Breaking Bad Trade Behaviors
It can be difficult to keep emotions from upending our decision-making—especially when we have money on the line. The problem is particularly acute for stock traders, who can often find themselves in emotionally charged situations with considerable sums at stake.
Here's how traders can take a clear-headed, more-considered approach to four potentially fraught trading situations.
1. You're holding on to a loser
For traders, losing money can be more painful, emotionally speaking, as gaining it is pleasurable—a psychological effect known as loss aversion. Once an investor sees shares fall below the purchase price, they become reluctant to sell it because doing so would mean taking a loss. This reluctance could ultimately make losses worse if the stock continues to decline.
2. You've had a string of losses
Losing streaks can happen to the best of us, but sometimes a bout of bad luck can actually reflect a problem with our trading strategy. Attributing successes to our own skills but failures to uncontrollable outside forces is known as self-attribution bias.
3. The market is tanking
Few scenarios trigger hasty or irrational decisions quite like a massive market decline. As panic sets in, greed, loss aversion, and wishful thinking can all collide. Instead of performing our usual due diligence, we allow price alone to dictate our trade decisions, believing it's an opportunity for quick and easy gains. At the same time, we may double down on losing positions in the hope that the market will rebound quickly—and our trades along with it.
4. The market is soaring
Biases don't just rear their heads when we're under stress—strong bull markets, too, can trigger a host of suboptimal responses, including overconfidence, self-attribution, and herd mentality. In such cases, many traders let positions stay open too long, even when they've surpassed their profit targets. Some even cash out long-term positions to free up more funds to trade, potentially exposing themselves to unwanted risk.
Wait and deescalate
The point here is for traders not to become a robot but rather to remain on the lookout for those times when emotions can get the best of us.
If a trader has trouble distancing their emotions from their trading decisions, it's never a bad idea to slow down or even take a break. Cooler heads usually prevail, and trading is no exception.
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This material is intended for general informational and educational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions.
Investing involves risk, including loss of principal.
Schwab does not recommend the use of technical analysis as a sole means of investment research.