In the twelve months to July 2022, the number of traders in the US spot FX market was greater than before the Covid-19 pandemic.1 Whilst investing has soared in popularity, challenging market conditions, chronic uncertainty, or a history of trading losses have led to rising levels of stress amongst traders.2,3 With this in mind, City Index commissioned a survey of 3,000 participants to delve deeper into the trading psychology of new traders.

Q1: How often do emotions influence your decisions?

City Index can reveal that over a third of traders find that emotions influence their trading decisions on a moderate basis (35.3%), which is the most common response amongst all investors surveyed. Similarly, three in 10 traders reported that emotions play a role in some of their trading decisions, but not frequently (33.3%).

One in five traders felt that emotions frequently impact their trading decisions and are aware of their influence (20.2%), however, less than three in every 100 reported that their trading decisions are consistently influenced by emotions—with it being a significant factor in their approach (2.6%).

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

James Roy, Neuro Expert at Brainworks Neurotherapy, commented on the psychology of trading and how negative emotions can influence our decision-making: 

“Market participants frequently grapple with the repercussions of negative emotions, such as fear and greed. 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 maintaining a disciplined and strategic approach.

Recognizing and managing these emotional triggers is imperative for traders seeking to navigate the complexities of financial markets. Strategies that integrate emotional intelligence can help mitigate the impact of negative emotions, fostering a more rational and deliberate decision-making process. Acknowledging the psychological nuances inherent in trading allows individuals to cultivate a resilient mindset, promoting sustained success in the ever-evolving landscape of finance.”

Q2: How do you react to losses in trading?

The majority of traders feel frustration and disappointment as a reaction to losses in trading, with one in three reporting this emotion (31.6%), however they do try and learn from the experience. One in five respondents will re-evaluate and adjust their trading strategy to avoid similar losses in the future (20%).

Fewer than one in 10 respondents will hold and wait for recovery when facing losses, hoping for a market reversal (9.9%), which is a similar level of traders who will seek external advice or opinions from peers, mentors, or financial experts to gain insights on how to handle losses (7.1%).

In an attempt to recover losses quickly, almost one in 25 traders react to losses by increasing their risk-taking to increase gains (3.9%). 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.

Q3: How confident do you feel when making trading decisions?

The research highlighted that the majority of traders feel slightly confident when making trading decisions, reporting some confidence but a noticeable level of uncertainty in their trading decisions. This sentiment was felt by over a third of respondents (34.4%), alongside one in three that feel moderately confident in their trading decisions, but recognising the room for improvement.

An equal number of respondents (288) felt either very uncertain and not confident at all in their trading decisions, or reported feeling very confident in their trading decisions and believing in their ability to make sound choices consistently. Fewer than one in 10 traders felt either not confident at all or very confident in their trading decisions (9.6%), revealing a diverse range of confidence levels among traders.

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

How emotional trading can be overcome for improved results

Trading can be an exhilarating journey, offering individuals the opportunity to grow their wealth and make informed financial decisions. The survey from City Index does, however, uncover that some traders grapple with avoidable emotions, such as fear, panic, and greed, often resulting from a lack of knowledge and inadequate emotional management tools.

Amidst the challenges, it’s crucial to highlight the positive aspects of trading. With the right mindset and tools, trading becomes an empowering experience. By embracing realistic goal setting, discipline tracking, and psychological insights, traders are equipped with the necessary resources to navigate the emotional rollercoaster of the market. Trading, when approached with discipline and guided by insights, can foster financial growth and confidence.