount of money you can afford to invest.

An effective method of preventing loss is using ‘Stop Loss’. This article will take you through the basics of using ‘Stop Losses’

2) Availability Heuristic:

It starts right at the beginning. At the time of choosing, a trader might do his research and conclude that the market has a high probability of going up.

However, our minds have a tendency to recall immediate facts or concepts when analyzing and making a decision. Even meticulous research is sometimes guided by faulty premises.

Solution:

Always be aware that there’s another side to the story. Spend your times researching on why the market might do the opposite of what you expect it to, make a list of all the reasons and try and look objectively. A second opinion might be welcome.

3) Greed

Unlike with the Availability heuristic, you can’t say you haven’t been warned about this. Greed can cloud your judgment and prevent exiting at the right time, or even investing too much at the beginning.

Solution:

Have a trading strategy and stick to it! Never take spur of the moment decisions.

4) Ego and Revenge

A trader nursing a massive ego might never be able to admit that he’s wrong to others, or worse, to himself. There are few worse methods of losing your objectivity.

Solution:

The same as in dealing with greed. Do not deviate from strategies under the heat of the moment. Always take decisions in a calm situation.

The picture below represents a good summary of the above situation.

Emotions and Trading

Always remember, the best methods do rely on instincts, but instinct untouched by reason can be extremely dangerous.

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