The Negative Effect of Emotion on Trading Decisions
Stockscores Foundation for the week ending March 17, 2025
In this week's issue:
In This Week’s Issue:
- Upcoming Events – Learn to be a Better Stock Market Investor
- Market Outlook – Market Bounce Back
- This Week’s Market Minutes video – Why I Love Stock Market Crashes
- Trader Training – The Negative Effect of Emotion on Trading Decisions
- Strategy – Is it Time to Buy TSLA?
Upcoming Events – March Webinar Series
Learn how to be a better investor and profitable trader with this free four part series. For best results, attend them live and in order as each will build on concepts from the earlier sessions.
- The Effective Way to Analyze Any Stock in Seconds
- Tues. March 25 6:00 PM PT
- Creating Wealth – How to Invest in the Stock Market Successfully
- Winning Trading Strategies, Day and Swing Trading for Part of Full Time Income
- How Stockscores Tools and Education Can Help You Make Stock Market Profits
- Saturday March 29 9:00 AM PT
CLICK HERE TO REGISTER https://www.stockscores.com/trader-training/upcoming-events/
Market Outlook – Market Bounce Back?
After a three-and-a-half-month downward trend in stocks, the market finally showed signs that it is making at least a short-term bottom. I say short term because today was a break of the downward trend of the past month but not the longer-term downward trend that began in December. Therefore, we will likely see a short-term improvement as the markets make a recovery from oversold conditions. However, we have not yet seen the signal that the longer-term weakness in the market is over. This is just the first step toward that.
This Week’s Market Minutes Video – Why I Love Stock Market Crashes
Stock market crashes create opportunity. I this video, I explain why and how to take advantage of them. Then, I provide my regular market analysis and look at the trade of the week on SUNE.
CLICK HERE TO WATCH THIS WEEK'S VIDEO ON YOUTUBE
https://youtu.be/hSg9wp65y1c
Commentary – The Negative Effect of Emotions on Trading Decisions
Stock trading is as much a psychological game as it is a financial one. Many traders, regardless of experience, fall victim to emotional biases that lead to costly mistakes. The emotional attachment to money, fear of missing out (FOMO), and impulsive decision-making often result in irrational trading behavior that deviates from sound investing principles.
One of the most common psychological pitfalls in trading is the reluctance to take losses. Investors often develop an emotional attachment to their money and their investments, making it difficult to accept when a trade has gone wrong. Instead of cutting losses early, traders hold onto losing positions, hoping the stock will recover. This behavior, known as loss aversion, stems from the pain of realizing a financial loss, which is psychologically more impactful than the pleasure of an equivalent gain. As a result, traders let their losses run while prematurely selling winning trades to lock in small profits, ultimately damaging their overall returns.
Another emotional trap traders fall into is the fear of missing out (FOMO). When a stock experiences a rapid price increase, traders may feel pressured to buy in at inflated prices, fearing they will miss further gains. This often leads to impulsive decisions, where traders chase hot stocks without the risk and reward profile of the trade. FOMO-driven trades frequently end in losses, as traders buy near market peaks and sell when the hype fades.
Moreover, emotions often drive traders to take risky, questionable trades rather than relying on data and analysis. Instead of following a well-structured strategy, traders may act on gut feelings, media hype, or market rumors. Emotional decision-making can lead to overtrading, excessive risk-taking, and falling for market manipulations. Successful traders recognize that emotional discipline is crucial and implement strategies such as pre-defined stop-loss orders, strict risk management, and objective analysis to mitigate impulsive decisions.
Understanding and controlling emotions is essential for success in stock trading. Investors who learn to manage their emotional biases, accept losses when necessary, and make decisions based on logic rather than impulse can improve their long-term profitability. The market is driven by psychology as much as fundamentals, and those who master their emotions gain a significant edge over those who do not.
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TSLA's stock price has been a yoyo of volatility over the past 5 months, surging from $240 in November of 2024 to $480 before Christmas. Since then, it has fallen all the way back to $240 again.
This volatility is great for short term traders, helped by the leveraged ETFs that you can use to further improve your performance. For example, TSLL is a double leveraged version of TSLA that went from $12 to $40 but has now fallen back to $8. TSLQ is the short, double leveraged version of TSLA which has gone from $20 in December to its current price of $60.
So, what is next? Right now, TSLA is building a reversal pattern that has potential for a move to the upside. To complete the pattern, TSLA needs to break up through short term resistance at $250. If that happens, it has a good potential to move up toward $300 provided support at $233 is not broken.
When trading the leveraged versions of TSLA, whether long or short, it is important to analyze the chart of TSLA rather than the leveraged ETFs. Leveraged ETFs are rebalanced daily which affect their long term price chart in negative ways. These are fine to trade in the short term but base your analysis on the chart of the underlying stock, TSLA.
1. TSLA
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2. TSLL
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3. TSLQ
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