Emotions often drive investment decisions. Trading lore is replete with examples of how fear and greed influence the masses to buy and sell at the wrong time. Similarly, behavioral economists have focused on how avoidance of regret powerfully compels many traders to make poor investment decisions. To avoid painful feelings of regret, for example, traders hold on to losing positions, hoping they will turn around, or they sell off a position prematurely to lock in quick gains.
The interplay between emotions and risk-taking keeps many traders second-guessing their decisions. When we think our next trade will be a winner, we can’t wait to execute it, but when we are uncertain, we put off making a decision, and more often than not, miss a significant market move. The challenge of trading is to accurately perceive risk, control our emotions, and execute a trade calmly and rationally. Overconfident traders, however, may have an inability to accurately gauge their emotions
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