Thadeus Geodfrey and finance are inseparable. He is a versatile expert with a strong cryptocurrency and market analysis background. Thadeus provides a unique blend of technical and strategic insights as a seasoned financial writer. His overarching probe and attention to detail inspire the InvestingGuide community. He guides you through the continuously evolving market landscape to build solid investments or make successful trades.
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Whether a trader or an investor, our motive is always the same – to succeed. Success here could mean making a profit from trading or seeing our investment appreciate over time. Striving for success and avoiding losses are natural parts of being human. Market volatility creates reasonable trade entry and exit points to buy or sell at different prices for profit. But losses happen and they not only hurt, they can also cause psychological and emotional distress. So, how do changes in market prices affect our mental well-being as traders or investors?
In This Guide
Psychological Impact on Investors
Usually, there are more hospital admissions for mental health issues during stock market downturns. The same applies to cases of domestic violence, declining cognitive health in retirees, and depression. That’s all down to the mental health of investors and traders. But as a trader or investor, you should be prepared for all market movements. While naturally, we try to avoid losses, it happening should not be a reason to be anxious, face depression, or psychological distress.
None of us wants to dwell on a bad situation. Psychologists say we have a defense mechanism to deal with unpleasant things from our perceived reality. Losses could be traumatizing, especially if they affect a life milestone. So, traders could take actions that worsen the situation if they cannot recover from the financial loss.
And just as losses can cause us problems, so can success. There’s no doubt success brings us joy. Well, but it’s not free. We all know too well the higher the height of success, the harder the fall. Success brings heavy responsibilities, high expectations, and unwanted attention. The higher we climb, the more we are afraid to fall, so, anxiety can strike. All these pressures can take a toll on our mental health.
Common Mental Health Challenges Faced by Investors
The psychological toll of market volatility manifests in various mental health challenges. Behavioral finance studies highlight several key psychological impacts of market fluctuations as follows:
Anxiety
Unpredictability in markets is not comfortable. For some traders, it triggers anxiety and stress, which affects their decisions and overall well-being. They develop anxiety disorders, don’t sleep well, and are generally distraught.
Increased Stress Levels
Some equities like contracts of difference (CFDs) are highly volatile. So traders get weary as they watch prices move against their expectations. Such fluctuations in portfolio values can cause significant stress.
Depression and Mood Swings
People react differently to bad situations. For some, prolonged market downturns lead to feelings of hopelessness and depression. They are constantly off and on, switching their moods hysterically. Such actions not only isolate us in society but also affect our well-being.
Overreaction to News
The fear of the unknown, which we have said creates anxiety, may also cause you to overreact to news events. Since you may not be thinking straight, you overreact to short-term market movements. Such irrational trading decisions further exacerbate market volatility.
Loss Aversion
We experience the pain of financial losses more acutely than the pleasure of equivalent gains. So, most of the traders create a defense mechanism. They’d rather avoid risk even if they see an opportunity to strike. Such fearful behavior inhibits us from succeeding in the market.
Impact of Technology on Investor Mental Health
Technology has transformed how we access, share, and react to market information. Today, the market is with us at our dining tables, as we instantly get information on what’s happening. But how has that impacted our mental health?
Real-Time Market Updates
Unlike in the past when we had to wait for financial market news, today, we have instant access to market data and news updates. In fact, bad news travels as fast as a bushfire. We get live coverage as events occur. While this is good, it also amplifies panic in the market. So, today, more than ever, the market is suscetible to emotional responses and thus highly volatile. So, if you can’t control yourself, your emotions can push you to make irrational decisions.
Social Media Influence
Social media platforms influence investor behavior and create emotional responses through market sentiments. An influencer or prominent person can easily sway the market price of a product with a single comment. A good example of this is how Elon Musk has, in the past, influenced the price of Dogecoin.
Algorithmic Trading
Automated trading algorithms are a good tool for helping traders deal with volatility and save their mental health. It cuts down our involvement in trading by automating decisions. We can use our spare time to engage in other activities, rest, foster social ties, and save our mental health.
How to Manage Stress and Anxiety
Investing in financial markets is not just about profiteering, it’s also about maintaining a healthy mindset. So, manage how you respond to the market to maintain emotional resilience. Here’s how to deal with stress and anxiety:
Diversification
Balance your Portfolio
Risk Management Strategies
Seeking Professional Advice
Spread your investments across different assets to reduce the impact of market fluctuations. Other than different classes of assets, also spread your investment across sectors and economies. So, if one market is adversely affected, another will offset the negative balance.
Strike a balance between short-term and long-term gains. Focusing only on now can lead to impulsive decisions due to sudden market movements. Focus on the market fundamentals and the bigger picture to base your decisions on facts, not sentiments.
Online brokers provide auto-trading tools to implement risk and portfolio management. Exploit the various techniques, like setting stop-loss orders, to protect against downside risks.
Sometimes you fail to develop coping strategies and maintain a balanced approach to investing. If that’s the case, perhaps you are overly anxious, consult with a financial advisor. Also, you can talk to a mental health professional for mental calm.
Final Thoughts
Market volatility is part of what makes trade possible. While we don’t want to make losses, unfortunately, they happen and the clock cannot be turned back. It’s better to manage the psychological process than to make up losses through risky investments or drastic measures. If they happen, handle them positively, recognize harmful methods, and avoid them. Protect your mental health by focusing on what matters and what you can fix. Build emotional resilience with proactive risk management to better handle market fluctuations. Discover our recommended brokers and explore their auto-trading tools that can help you.