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The most dreaded situation that an investor must aim to avoid is a panic crisis. It is, however, easier said than done. When it comes to avoiding panic, it's important to understand how investments work.
The business cycle and the market cycle are discussed. When we try to understand these cycles, we see that they come in a variety of forms. The emotional cycle of an investor, not the market cycle, is what requires our attention here. We're all humans, so we have feelings. When it comes to trading, though, it is usually our emotions that cost us. This article explains the emotional investing cycle.
An investor goes through a series of psychological stages. Assume that an investor takes a long position at the start of the curve. We can see that the trader begins with a favourable viewpoint, and that he or she has a positive outlook on the market in general. When the market is rising, his optimism transforms into exhilaration, as he feels the market will continue to favour his investments. His exhilaration develops into thrill as the market rises. He is overjoyed with his investment and believes he has landed a terrific deal. The stock in which he invested is now all over the headlines. He is overjoyed with his investments. This is the time in the cycle where the financial risk is highest.
This is the point at which the market plummets. Because the stock is saturated, the market swings against the investor's wishes. At first glance, we can deduce that he is concerned about his profession. He believes, however, that this is a temporary effect and that the market will soon resume its upward trend. The market continues to move against his wishes. The investor is now denial about the abrupt drop in the value of his investment. When the market fails to recover, he becomes fearful of the market and his investment. Then there's the point of no return. The investor has gotten himself into a pickle. He's at a loss for what to do and is on the verge of panic.
The investor is emotionally stimulated in the panic zone, and his emotions cause him to want to close a position regardless of the present market price or market scenario. This is the cycle's most susceptible stage. He reaches a point of pessimism, where he has lost all hope and is depressed. As a result of this, the investor feels helpless and panicked, he shorts his position and exits the transaction. He cuts his losses and exits his transaction when the financial potential is at its peak.
Because he lacks a risk management strategy, the trader finds himself in this situation. He would have set a stop-loss at a level he could manage if he had designed his strategy around the risk he was willing to take. However, because there was no stop-loss in place, the trader believes the investment will recover and that he can always make up for the loss he has already suffered. It has been scientifically shown that when you are emotionally charged, a separate portion of your brain is active, and you stop thinking properly.
Conclusion
We're all terrified, which is understandable. When certain risk management strategies are implemented, however, the damage caused by the panic situation can be reduced. In high-value trades, even the tiniest absence in the risk management approach might result in the loss of the entire trading account. For many investors, this may mean losing all of their money and possibly jeopardising their careers.
It's hardly rocket science to devise risk management solutions. To use a risk management technique to the benefit of your assets and total portfolio, all you need is a strong grasp of the market. A Certified Investment Advisor can assist you in determining your risk tolerance and planning your investments to line with your long-term financial goals.