Learning to cope with panic

These days trading online has become immensely popular among average users. This is why it is important to touch upon how to deal with receiving disappointing trading news. In our article, we suggest examining this rather significant aspect of trading through the lens of psychology. In particular, we will look at the panic traders experience while trading on the market. Undoubtedly this information will help you, as a potential investor in financial assets, gain tools not only for decreasing destructive emotions, but also that enable you to conduct trading operations more effectively and accurately.

 

Learning to cope with panic

 

So, following the spike in popularity of online trading, many scientific studies were provided for the benefit of users. These studies outline various coping strategies. However, there are relatively few books on the list that directly touch on the psychological problems that arise when working on the financial market. This is due to the fact that the majority of online traders prefer to swing trade throughout the working day, meaning that the primary focus in on using various mathematical and technical analysis services. Their mental state and emotions are viewed as of secondary importance. However, it is worth mentioning here, that if an investor strives to achieve success and become a professional participant of the financial market, it is almost impossible to do so without studying the psychological aspects of trading. Only deep introspective analysis gives you the guarantee that you will achieve a financial result from trading! Therefore, we suggest that you begin to analyze traders’ emotions starting with panic, a fairly uncomfortable idea for many. Here we will break down how panic can occur through the process of trading, as well as provide recommendations as to how you can calm yourself back down.


The theory behind panic and the reasons it arises

Through studying panic as an emotional and psychological concept applied to financial trading, it is important to start by taking several practical examples where investors experience this feeling. So, if the behavioral patterns of the entire army of online traders on the financial market were to be modeled, then it would imminently be clear that there are several points when market participants start to panic when trading:

● Working on the market when there are high levels of volatility and they have a lack of specialized knowledge for evaluating these rate movements. To put it simply, private traders start to panic when the market makes large, impulsive movements that could generate profit, but the participant trading doesn’t have the necessary skills to identify the vectors of market movement. Losing sight of the great opportunity for profit, traders, especially beginners, start to panic and begin to make many critical mistakes.

● Holding a critically-losing trading position. Many have experienced this when they have placed a trade on the market and they begin to see the rates move in such a way that the position begins to fall into a losing zone. Typically, investors can’t find the right time to close a losing position, as they are hoping for a profitable rate reversal, which is why when the contract reaches a critical level of loss, they start to panic. As follows, the investor can either worsen their situation by placing further contracts against the market, increasing their trading position, or they can liquidate the contract without accounting for corrections against the trend.
● And the final devastating moment where panic arises, when there is a complete loss of capital. There are many factors here that contribute to this panic arising, there is the devastation from trading, the loss of hopes for financial fortune, and the search for further funds to continue trading with.

These situations lead traders to panic, of course, not every trader reacts the same way. Every individual trader has factors of their own that lead to the emergence of negative emotions. That being said, these situations listed are almost always factors that lead to panic.

Many professional traders and psychologists who specialize in evaluating investors’ work recommend using a demo account in your trading regime to decrease the likelihood of such feelings arising. Without a doubt, this approach allows you to understand the possible reasons that contribute to panic arising. However, a demo account doesn’t fully uncover the emotional aspects of trading because it lacks the most basic component, the feeling of risk and the possible loss of your own funds. For this, we suggest going through the primary reasons that panic arises, meaning that you need to have an understanding of the definition of the term.

Panic is a negative emotion experienced by traders that arises when the investors sense real or imagined danger (in this case, the danger is almost always concerning the loss of capital). The manifestation of this state is accompanied by the loss of self-control and the rise of further negative factors that impact the mental state of the trader.

In order to fully understand panic psychologically and learn to control your own actions and emotions when it arises, first and foremost, you need to understand the reasons why such emotions arise. We will give you several situations when panic arises, however, in these cases, the trader’s mood is always an effect, not the cause. In order to avoid panicking, you need to understand what can provoke that reaction.

Panic is an effect of other negative emotions that financial market investors are susceptible to. We would include the following leading psychological concepts:

● Greed

The general understanding of greed is that it is the drive for investors to generate as much profit as possible in as little time as possible. Simply put, private investors always want every trade to produce the highest level of profit as possible. This is unrealistic in reality. The negative factor that leads to this feeling arising is the moment when the investor gives in to greed and focuses on possible, hypothetical profit, completely ignoring the technical and psychological aspects of trading. Therefore, trades formed in such a state are seen as a means for enrichment, not as a technical tool for generating real profit. Other than that, greed as a reactive mental state blinds traders from accurately evaluating their signals and financial trading and, as it follows, there comes a time when the increasing demands of a contract lead to a critical loss, causing the investor to panic. Technologically, greed always leads to the violation of risk management guidelines, which is one of the most important trading factors in terms of producing results.

● Fear

This emotion is a key psychological aspect that leads to panic arising when trading on the financial market. Psychologists classify fear as a negative emotion that arises during losing trading operations prompting intense reactions from investors over minimal negative trading factors. Fear causes both psychological and physical suffering that is driven by primitive instincts, in particular, the drive to survive and threats to social status. It is worth viewing them as both real and imagined threats.

In practice, there are many preconditions and formats that cause fear to arise. In particular, the loss of significant capital, the inability to continue trading, and the need to undergo in-depth self-analysis to understand your own mistakes are only several of traders’ leading fears.

Through studying the above, investors make an array of complex mistakes so as to suppress their fear, such as closing trading positions during the worst points for their capital and refraining from trading in the best conditions. That being said, this negative emotions can be seen as a positive trading point as well. This fear of losing capital can more strongly motivate traders to undergo professional research regarding the most effective approaches to money management, leading to them trading in a more disciplined manner.

When analyzing fear as an emotional precursor to panic, it is worth pointing out the following: If you fear losing capital due to simple mistakes, you miss profitable conditions for trading operations applicable to your own trading strategy, meaning you have no place on the financial market. The inability to keep your own fears under control and increasing failure to prevent negative psychological trading aspects from arising will always cause you to panic. As it follows, you won’t be able to earn profit and be satisfied trading under such duress.

● Hope

This feeling is characterized by a desire and aim to achieve a specific result. Usually, traders expect maximum signals and, as follows, an improvement in their social and professional status.

However, in trading, inflated hope can turn into very destructive factors that, in the end, lead to panic. In this case, is worth viewing hope in combination with greed, as these emotions are closely connected and have several common indicators. In practice, it usually plays out like this, the increasing demands from a trading position, especially when the trading forecast is confirmed, prompt an investor to let their contract run until they achieve a specific, often unrealistic, result. However, the market changes drastically and it’s trend movements don’t take into account your hopes, expectations or greed. This is why when you start to over-rely on hope, be prepared that sooner or later you will experience serious losses. The final factor is the fundamental cause of panic arising!

● Disappointment

This negative emotion is characterized by traders’ disappointment and the collapse of their hopes following a negative trading result. These situations should be seen as missed opportunities for profit, as well as direct losses.

This feeling is destructive for financial trading for several reasons. First, the feeling of disappointment caused by missing an opportunity prompts a psychological reaction of fear and panic. Second, such a strong focus on the disappointment distracts from your own professional introspective analysis. It is destructive to think that if you have a specific number of losing contracts, then future contracts will have negative results as well.

In this case, the positive way to escape your disappointment is to analyze the mistakes that lead to your loss. For that, it is recommended that you outline a trading plan, where you clearly note the positive points of your trading, as well as the negative factors that have lead to financial losses. By analyzing your mistakes in such a way, you will send positive signals on a subconscious level to continue trading highly professionally.

So, analyzing the factors that cause panic to arise is already an effective approach that enables you to decrease the likelihood of this mental state arising in the first place. In order to outline more concrete approaches for calming yourself down once you’ve already begun to panic while trading, we have the following practical recommendations for you.

How do you calm yourself down?

Use the following approaches to prevent panic when trading:

● Don’t start trading without first doing your research and gaining the necessary professional skills
● Introspectively analyze your pluses and minuses as accurately as possible, this gives you the ability to construct the most effective behavioral model for you on the market
● Analyze your own market activity down to the smallest detail
● Clearly evaluate your own financial and technical abilities
● Don’t risk large amounts of money, only use funds that you can risk without causing psychological duress

If you’ve already begun to panic:

● Stop, it isn’t worth making further mistakes. Disconnect from the terminal, close your trading positions and try to relax!
● Return to trading on a demo account, it is risk-free and achieving a virtual result has a positive impact on your mental state
● Analyze your work and honestly acknowledge your mistakes! This approach will give you the ability to rid yourself of several factors that lead to panic, and you will be more emotionally stable

In conclusion, it is worth saying that professional psychological analysis of your own market activity and expanding your understanding of the finer details of trading enables you to not only avoid panicking but opens up the possibility for traders to receive more accurate trading signals.

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What do you do once you’ve started to panic? How do you calm yourself down?
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