Trading the Markets: Hope

In the psychology series, I’ve covered fear, greed and discipline. Let’s talk about another controlling emotion due to which we could suffer unnecessary losses in the markets: hope.

Hope is a very important part of our lives. If there’s no hope, of a better future, why would one maintain their health, or work? But in the financial markets, one can not rely on hope. As Henry Cavill’s character pointed out in the sixth part of the Mission Impossible series, “Hope is not a strategy.”

The problem with a trader/investor relying on hope to get through is that it blinds them to the pointers the market is throwing at them that might tell them that the result they are hoping for might not occur. Our bias skews the factors we consider in our analysis.

Hope gives us a false sense of confidence and we keep adding to losing positions in the name of “averaging” so that we don’t have to actually book any losses. What eventually happens is that you would have to sell at a point because the losses just get too big to bear, and that point would be very near to the actual turning point of the asset’s price journey. This happens because many participants would be relying on the same thesis and would give up around the same area due to predictable human psychology. The big fish then swoop in and take all the profits for themselves.

Hope also sometimes leads to the other two emotions we’ve discussed before: greed and fear. When you hope a trade you’re losing turns around, you’re engaging with fear. When you’re not booking profits even after considerable gains, you’re engaging with greed. And both of these situations lead to loss of wealth.

So what can you do to keep yourself from relying on hope in both winning and losing positions?

As with everything, you need to follow your backtested plan to a T. You cannot engage with emotions like greed, fear and yes, hope in the financial markets. Our brains are not inherently wired to book big profits and cut losses when they’re small, and that’s why most people lose money in the markets. So you’ve got to do things that other people are not able to do so that you get the results that these people don’t.

So, all the best, control your emotions and if you enjoyed this article, you can read more from me here. And do let me know if you want a specific topic covered. Subscribe for free to receive more posts like this every day!