Sunday, April 11, 2010

Stop! Face it!

Imagine that u initiate a long trade after doing proper homework.

Your understanding says that the price will go up.

Your method says that it is perfect time to enter the trade.

You even have more than sufficient buffer funds to handle any adverse price movement.

In spite of all this homework and conviction

why do u have butterflies in stomach?

why do u feel nervous?

why are u restless and uneasy?

God forbid, if the price actually dips

the fear of loss takes its toll and u square off after putting a brave face for some time! Only to find the stock recover and rise!!

Even in case the price goes up,

the fear of losing the profit results in premature exit!

The funny part is that all this while u know that your reaction is wrong.

So, why do u still succumb to this fear?

What do u do to overcome this weakness?

Fortunately, "James-Lange theory of emotions" can help us understand and overcome this.

This theory was developed independently by two 19th-century scholars, psychologist William James and physiologist Carl Lange.

According to this theory "we don't run away because we fear, but we fear because we run away".

Both the scholars conducted several experiments to prove their theory.

As explained by the scholars :

".....suppose you are walking in the woods and you see a grizzly bear. You begin to tremble and your heart begins to race. The James-Lange theory proposes that you will interpret your physical reactions and conclude that you are frightened ("I am trembling, therefore I am afraid.").

Likewise, on seeing the adverse movement of price in stock trading, if (by habit) your first reaction is to square off, you will panic! Resulting in actual square off!

If, on the other hand, your first reaction, out of conviction of your homework and safety measures, is to ignore any adverse price movement, you will not panic and hence not square off!

Think it over.

"We don't run away because we fear, but we fear because we run away"

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