Every stock market trader goes through these 4 stages; Which emotional stage are you in?

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Tue, Oct 2, 2018 2:39 PM on Beginner's Guide, Exclusive, Latest, Recommended, Stock Market,

~Krishna Khatiwada

In every phase of life, everything is evolving in its environment whether it’s a living thing or non-living thing. Research says that humans are evolved from the Chimpanzee (human's last common ancestor) but it's not like that we slept one night as a Chimpanzee and the next day we woke up as a human. In fact, we went through the long stages of evolutions to finally reach this form and maybe after 1000 more years we could be in a different state and could develop or terminate new organs during this period.

In a similar way, we will discuss the journey of an amateur trader to a successful trader through the evolution in a stock market.

In the strong bull market, you will find that making money is very easy, just call the broker, tell him to buy the stock and enjoy the uptrend. However, we will try to explain the phase that a novice trader will go through after entering the market.

1st Stage: "You don't know that you don't know" (Excitement stage)

This is the best moment in the stock market as you don’t know what you are doing but you will get what you are expecting.

In stock market, the novice traders are usually attracted during the strong bull market as everyone talks about how easily they have been making money in the market. They will see that their friends and relatives are making huge in the market and they start to believe that they can make lakhs in the market in a short span of time and further, some of the very enthusiastic might even leave their job to be full-time trader.

Here is the proof that many people are attracted in the bull market:

The picture below shows the interest and enthusiasm in the market during the strong bull of 2016.

During that time, daily turnover was above Rs 1 arba and many times the turnover has exceeded Rs 2 arba. During that phase, turnover was always above Rs 70 crores. When a number of participants increases in the market, the turnover also increases. Increasing volume is one of the strongest signals of an uptrend in Nepalese capital market.

The picture below shows the latest chart of NEPSE. Currently, NEPSE is in a bearish trend.

 

In the period of last one year, the turnover of NEPSE was above Rs 1 arba only 4 times and has been below Rs 20 crores numerous time. This shows people are not interested in the market right now (i.e. in the bearish trend). This means new traders are less likely to enter during the bear and sideways market.

So new traders start investing and in a bull market, the stock usually goes up and fill their pocket with an unexpected profit. They feel that making money is easy, it’s the society who mislead us by saying "making money without hard work is impossible". When the market surges up with the high intensity, they start to increase their investment as a result, a slight retracement,  will make them lose all the profit along with their capital. After that loss, they realize that the market has two directions.

Making money in the market is very easy but it is a lot easier to lose here. Most of the novice investor quit investing in this phase.

2nd Stage:  "You know that you don’t know"(Frustrating stage)

This is the stage of anxiety and stress, as you don’t want to be wrong even in a single trade, however, in reality your trade goes wrong, a majority of times. Market fluctuation, sometimes, makes you over-confident and sometimes makes you hopeless in this stage.

This stage is quite frustrating because you start looking for the Holy Grail which can predict the market perfectly and you start reacting on every new concept you learn. Every next day you feel that you would have predicted the market correctly, but it's just the lack of latest learn technique which is refraining you from making the right prediction.  In this stage, you don’t understand which information is just for the information and which are for the reaction. Every market of the world doesn't react similarly to the same information. As you are open to World Wide Web, you will find many people who guaranteed that their techniques work in the market but when you apply the same thing here in our market, it goes against you. You start to feel that making money in the market is beyond your understanding/capacity.

As a matter of fact, the majority of investors are unsuccessful in the market thus you meet many people who are cursing the market and giving their bitter experience in it. All these things force you to question your concept and confidence in the market. In this stage, you blame everything where you can and you don’t accept your mistakes. This stage is very difficult to survive. But if you survive this phase, then there is a possibility that you will be successful in the market.

3rd stage: "You know what you don’t know" (Understanding stage)

In this stage, you realize that being wrong is fine, you cannot be right all the time. You start being humble with the market and you stop blaming others for your loss.

You will start doing real research on the market. You will learn about the forces that affect the market direction and impact of own emotions in the market. You will understand that there is no Holy Grail in the market and you don’t have to know everything to be successful. You realize that no analysis can predict the market with 100% accuracy and everything in the market comes with a limitation. In this period, you start respecting the beauty of uncertainty in the market. You start to look at the potential loss before the potential gain and keep "safety of margin" at the top in the list of priority. You will focus on what you bought/sell? Along with how you bought/sell? And you will know about the importance of emotional discipline, however, you need to practice and implement these things in reality to cross this stage.

4th Stage: "You know"(Emotionally Stable)

In this stage, you will have accumulated required knowledge, plan, and experience to execute any trade. You can enjoy even the phase of high fluctuation in the market because you will trade with the proper plan. You will have a replacement plan on the different situation and you are adaptable to changing market sentiments. You don’t panic on every bull or bear and you will begin to realize that market is neither up all the time nor is it down all the time. You are not so excited when a trade goes in your favor and you don’t panic when it goes against you. You will be emotionally free from trading while being in the trade.

These are the stages investors go through in the stock market. Many newbies fail to cross the first and second stages and even knowledgeable investors fail to reach the stage of "you know".  "We are not truly successful unless we are able to produce the same result regularly", in the same way, if we are not able to make consistent profit in the market then we are not a successful trader.