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Fear and greed drive market action. We enthusiastically put on trades when we think a huge profit is assured, but when we see the market shift dramatically, we get out as quickly as possible. We fear being trampled by the masses as they all rush to sell. Fear and greed are powerful emotions that underlie the actions of the masses, but behavioral economists argue that regret is equally powerful. Regret is so powerful, in fact, that we may avoid putting on a trade because we do not want to beat ourselves up for making a bad mistake. We have our pride, after all. To preserve our feelings of worth, it is often easier to avoid taking a risk, than facing humiliation and self-reproach when we lose. But you'll never learn to trade profitably if you don't take risks. It's essential to learn to control your feelings of regret before you find yourself stuck.

We experience regret when we look at a decision and imagine it could have turned out differently. In the trading arena, it can be hard to escape regret, since we can feel regret by taking action or by doing nothing. When we open a position and end up losing, we can regret executing the trade. But we can also feel regret when we let a winning trading opportunity pass by because we were afraid to take a risk. In both cases, we let our mind imagine alternative realities, and when we start to think that one of those imagined realities are better than the way things actually turned out, we feel regret. We think, "If things had turned out differently, I would now be really happy."

Regret may be unpleasant, but it isn't always bad. Sometimes regret can actually motivate us to take action. Regret forces us to take action to fix matters. If you hate your neighborhood, and regret you moved there, you are likely to fix matters by searching for a new house. If you regret buying a huge car as gasoline prices spike higher and higher, you might decide to take the bus more often or buy a scooter to do daily errands. And similarly, when you make a losing trade, you may feel regret for making a mistake, but this uneasiness can also force you to make a new trade in order to earn back the capital you have lost.

If regret can motivate people, then why do behavioral economists view it as one of the biggest obstacles that traders must overcome? Many times, traders are consumed with regret even before they have something to regret. They have yet to make a trade, but worry about feeling badly if they made a trade and lost. Once we make a losing trade, regret isn't as unpleasant as you think it will be. But if you are often consumed with regret, just thinking about the possibility of making a future regrettable mistake can prevent you from trading. You may meditate about what you should have done. If you suffer this ailment, it is useful to tell yourself encouraging thoughts. Remind yourself that if you do make a mistake, you can always fix matters. It isn't the end of the world, and it isn't the end of your trading career. You can work harder to develop a winning strategy to make back all the profits you have lost. Or you can tell yourself encouraging thoughts, such as "losses are part of the tuition you pay to become a trader. 



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Saturday, 22 June 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.