When the market indicator turns red and prices start to fall dramatically, many traders go into a state of fear and panic, which is one of the biggest mistakes that can lead to huge losses and destruction of capital.
Why do fear and panic occur?
1. Emotional response: Seeing a portfolio shrinking with every moment leads many to make irrational decisions in an attempt to protect capital.
2. Lack of a clear plan: Lack of a trading strategy makes investors vulnerable to momentary market fluctuations.
3. Herd Effect: When others start selling, some feel pressured to do the same for fear of “losing out more.”
The danger of panic selling
• Realizing actual losses: What were merely “unrealized” losses become a confirmed loss when selling at the bottom of the market.
• Missing the bounce: Markets often experience strong bounces after large sell-offs, which means missing out on an opportunity to recover capital.
• Entering a loss cycle: When an asset is sold at a loss and is later invested at a higher level, the cycle repeats.
The Big Bounce and the Next Collapse
Sometimes a sudden bounce occurs after a sell-off, causing panicked investors to buy when prices rise, only to find themselves stuck when the market drops again. This behavior gradually destroys capital as a result of buying and selling at the wrong times.
How to avoid falling into the trap?
1. Control emotion: Don't let the color red drive your decisions, but base them on data and analysis.
2. Plan ahead: Determine entry and exit points based on a well-thought-out strategy.
3. Long-term thinking: Financial markets are volatile by nature, and success in them depends on patience and a long-term vision.
a summary:
Fear and panic selling may seem like the easiest solution, but it is actually one of the fastest ways to destroy capital. A successful trader is one who stays calm in difficult times and uses volatility to his advantage rather than being a victim of it.