The psychology of risk: Emotions and decision-making in trading
money, there is another group that is experiencing significant losses.
However, the number of people profiting from the stock market may be less than the number who lose.
And what differentiates a successful trader from a non-successful one is their understanding of risk and its management.
Mark Douglas, an extremely successful trader, mentions in his book “The Disciplined Trader” that successful trading is 80% money management and 20% strategy. The money management part involves largely assessing the risks.
Therefore, understanding risks and how they influence emotions and decision-making in trading has become crucial for traders today.
Understanding risk psychology
The stock market is abundant with fluctuations in price, volatility, and uncertainty, which significantly impact trading decisions for participants. It is also evidently prone to trade risk, which is the potential for financial loss or negative consequences when trading an instrument on the stock market.
However, on the other side, if the risk is managed with efficacy, a reward awaits the trader, which is the profit they make.
This is where a lot of traders fail to realise the risk and seek an edge to reap more profits. A common saying that goes around is “the greater the risk, the higher the potential for profit.” However, the point that is missed is that there is also a high chance of bearing significant losses, which most of the traders do.
A study conducted by the Securities Exchange Board of India (SEBI) stated that nine out of ten traders in the F&O (future and options) segment lose money. Therefore, it efficiently proves that trading is a risky affair, and it significantly impacts emotions and decision-making.
Risk-impacting emotions
While in a
