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Trading on Your Emotions Can Cost You: How to Tame Them for Success

By: Fracalerts

Like many traders, you may wonder—how successful can I really be at trading? That depends. How good are you at turning your blood into ice-water? There's a legitimate reason why we ask. A critical part of trading success relies on how efficiently you can control your emotions in the face of market panic or uncertainty. You may be an ace at technical analysis or reading the Baltic exchange, but if your heart pounds and your hands shake when the market fluctuates, your portfolio could suffer. After all, markets are about measurable variables such as corporate earnings, valuations, and supply and demand. By contrast, emotions are flighty and mercurial. They're, well, emotional. But emotional trading is a real threat with significant earnings fallout. For example, right now, U.S. traders are enjoying the fourth largest bull-run in our history, according to CNN Money. 2014 generated historically high returns. To profit, all traders had to do was invest in the stock market after it famously bottomed on March 6, 2009.

Many Traders Missed 2014's Bull Market Returns

Instead, most Americans missed out on easy rebound profits because they kept an average of 36% of their portfolios in cash, according to a survey by the Center for Applied Research at State Street. In short, they were afraid to get back in the pool. "Investors continue to stash cash under the mattress in surprisingly sizable ways," observed Suzanne Duncan, global head of research for the Center for Applied Research. It's not our fault. Humans are designed to respond to fear and anger in order to, literally, save our lives. In times of danger and uncertainty, the “fight or flight” instincts left over from our cavemen DNA tell us that we must move quickly and avoid risk to survive. This served us well during sabertooth tiger attacks, but it’s counter-productive when trading. These misguided fight or flight impulses can make you place trades too often, racking up unnecessary fees, or send you fleeing to cash when the market drops, locking in losses.

How to Tame the Invisible Tiger

Without the physical release of chucking a spear at said tiger (or your laptop), the stress hormone cortisol builds up in the blood, causing anxiety, indecision, and a sort of psychosomatic mental paralysis. That's why during financial crises entire investment firms can become paralyzed by risk aversion, driving a nervous market into freefall.

There are a couple new age ways to counteract this fight or flight response, including learning how to meditate and re-training your brain using electrodes and monitors through neural feedback sessions.

Or you could try using a logical, pattern-recognition program like fractalerts to read market signals and tell you ahead of time when peaks and valleys are approaching.

That catches the tiger by the tail, so to speak, so you may feel more in control of your finances, and your heart rate.

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