How Emotions Affect Day Trading

In order to be a successful day trader, you need to have the right tools, choose the right markets, and trade the right trading systems. However, it is just as important to have the right psychological and emotional outlook.

Lets illustrate the trading emotion using an Intraday Trades,similar emotions can occur over Swing trades and positional trades ranging for weeks or even months.

9:15 AM: You watch as the market opens. You are looking for a good buy entry point into Century Textile @635 based on your analysis you think that Century Textile has giving breakout and momentum is on upside out after many days of consolidation stock has seen.

10:30 AM: Century Textile inches upward till 639  for an hour from you entry price ie.635 ,you are waiting for pullback near your buying point to take trade.Century Textile then takes a small dip. You think, “Great chance to buy on the dip!”  Originally you were planning to buy 2000 shares, 1000 for intra-day trading and 1000  for positional trading.

2000 shares? That means even if you successfully catch a Rs 5 stock price move, you only make a measly 10K? Better double that.

You buy 4000 shares of Century Textile at 635 (Emotion: greed), contrary to your initial plan and risk guidelines. Based on your technical analysis, you plan to take profits on half of your shares at 642 and cut losses at 632.

12:30 PM: Century Textile zooms upwards along with the Nifty 637, 640 (Wow it broke its previous High ). 641 and finally 642 . you’ve reached your profit-taking point!

But wait! You don’t take profits yet (Emotion: greed) The rally isn’t over.644.647 650.. sweet! This is awesome! (Emotion: elation) You’re not sure why it’s going up this far, but who cares?

You’re making money. You pat yourself on the back. Maybe you’ll buy yourself an expensive lunch to celebrate.

1:15 PM: Century Textile rally starts to weaken.. then it starts to move sideways.  C’mon, this rally has got to have another leg up, right? (Emotion: hope)

Then Century Textile  starts to fall slowly… 646..643… Well, that doesn’t mean the rally is over, right?

Your technical indicators tell you a falling trend has began, but your heart tells you that this could be just a slightly over sized downward correction and that the rally hasn’t ended yet (Emotion: denial).

1:45 PM: Century Textile starts to trend down further. 640 .. 637You want to bash your head against your keyboard. Why didn’t you sell earlier? Why is this dropping so much anyway?

Some FII or  hedge fund or operator must be short-selling huge amounts to manipulate the price. It’s not fair that hedge funds are bigger than I am. (Emotions: anger, frustration)Price starts falling on rapid scale 635 (Cost Price). 632  ( you’ve hit your stop loss point but you fail to hit the sell button. After all, Century Textile was having a great day. Surely the price will bounce back up eventually? (Emotion: hope)

2:00 PM: 630 , 628 620 the selling spree is not relenting. You minimize the window that shows your losses because it is too painful to watch. Why didn’t you sell earlier?

You’ve just erased everything you’ve made from weeks of trading. How are you going to ever make this money back? (Emotion: despair)

You stop caring about how much Century Textile  can drops (Emotion: resignation). It’s already a huge loss anyway… what’s a couple more thousand matter anyway?

2:30 PM: 615… your technical analysis indicators show that right now may be a good buy entry point.

You know that you already have 2000 shares and you can’t afford to take any more risk. But you are mad at Century Textile and you want to get revenge.

You call your broker ask for extra leverage after few if and buts he aggressor and you get more leverage. You double down and buy another 2000 shares, bringing your total share count to 4000 (Emotion: desperation).

2:45 PM:Century Textile  starts to nosedive. Wait, what!? Century Textile dropped 5 rs in 1 min? 612..610 What is going on? What are you going to do? (Emotions: panic, fear)

You cringe as you submit a market order to sell all of your 4000 shares at 610. Almost immediately after you sell, Century Textile stops nosediving and recovers slightly.

You sold your shares at the worst possible price; if you weren’t so panicked, you could have divided your order into chunks and used limit orders and achieved better price execution. You want to cry. You are a failure. (Emotion: depression)

3:00 PM: You spend the rest of the trading day wallowing in misery without making trades. Next day Century Textile opens with a big gap up due to bullish sentiment of global market and it comes back to 635 and makes a high of 660 next day.

You stare in disbelief… but there is nothing you can do now – if only you had followed your initial plan… (Emotions: helplessness, regret).

If You Could Do It All Over…

What would an experienced trader have done in the above situation?

Actually, even experienced traders are affected by emotion – I’ve seen a white-haired trader at a bulge bracket investment bank turning red, swearing his head off, and pounding at his keyboard – but I’ve also met a trader in his early 30′s who never once lost his cool.

So the question should be, “What should this trader have done in the ideal scenario?

In this example, the trader should have followed his own plan and rules strictly – he should have stayed within his risk limits and do not be excessive leveraged, sold the stock when the price hit the pre-determined stop-loss level, and he should have taken his profits when the stock reached the pre-determined profit-taking level.

In short, he should have sold immediately when the stock hit 640 – yes, that’s “only” a profit of 10000 INR, but it’s way better than loss.

Experienced traders know when to break their own rules because they have the discipline to not break the rules too often and to keep the risk-taking from getting out of hand.

Traders without such discipline such stick to strictly to their rules to protect themselves. As the saying goes, “plan your trades, and trade your plan.”You need to have a trade plan and a profitable trading system to survive in market for long run.


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18 thoughts on “How Emotions Affect Day Trading”

  1. The same thing happened with me today.. on 6thApril15 I never forget this date.. as I’m quitting from Market.. My story goes like this..
    I did not plan to trade SBIN at all as the Bank nifty is going down in first hour.. I broke my rule entered in SBIN bought it as MCAD and few technicals said me to buy.. I entered 274,2 and SL is 271 my target is 2 points (276,2).. it started falling.. I just waited for 24 pisa rise and exited 2 lots with 750 Rs. I thought wow.. I’m a lucky guy could have waited lil more to get 2k. it went to 276. I bought again 2500 shares.. now my target is 277 SL is 273.. now what you will expect.. to hit my Target first.. It is near to my SL then I moved my SL ro 272 it again touch 271.95 by eating my SL. Now my Loss is 10k.. I should be keep quite.. after hitting my SL it went to high of 276.3 I could have gained another 1k If I follow the rules..

    Again with angry trading.. after hittin High its back to 273 @ 2PM now I entered in Short and placed my sell order of 5000 shares @273.5 put my Target for 1 point ( at least it may cover my 5k loss) and SL of 2 think what could have happened..

    Now SBIN up with 276.8 @ 2:10 PM and ate my 23,000. I lost my money and resigned..
    By my experience, we could have planned our trades earlier. not to trade with out plan. some times it may work else you will end up with loosing.

  2. Excellent explanation. Such examples from time to time will help us a lot because even after understanding the game in one stock one tends to repeat it in case of ” stocks” for which he has soft corner. Such soft spots do really exist.
    Please provide such examples if possible.

  3. Me after putting around 3 years in active FNO trading, have been able to control my profit booking and stop loss levels to a considerable extent. What disturbs me is not the loss in trade because the trade went the other way as small losses are the part of day trading. What pains me more is that sometimes I become too much indecisive in the morning to enter a trade when my trading system clears orders me to jump in.The resultant loss of the profit, when the trade successfully takes off without me having boarded in, puts me in a state of despondency.. The feeling of left out is too much ..Hope to control this part of my weakness this fin year…Happy trading

  4. This is just an awesome article. Every trader would have faced this in his lifetime. I always keep thinking why are you taking pain of educating people for free. You give your views for Nifty and stocks everyday for free and you keep posting these kind of articles everyday. You are taking so much of pain(time). I and many of us only can say ‘SIR, BIG THANK YOU FOR EDUCATING US’. God Bless.

  5. Sir , in your training program you explain all this in detail. After obtaining training i never faced these type of problems. Because of trading. Plan prepared previous dsy. I just implement it very stricty.
    Thanks for training.

  6. Kudos for such an amazing write-up. You have hit the nail on the head. You are a very good trading psychologist who can easily feel the pulse ( and understand) of an aspiring trader. We look forward for more such articles that are based on cutting edge psychological research which truly improves the psyche and human behavior of a trader who can otherwise easily succumb to ‘ emotional hijackings’.

  7. Kudos for such an amazing write-up. You have rightly hit the nail on the head. You are truly a great trading psychologist who can feel the pulse of an aspiring trader. We look forward for articles based on cutting edge psychological research which can indeed improvise the traders psyche and human behavior, thereby preventing them from succumbing to ’emotional hijackings’ while trading.

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