What is the psychology of trading?
Trading psychology is the study of the emotions and thoughts that affect a trade's likelihood of success or failure. Trading psychology is a representation of the various parts of a person's personality and habits that influence their trading activity. Trading psychology can be just as important in determining a trade's performance as other elements like knowledge, experience, and competence.
The two most crucial components of trading psychology are risk-taking and discipline. How successfully a trader can put these concepts into practice will determine whether or not their strategy is successful. While fear and greed are typically associated with trading psychology, other emotions like hope and remorse also have a role in trading behavior.
With regards to Investor Psychology
Investing in psychology is crucial.
While greed and fear are two emotions that affect investing, many others are more diversified and have a greater effect.
Investor psychological profiles have an effect on how well an investor's portfolio performs because investment decisions are emotional in nature.
Create an investment portfolio that satisfies your objectives. Comparing your investment strategy to your "profile" is the only way to gain.
The hardest problems we face as traders are those we aren't even aware of. Even while certain human traits affect our trading, we frequently are unaware of the harm they are doing to our performance and financial results. Although there are additional human tendencies, we will concentrate on three since, if not managed, they could prevent us from achieving our financial goals.
Let's examine three typical psychological quirks that frequently result in such issues.
Sensation-Derived Bias
But even while we believe facts support our ideas, we must acknowledge that this is not always the case. But even while we believe facts support our ideas, we must acknowledge that this is not always the case.
A trader who regularly reads business news may believe they reached this conclusion by ignoring the media's editorial opinions and just paying attention to the facts if they believe the market is rising as a result of all the information available. However, given that biased information sources would alter our personal bias, this trader may still encounter problems.
Even facts can be exploited to justify bias or an opinion. Thus, we must always remember that every story has two sides. People who only hear one notion or point of view frequently begins to believe that it is the only rational one. Since they won't be able to see the opposing viewpoint, the knowledge they do have will have an impact on their choice.
Avoiding clear of vague
Avoiding potential problems or things that are not totally clear to us prevents us from taking action on many fronts and could leave us mired in an unproductive situation. The phrase "fear of the unknown" is another name for this.
Contrary to what some people may think, traders sometimes actually fear success. Even though they might not be aware of it, traders frequently worry about venturing outside of their comfort zone or simply that their winnings would be taxed. Naturally, this could lead to self-sabotage.
Trading exclusively in the industry you are most familiar with, even though that industry has been declining and is anticipated to continue declining, could be another source of bias. The trader is avoiding the investment since a consequence might occur because it is unpredictable.
Another common practice is selling the winners too soon and keeping the losers for too long. We must consider the magnitude of price changes to determine if they were the result of noise or something more significant. Investors who don't enjoy taking risks sometimes ignore the security trend and exit deals too early.
On the other side, when investors lose money, they frequently search for new risks, which prolongs their losing streak. These aberrations from rational conduct are the result of psychological biases, which also result in irrational acts that prevent investors from taking advantage of potential rewards.
Possibility Of Expectation
An intense feeling is an anticipation. An "I want" or "I need" attitude is typically connected to anticipation. Even though the event we are anticipating won't happen for long, there is already an air of anticipation, which can be a wonderful emotion.
In fact, waiting may be so enjoyable that we sometimes forget to genuinely enjoy the anticipated outcome.
If you knew a million bucks was about to show up at your door tomorrow, you would be filled with joy and anticipation. It is possible to become "hooked" on this sensation and delay earning money as a result.
We can fall into the trap of using the thrill of anticipation as a consolation prize when things aren't quite as easy to come by. The eager homeowner is likely to take advantage of the offered free money.
Billions of cash exchange hand every day, but we lack the faith to follow through on a plan and share in the rewards.
This can be the result of our subconsciously deciding that fantasizing about the benefits is sufficient. Despite our desire for profitability, "wanting" has taken the place of profitability as our goal.
The Final Verdict
Our biases may influence our decisions even when we don't think we're trading using biased information. Furthermore, even when we anticipate how the market will act, we still make poor decisions when the outcome is vague.
Furthermore, we might be prevented from achieving our objectives by our expectations. To help us with these potential problems, we may reduce biased inputs, enhance our comprehension of market probabilities, and explain what we desire from our trading.