When choosing trading pairs and coming up with a winning trading strategy, emotions have a huge role to play.
All successful traders attest that success in the financial markets doesn’t take some genius in reading charts; for the most part, it’s about properly managing emotions. However, this is easier said than done, especially when money is at stake.
Luckily, music has been shown to ease some of these emotions and help traders remain calm even in high-stakes environments.
The Rhythm of Trading: Emotions and Decision-Making
To deal with the emotions that characterize trading, it is essential first to understand the emotions involved. The two main emotions traders have to deal with are fear and greed.
By controlling these two emotions, managing volatility in the financial markets, including stocks and the forex market, becomes easier.
You are probably wondering: How do emotions affect trading? Consider a scenario where you trade in the S&P 500 at $3500 with a leverage of 1:50.
When making this trade, you have probably already done a strong analysis to conclude that the market will go up.
However, due to the high leverage, a small market dip can make you panicky. Out of the fear of being margin-called, you end up closing the trade.
The market eventually turns a corner and rallies by 200 points or more, and you miss out on the trade. Through the emotion of fear, you end up missing out on a good trade and also losing money in the process by closing out below the price you bought.
The emotion of greed works in the same way but in reverse. For the same trade of buying the S&P 500 at $3500, a market can rally and give you a good return by just moving a few points.
With the trend confirmed, and the trade confirmed, confidence drives the trader to increase leverage to make more money or even open multiple trades to try and capitalize on the trade.
The result is that a slight correction in the market can lead to a margin call for what was originally a good trade had greed not set in.
While it may seem like overtrading and taking on excessive leverage may be the key drivers in bringing out the emotions of fear and greed, the randomness of the market also has a role. That’s why it is vital to have strategies to deal with fear and greed even when the leverage and other trading parameters are right.
Luckily, music is a fantastic way to deal with the emotions of fear and greed. The choice of music when trading can go a long way in calming these emotions.
For instance, slow, calm music has been shown to ease the emotion of fear. This means listening to such music can help calm a trader down when market noise could drive them towards closing out a trade that would otherwise return to the correct direction if left on its own.
On the other hand, jazz music has also been shown to calm a person down from the emotion of over-excitement. For someone with a trade that is going well but is getting too excited and about to mess up the trade, listening to such music can help a lot.
The impact of music on a trader’s decisions has a scientific basis. According to an article by Pfizer, music has been shown to increase blood flow to the brain. This, by extension, gives a person more energy and control over their emotions.
The Pfizer article adds that whenever you get chills after listening to a particular song, it is due to the release of Dopamine.
This neurotransmitter is known to improve moods. This explains why a trader who is tense and about to make a wrong decision can calm down after listening to a good song and hold back, or move towards a more rational decision.
Beyond The Music
While music can help you better control your emotions when trading, it is crucial to understand that this alone cannot enhance your trading outcomes.
As such, mastering the emotions of trading through music should also be combined with other factors. The most important of these is an understanding of the general market dynamics.
While no one can predict the market with certainty, certain macro factors can help determine the overall direction the market will take – all factors held constant.
A case in point is the stock market’s performance post-2008. Between 2008 and 2021, interest rates remained at near zero.
This disincentivized saving and saw money flow into the stock markets, which offered better returns. Essentially, long trades gave better outcomes than shorts in that period.
Without a good understanding of the macro factors driving the market, it is easy to find yourself fighting the market, which is a losing battle for the most part.
It is also essential to manage risks as much as possible. The best way to do this is to internalize that markets are random.
As such, even if your analysis tells you that a trade will go a certain way, there is always a chance that it can take the opposite direction and harm you. For this reason, ensure that you give your trades enough breathing room in case of a drawdown.
Still on being aware that you can be wrong, it is vital to cut losses once a trade goes bad. The worst decision a trader can make is to let a bad trade run until it wipes them out.
This is where music comes into the picture, to control emotions and help you cut out bad trades without feeling bad about it.
Trading is all about the emotions of fear and greed. These emotions drive traders to close out potentially good trades out of fear, ruin good ones, and sometimes enter into bad trades out of greed.
The good news is that music can regulate these emotions and help traders make better decisions. All one has to do is find music that fits whatever situation they find themselves in when trading.