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Trading psychology: trade smarter by understanding panic selling and FOMO


Whether it's panic selling, FOMO'ing into the wrong shares or hiding cash during periods of volatility, traders make the wrong decisions, which hurt their returns in the long-run.

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Disclaimer: General information only. All forms of investments (in particular, trading CFDs, commodities & forex) carry significant risk, including the risk of losing more than the invested amounts, market volatility & liquidity risks. Past performance is no guarantee of future results. Such activities are not suitable for most investors. Seek independent advice and consider the PDS and TMD on the provider's website before making any trades.

Every trader comes in with a well thought plan and how they hope to react when they are trading.

Unfortunately though, traders can undo even the most well thought out and methodical strategy if they are unable to control their emotions.

As IG Australia market analyst Tony Sycamore says trading consistency is important when it comes to trading.

"It's better to take the human or emotional aspect out of trading and this goes back to the idea, a trader can't control the direction a market takes, but they can control where they exit a trade, either for a loss or for a profit," he explains.

To help you understand the basic psychology behind trading and what some of the emotional biases you will face, Finder has teamed up with IG to talk you through panic selling and FOMO.

IG Guide: How to manage the emotions of trading

What is panic selling?

Panic selling can be one of the most gut wrenching feelings a trader can experience. After years of building up their portfolio, changing market sentiment can see the price of an asset fall.

In essence panic selling is a widespread sell-off of stocks, or even the entire market due to rumours, low trader sentiment or an overcorrection to changing economic circumstances.

And while investors have no control over the market as a whole they can control their reactions.

As Sycamore says, even the most experienced trader can experience mood swings when the market is falling.

"The key is trying to minimise the swings, stay in the zone and follow the process," he says.

"Know that there will be both good days and bad days in trading. The desired outcome is to have more good days than bad days and to build the account balance."

What is FOMO?

If panic selling is moving off assets at the wrong time, then FOMO is the exact opposite.

The fear of missing out or FOMO is an emotional response to other traders succeeding. If you have FOMO you have an uneasy dissatisfaction with others supposedly living a more successful life.

IG's trading psychology specialist Louise Bedford believes this can lead you to make mistakes with your trading.

"Every time you defy the specifics of your written trading plan by knee-jerking out of, or into, a position, you make it easier to ignore your trading rules the next time. When you drift from your trading plan and panic sell, this can become a destructive habit," says Bedford.

How these biases can lead to decision fatigue

Unfortunately, traders who suffer these biases are likely to double down on their mistakes due to a psychological phenomenon known as decision fatigue.

Effectively it refers to the deteriorating quality of decision making over a long period of time.

Take this to your trading and it can be problematic.

Bedford says treating every trade in the same way can help offset these biases and limit decision fatigue.

" If you are constantly treating each trade as requiring your conscious thought, it can drain you. If you face too many decisions that require your active attention, this can be taxing," she says.

"Sure, the first few decisions you make in the day might be carefully considered… but as the day wears on, each extra decision taxes your working memory, and your ability to make additional decisions becomes worse."

That's bad news for a trader, because consistency is important.

Tips to avoiding biases in your trading

While having biases in your trading is normal, actively reflecting on the decisions you've made can help you grow as a trader.

"Look at your past trades. Try to understand why you made the decisions you did as a trader, and aim to isolate areas where you could have acted irrationally. Set this up as a once-a-year review in your calendar," Bedford says.

To help traders overcome panic selling, FOMO and other biases they might face, IG's specialists have given Finder a few handy trading tips:

  1. Get clear on your goals: Have a think about the trader you want to become and let that 'future you' draw you forward.
  2. Develop a habit of writing your thoughts on paper: Some psychology experts call this a Morning Journal.
  3. Review your results with another trader: See if they can help you recognise places in your trading plan where you broke your rules or engaged in behaviour that could be harmful to your trading account."
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

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