Psychotrading: what is it and what is it for in the investment world?

Stock trading involves good emotional management, facilitated by psychotrading.

The world of trading, or in other words, the buying and selling of shares, is quite complicated. In addition to knowledge and experience, it is necessary to have a cool mind, to be rational and to prevent our instinct and impulsiveness from playing tricks on us.

But, of course, we all want to make money and avoid losing it. If the price of a stock rises, it invites us to buy more, and if, on the contrary, it falls, it encourages us to sell it before we lose money.

That is why it is so necessary to manage emotions, understanding them through a great emotional intelligence, aspect that is studied by psychotrading.. Let's see it below.

What is psychotrading?

Being a good investor is not easy. It not only requires knowledge of economics and markets, but also experience, risk management, knowing why you are investing, when to buy a stock and what is its most profitable value, among other aspects. However, and despite having the necessary theoretical and practical knowledge, emotions can play a very bad trick..

Poor management of emotions in the field of stock market operations can be detrimental. This is why there is psychotrading, a discipline that combines psychology, economics and the world of finance to help us understand how our emotional side influences the purchase and sale of shares and other assets.

Psychotrading or psychology of trading can be defined as the control of emotions when it comes to trading.. Basically, it is the application of good emotional intelligence in the world of stock trading.

The emotions of investments

Psychotrading is a relatively recent discipline that is still developing its corpus of study. It aims to study investments in the stock market and other markets, highlighting the relevance of emotions when carrying out stock market transactions. It is difficult to detach emotions from investments, but the truth is that it is possible, contributing to a much more meditated and reflexive decision making and, consequently, assuming less irrational risks and obtaining more benefits.

The most experienced "traders" are very clear that the emotional factor has a great influence on the realization of investments.. Therefore, those who have more experience try to share it with beginner investors, highlighting the importance of knowing the great influence that emotions have on decision making in the market. Thus, knowing this influence, it is possible to learn to control emotions and avoid mistakes that can make us lose a lot of money.

It is not common to use robots in the investment world. Most of the decisions that are made in this world are made by people, people who have feelings.. As it is logical to think, these emotions influence the decisions that are made with the budgets and donations of investors, mediating the purchase and sale of assets.

Although there is a wide range of emotions that we can experience in the world of finance, the three main ones we can highlight are euphoria, fear and greed. The first two are especially important, being expressed and experienced in absolute terms, which is why they should be banished from stock decision-making, since they can make us err more easily.

Going a little deeper, let's understand how emotions influence trading:

1. Fear

In this context it is mainly fear of losing. It is normal that, when we see that the price of the shares is reduced, we get a little panic thinking that we have bought some shares that are not going to bring us income of any kind.

This generates anxiety and tension, feeding the FOMO (Fear Of Missing Out) phenomenon, making us sell the shares before they reach a lower value than the one we bought them for and at least have a minimum profit.

This, in the short term, may be positive in that we have not lost, but what if the shares go back up? What if we have sold shares that are now worth 4 times more than what we got at the time?

Fear makes us make decisions quickly, acting on the precautionary principle, but it can lead us to make the mistake of missing a very good opportunity.

2. Euphoria

Euphoria is an emotion that usually appears when the price of our shares soars. Seeing that shares we bought for little are now worth a lot gives us a real feeling of joy, even ecstasy.

The feeling of euphoria can lead us to take uncontrolled decisions, such as buying many more shares investing our savings in the blink of an eye.

It may feel as if the price will rise without limit for a moment, but what if it stagnates? What if it goes down again? Wouldn't it be better to sell some shares rather than buy new ones?

3. Greed

It is said that greed breaks the sack and this is perfectly applicable to the world of trading. This emotion can lead to irrational decisionsFor example, buying and buying, trusting that sooner or later the price of the shares is going to skyrocket.

Before doing anything, we must think that we are not sure, we are not sure if it is going to go up or down, so buying a lot of shares as if there was no tomorrow is a huge risk.

We must know when to stop, no matter how much we want more, buying a few shares that we think could have some productivity and avoiding abusive buying.

How to manage these emotions?

Psychotrading involves knowing the emotions that take center stage in the stock market.. Knowing them is a big step to avoid their influence, which can be really harmful because it prevents us from deciding rationally what to do. That is why it is so important to manage these emotions. To do this it is essential to have a good, consistent trading plan, and stick to it rigorously from the outset, preventing emotions, instincts and pressure from clouding our judgment.

Any action that involves the use of money must be operated with discipline and reflexivity. It is logical to be a little flexible, since there are many times when we are presented with opportunities that we cannot ignore, however, we cannot allow our Heart to take the helm of our economic decisions instead of having a cold and calm mind, thinking in a meticulous and meditated way what to do with our money.

Here we will see a series of practices to keep in mind. we will see a series of practices to take into consideration when buying and selling shares.. It must be said, however, that the purpose of this article is to inform, and that none of what is explained here is a meticulous guide on how to invest in the stock market, but rather some aspects that could be of help to the trader.

1. Be humble

It is necessary to be humble when trading with money. Everyone can have a good run in which after several days in a row the price of their shares has increased, however, sooner or later it can go down again. That is why, you shouldn't build castles in the air thinking that you are going to make a fortune or that it is no longer or that it is no longer worthwhile to consider buying and selling other shares. Nothing is certain in this life.

2. Disconnect

From time to time you should disconnect from everything related to trading. Money is something that can become an object of obsession and it is not at all healthy to be aware 24/7 of the price of shares, how much or how little it goes up and down, how much money we have already earned... Obsessing will make us lose control, causing us to make risky and ill-considered decisions.... That is why we should look for a period of peace and disconnection from time to time, keeping our minds busy with other matters.

3. Routine and discipline

As we have commented before, routine, discipline and constancy are the best allies to avoid that the emotions that may arise from the transactions cloud our judgment. Order and concentration, avoiding making decisions that are out of plan and exaggerated, will prevent us from having scares. It is also worth mentioning that flexibility is necessary to take advantage of the opportunities that may arise, but it is also necessary to maintain a methodical approach.a personal guide on what to do.