It is well known that fear and greed are both powerful stimuli in the trade markets. When a large profit appears assured, many dash at the speed of light to make a trade. At the other end of the trading spectrum, when a downturn is inevitable, for one's own safety, they best step aside quickly, to avoid the stampede that is certain to ensue as traders assemble to "sell, sell, sell"!
Behavioral economists have identified another powerful impetus that drives the actions, or inactions, of those in the trades market, regret. These feelings can impede traders from taking necessary calculated risks in order to "stay in the game". This emotion is so powerful, that an individual may not place a trade due to the possibility of making a mistake and "beating themselves up" about it later. However, it is essential to take risks in order to profit in the trades market. To become a trader of means, it is imperative to bridle unhealthy feelings of regret in order to succeed.
Feelings of Regret: A "Catch 22"
Feelings of regret are often a "catch 22". Regardless, if you make a particular trade and don't profit, or you allow an opportunity to make a trade pass, in both instances, feelings of regret are bound to surface. One imagines various outcomes of each decision. "If only I had made the trade, I would be out of my financial hole," or "If I had weighed the risk more carefully, then I wouldn't be in this situation". The problem lies in believing that if we had made a different decision, the outcome would have been better. Regret leaves us second-guessing our every move. This leaves us paralyzed from taking further action, afraid that we will somehow make a mistake.
Regret: A Powerful Motivator
Although regret is known to cause inaction, it can be a powerful motivator as well. For instance, if you regret saying hurtful words to a friend or another individual, you may be motivated by your regret to apologize. As gas prices hover around $3 a gallon, you may regret purchasing a vehicle that gets low gas mileage. This regret may motivate you to take alternative forms of transportation or trade in your vehicle for one that is more economically, not to mention more environmentally, efficient.
When viewing the trades market, one’s regret at making a losing trade can motivate them to take calculated trade risks in order to recoup their losses. Dr. Keith Markman, an Ohio University psychology professor, and his associates, performed a study that demonstrates how regret can spur people to action if they feel their efforts will bring about positive change.
In the study, the researchers had participants play a computer game of blackjack. They controlled whether each individual would win or lose. It is not surprising that the results showed that those who lost had the strongest feelings of regret. However, the study went one step further. Some participants were given the option to place an additional bet to win back their losses. It was discovered that those who were able to make an additional bet displayed more regret than those who could only place one bet and lost.
What would be the reason for this phenomenon? It is postulated that when we are faced with a win/loss situation and we lose, we take it in stride. We take our licks and go on with our lives. We have no other choice, correct? When given the opportunity to fix a situation or problem, we may experience increased feelings of regret, but we are, nonetheless, spurred into action.
Regret: A Powerful Motivator or Paralyzing Agent? Which is it?
This may appear contradictory when viewing the theory by behavioral economists that regret is one of the biggest roadblocks experienced by those in the trades market. How is this explained when regret is shown to incite action if it may bring about positive change? For example, if a trader is hit with a loss, they are often motivated by their regret to take calculated risks to regain some if not all their losses.
Behavioral economists believe that the problem or roadblock is not the regret experienced after a trade loss has occurred but feelings of regret that surface before there is an action or trade made to regret! This is the "type" of regret that brings about inaction instead of needed action. As a trader, it is imperative that you not fall into this rut of inactivity.
Instead of focusing on the negative, try to encourage yourself instead. Even if you are hit with a loss, that does not spell the end of your trading career. There is always the opportunity to recoup your losses by making future well-informed, calculated trades. All those in the trades market experience losses. You are in good company. Seasoned, successful traders are made not born.
The only way to develop the necessary skills is to learn from your mistakes, keep informed of various trading methods, and learn, by trial and error, which ones work best under different market conditions. This cannot be accomplished by allowing your emotions to dictate your actions, or in the case of paralysing regret, inaction. You have to be "in it to win it".