Income Investors Overcome Emotions to Profit in Three Steps

Income investors overcome emotions to profit through stock and option trading by following a three-step process.

Income investors can overcome emotions to profit by taking the advice of seasoned market professionals who can navigate through trading minefields. The need for guidance is real, according to a recent survey that found differences in how people in various age groups made investment choices.

The survey by City Index took place between November 23 and December 4, 2023, to identify ways emotions affect traders. The survey included 3,000 participants and asked three key questions to let the respondents rate how much their emotions affected trading decisions.

While traders vary in their confidence levels, the reality is that they can lose money. This risk highlights the danger of over-relying on personal confidence, revealing a need to integrate robust risk management practices and a disciplined approach into trading strategies, the survey found. Regardless of confidence, effective risk management is essential for safeguarding financial capital amid market threats.

Income Investors Overcome Emotions to Profit: Day Trading Sherpas

Two day-trading sherpas recently helped their subscribers profit handsomely by guiding them through a volatile market. They correctly expected NVIDIA (NASDAQ: NVDA) to report strong earnings earlier this week when the market was in need of a catalyst to regain its bullish ways.

Those who trade in small timeframes include people who day-trade. They can stay connected to the market on a minute-by-minute basis in advisory services that specialize in quick trading, said Ahren Stephens, co-leader of the aptly named Trading Room. Every morning, 9:20 to 10:30 am ET, Stephens and his partner Hugh Grossman host the Trading Room, a virtual meeting where training and trading converge in a live, real-time market environment.

“We need to think quickly, logically and without emotion in an effort to buy and sell quickly and to be on our toes at a moment’s notice,” Stephens said. “Because of this fast execution and response time, sometimes it is possible that our emotions get involved in our trading setups. For me, I would say that occasionally emotions can play a role in our trading decisions.

“When news items come out and trades are going in your favor, as well as when you have to wait out a news event that isn’t going in your favor, that is when you need to exercise either quick exits or long-term patience.”

Stephens spoke this week to investors about day trading at the Las Vegas MoneyShow. He explained that overcoming emotions involve “conquering fear and greed.” The keys are to follow a trading plan, to use correct capital management techniques and to take breaks after huge wins or an unexpected loss.

Income Investors Overcome Emotions to Profit: Day Trading 

Trading is one of the few professions where you must learn to take a loss from time to time, Stephens opined. It is part of the process, he added.

Ahren Stephens co-heads Trading Room and Pick of the Day.

“The average person who comes to trading tends to think of trading in terms of normal rules of life,” Stephens said. “If you work harder at something, you tend to get rewarded with bonuses, with promotions, or with a greater sense of purpose and accomplishment. This is not true in trading.

“People who work harder in trading often get burned out, work longer hours, or make trading mistakes because they are chasing the one that got away,” Stephens said. “If you tend to think of trading in terms of a similarity to fishing, that would be a better mindset to have. Every day you come to the ocean: There are whales – the Market Makers, the Sharks – Institutional Traders, and the Swordfish, Mackerel, and Salmon – the Retail Traders. This is the one place in the world where the longer you last, the higher in the food chain you can go. We as traders are also The Fisherman.

“The Fisherman comes out every day with his net, hoping to catch a fish. Some days you go home with few fish, some days one fish, some days with many fish, but at the end of the day, you came to the ocean and tried to catch a fish to feed your family.”

Stephens said he is in the camp where he tends to cut losses immediately. If a trade goes against him, he exits it quickly and looks for ways to learn how to trade better in the future.

Stephens partners with seasoned trader Hugh Grossman to lead the Pick of the Day advisory service that focuses on assisting day traders who are unable or unwilling to do premarket analysis. The Pick of the Day is emailed to subscribers around 9:15 a.m., ET daily, on days the market is open. They also team up to co-head the Trading Room.

Income Investors Overcome Emotions to Profit: Seasoned Day Trader’s View

Grossman, who originally launched the Trading Room, responded that we may know what to do intellectually but trading will always be an emotional activity, nearly impossible to fully detach ourselves as we watch equity prices fluctuate with market forces.

Hugh Grossman co-heads DayTradeSpy’s Pick of the Day and Trading Room.

In talking to new traders, most are definitely always affected by emotion, Grossman said. But those who can transition to reducing their emotional input tend to become better traders, he added.

Income Investors Overcome Emotions to Profit: Retirement Expert’s View

It is not surprising that people report emotions are more involved in their investment decisions as they age, said Bob Carlson, a former pension fund chairman who heads the Retirement Watch investment newsletter.

“I suspect that’s primarily because they are more self-aware,” Carlson continued. “It is likely that younger people don’t realize how much emotions are motivating their decisions. They follow what they see online or what they hear friends are doing and believe they’re acting thoughtfully. Only after they are a little older do they realize emotions were the primary motivation.”

Carlson counseled that he suspects the percentage of decisions motivated by emotion are higher than reported in the survey. The survey is based on self-reporting, not an independent analysis.

“I think it’s likely many people don’t realize how often emotions influence their investment decisions,” Carlson commented. “Also, most people don’t carefully record their investment decisions and why they made them. That makes memory an important part of the survey’s results.”

Bob Carlson, head of Retirement Watch, talks to Paul Dykewicz.

Carlson expressed surprise that recognition of emotions in investing was as high as the survey showed. Most people don’t want to recognize that financial decisions were based on emotions, he added.

“The survey shows the importance of having a process in place for making investment decisions and following the process so that the role of emotions in investing is minimized,” Carlson concluded.

Income Investors Overcome Emotions to Profit: Survey Results

The survey revealed that more than one third of traders, or 35.3%, find that emotions influence their trading decisions on a moderate basis, becoming the most common response among all investors surveyed. Similarly, three in 10 traders, or 33.3%, reported that emotions play a role in some of their trading decisions, but not frequently.

One in five traders, or 20.2%, indicated that emotions frequently impact their trading decisions and are aware of their influence. However, almost three in every 100 survey participants, or 2.6%, reported that their trading decisions are consistently influenced by emotions, with it rated as a “significant factor in their approach.

The age group most likely to have their trading decisions consistently influenced by emotions were 41–60-year-olds, with this sentiment selected by 35.4% of that cohort. In comparison, just 10.1% of 18-24-year-olds surveyed considered emotions to be a significant factor in their trading decisions.

Income Investors Overcome Emotions to Profit: First Question

The first question of the survey asked, “How often do emotions influence your decisions?”

James Roy, a neuro specialist at Brainworks Neurotherapy, commented on the psychology of trading and how negative emotions can influence the decision-making of traders:

“Market participants frequently grapple with the repercussions of negative emotions, such as fear and greed,” Roy said. “These emotions can distort rational decision-making by activating the amygdala, prompting impulsive actions and clouding judgement during periods of market volatility. The evolutionary roots of these emotional responses, tied to survival instincts, contribute to the challenges traders face in using a disciplined and strategic approach.”

Recognizing and controlling these emotional triggers is imperative for traders seeking to navigate financial markets. Roy continued. Strategies can help mitigate the impact of negative emotions, fostering a more rational and deliberate decision-making process, he continued.

Acknowledging the psychological nuances inherent in trading lets individuals cultivate a resilient mindset in pursuit of sustained success, Roy concluded.

Income Investors Overcome Emotions to Profit: Second Question

The second question addressed, “How do you react to losses in trading?”

Most traders feel frustration and disappointment as a reaction to trading losses, with almost one in three, or 31.6%, reporting this emotion. However, they do try and learn from experience. One in five respondents, or 20%, will re-evaluate and adjust their trading strategy to avoid similar losses in the future, the survey found.

Fewer than one in 10 respondents, or 9.9%, will hold and wait for recovery when facing losses, hoping for a market reversal. Nearly as many traders, or 7.1%, responded that they will seek external advice or opinions from peers, mentors, or financial experts to gain insights on how to handle losses.

In attempting to recover losses quickly, almost one in 25 traders, or 3.9%, react to losses by increasing their risk-taking to increase gains, the survey reported. The age group most likely to engage in risk-taking was those aged 61 and above, with 31.4% saying they do so to recover losses quickly.

“I don’t take to losing easily anymore,” Grossman said. “I learn to re-evaluate and adjust strategy to avoid making the same mistakes as in the past. In learning from your errors, I tend to make less of them, leaving me with only the strategies that make me money.”

Income Investors Overcome Emotions to Profit: Third Question

The third question inquired, “How confident do you feel when making trading decisions?

The research highlighted that most traders feel slightly confident when making investment decisions, reporting a noticeable level of uncertainty. This sentiment was felt by more than one-third of respondents, or 34.4%, along with one in three feeling moderately confident in their trading decisions but recognizing room for improvement.

An equal number of 228 respondents expressed feeling either very uncertain and not confident at all in their trading decisions, or feeling very confident in their trading decisions and believing in their ability to make sound choices consistently. Fewer than one in 10 traders, 9.6%, reported feeling either not confident at all or very confident in their trading decisions, revealing a diverse range of confidence levels among traders.

Grossman told me that he feels “very confident” in his trading decisions or else he wouldn’t enter a position. He generally does his homework and enters only if, and when, the time is right.

“I’d rather not be in a trade wishing I was, than to be in a trade wishing I wasn’t,” Grossman said. “It doesn’t surprise me that most people say they are only slightly confident. What we see are lots of newbies, which is what we would expect of them at this point in their trading career.”

Income Investors Overcome Emotions to Profit: ‘Pigs Get Slaughtered’

“There is a great quote that many traders and investors know, which is this: ‘Bulls make money, Bears make money, but Pigs get slaughtered,’” Stephens said. “If you have overconfidence in anything that doesn’t have a 100% chance of working out in your favor, you can get slaughtered and have to lick your wounds. Overconfidence when dealing in financial trading can cause you to risk more than you should, which would then cause you to lose more money in the event that a trade goes against you.

“This, in turn, would cause an emotional blow that you may not be able to recover from. When traders start out, they may rely on ‘gut feelings’ that may work out with the first few couple of trades. These ‘gut feelings’ then may turn into nausea if a trade goes against them that they thought was going to go in their direction. They then, in turn, blame the market, can turn to hope for a position to turn into a winner, or even start praying depending on the size of their position. This is, of course, what separates the long-term players that stick around, versus the hobby traders that may lose their entire account over a few short weeks or months.”

Geopolitical Risk Rises

The death of Russian opposition political leader Alexei Navalny at the hands of his captors in a Russian prison and the refusal of the country’s President Vladimir Putin to release the body of his rival show that nation is moving further along the path of brutal autocratic government with shrinking prospects for its people to have a voice in their governance. With the main opposition leader now dead, the upcoming election in Russian is viewed as a sham by many world leaders, including President Biden, who responded with criticism of Putin and sanctions.

Putin has held power in Russia since 2000 either as president or prime minister. If he is re-elected and completes a new full six-year term in the country’s next election on March 17, he will surpass any Russian or Soviet leader in tenure, even Tsar Peter the Great, who died in 1721.

Russia also is making inroads in seizing additional land in Ukraine with Western leaders failing to sustain their previous funding of the weapons needed to fend off the invaders. The United States Congress specifically has been unable to pass legislation to help Ukraine continue its quest for freedom as a treasure beyond measure.

The war in Gaza is continuing in response to the Oct. 7 attack and murder of 1,200 civilians in Israel by Hamas. Attempts to enact a temporary ceasefire thus far have failed.

Traders need to consider geopolitical risk when making investment decisions. At least for day traders, the risk typically is limited to just minutes or hours.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Special Holiday Offer: Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing on multiple-book purchases.