What is the regret theory in trading?

Some newbies allow self-doubt to get in the way of trading. Beginner traders are prone to regret losses, wrong decisions, and missed opportunities. It’s right to analyze your choices and learn from them. However, it’s wrong to focus on them and stop doing something you could succeed in. 

Even Warren Buffet, one of the most authoritative investors in the world, makes investment mistakes. For instance, in 1993, his company Berkshire Hathaway bought Dexter Shoe Company. This investment resulted in a 15 billion dollars loss for Berkshire’s shareholders. If Buffett gave up, he wouldn’t be the most successful investor these days. 

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By learning the basics of the regret theory, you will know how to stop regretting every trading decision you make. 

What is the regret theory?

The regret theory is a psychological term widely used in trading and investing. Any investment includes risks. There is no investor who would make only correct decisions. However, there are those who regret any wrong decision they make. It leads to a cycle of failures. 

Imagine a trader buys Bitcoin at $60,000, expecting it to rise further. However, a bullish trend turns down, and bitcoin plunges to less than $20,000. There are two ways the trader might behave. 

Scenario 1: The trader closes the trade believing the first cryptocurrency will never recover and regret that they bought it at highs. After, the trader decides to stop trading. 

Scenario 2: The trader closes the trade with losses and understands it was a mistake to buy at highs. However, they learned from this that market analysis is a vital part of trading. So the next time, they analyze the market properly and remember it might fall. 

In the first case, the trader lost an opportunity to succeed in the future and open trades that could cover those losses. It’s all about the regret theory. 

Fear of missing out (FOMO)

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The regret theory goes hand in hand with the fear of missing out. It’s another psychological issue a newbie trader can face. The fear of missing out is when a trader is afraid of missing an opportunity to get a significant income. They think irrationally and try to follow the market without proper analysis. 

Let’s take the same example. A trader sees Bitcoin skyrocketing. They want to be among traders who have such a valuable asset. However, they don’t analyze the market and don’t understand that the asset is overbought. It means there are no fundamental factors that would explain such a high price. The asset is driven by the market sentiment that will change as soon as the euphoria ends. 

The trader buys BTC at highs and suffers losses when the trend changes.

How to overcome regrets and FOMO

Some basic rules will allow you to overcome the regrets and fears you may have while investing. 

1. Be ready for mistakes

You should remember that any investment is risky. You won’t be able to have only winning trades. Keep in mind that you can correct your mistakes in future trades and cover those losses. 

2. Be flexible

If you are stuck with your beliefs, you won’t succeed in trading. Professional traders are flexible. They constantly try new strategies and assets. If you are afraid of improving your skills, you will fail. However, flexibility leads to higher risks. Don’t regret but learn from your mistakes. 

3.Set rules

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Although you should be flexible and take risks, you should follow specific rules that prevent you from losing all of your capital. Remember the risk/reward ratio, hedge your investments, and set clear rules for stop-loss and take-profit orders. 

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Final thoughts

You can’t trade and invest if you regret every decision you make. Mistakes are one of the sources of new knowledge and skills. Be ready for risks, but frame your trading activity with specific rules to balance peace and risk.

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