trading-logic vs emotion?

<p>Trading market, it’s a combination of both. Technical analysis is the translation of Behavioural finance in charts. As behavioural finance deals mostly with cognitive and emotional biases that make investors and traders act in a specific way, technical analysis quantifies these acts into the charts and other mathematical indicators. For example, the failing bullish momentum (i.e. the buyers are leaving slowly and losing force or they believe that we’re already too high), can be seen in a bearish divergence with a technical indicator. Another example is the support and resistance levels which can be seen as psychological levels to some investors that may feel that certain levels are cheap, and others are expensive.</p>

<p>The emotional side is the uninformed, misinformed, and the gamblers. There are new investors, misinformed retail investors and retail traders, and poorly educations small funds managers. The logical side are all the professionals, institutions, and wise investors who make decisions on logic, risk assessment, and analysis.</p>

<p><br>The market is neither emotional nor logical; it doesn’t have any feelings whatsoever. It’s the people who project and act on their individual emotions. So collectively it’s either fear that drives selling or greed that spurs buying.</p>

<p id="isPasted">For consistently successful trading, logic must dominate emotion. Emotions like fear and greed lead to irrational and impulsive decisions, while a logical, systematic approach based on data and analysis is key for discipline and long-term profitability. The battle between emotion and logic is a primary challenge for all traders.&nbsp;</p><p><strong>The consequences of emotional trading</strong></p><p>Allowing emotions to drive trading leads to several common and costly mistakes:&nbsp;</p><ul><li>Fear: Can cause a trader to exit a winning position too early, missing out on potential profits, or to panic sell during a market dip, locking in losses.</li><li>Greed: May lead to holding a winning position for too long in the hope of greater gains, which can result in the market turning and erasing profits.</li><li>FOMO (Fear of Missing Out): Triggers impulsive decisions, causing traders to jump into a rapidly rising market or stock out of a fear of missing potential returns, often near the peak.</li><li>Overconfidence: Can occur after a string of successful trades, causing a trader to take on excessive risk or ignore risk management principles.</li><li>Revenge Trading: Driven by frustration after a loss, a trader may take impulsive, unplanned positions in an attempt to quickly win back lost money, often leading to bigger losses. </li></ul><p><strong>The benefits of logical trading</strong></p><p>A logical approach to trading is rooted in a well-defined plan and objective analysis, which helps mitigate emotional impulses. </p><ul><li>Data-based decisions: Logical traders use market data, technical indicators, and historical trends to form their strategies, making decisions based on factual evidence rather than impulse.</li><li>Discipline and consistency: A trading plan outlining entry and exit criteria, stop-loss levels, and profit targets is central to logical trading. Following this plan systematically ensures discipline and consistency, even during market fluctuations.</li><li>Risk management: Logical trading prioritizes risk management by using stop-loss orders and managing position sizes. This protects capital and reduces the emotional stress associated with potential losses.</li><li>Long-term perspective: Focusing on long-term goals helps a trader avoid overreacting to short-term market noise and emotional swings. </li></ul>