3 Psychological Quirks That Affect Your Trading

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3 Psychological Quirks That Affect Your Trading

The most difficult difficulties we encounter as traders are those we are unaware of. Certain human inclinations influence our trading, but we are often oblivious of how they effect us and our bottom line. While there are numerous human inclinations, we will focus on three that, if not handled, might stymie our efforts to achieve our financial objectives.

Key Takeaways

  • Humans are emotional beings, with psychological and cognitive flaws impacting our financial decisions—often negatively.
  • The first step in overcoming our psychological flaws is recognizing the sorts of errors we often make and how they might harm our investment success.
  • Sticking to your trading strategy might be difficult, but you have a greater chance of success if your approach is founded on a solid and objective framework that is devoid of emotions and prejudice.

The Enemy We Don’t Know

When dealing with trade objectively, we may understand where we went wrong and try to rectify it for the next time. If we leave a trade too early in a move, we may change our exit criterion by employing a longer time period or an alternative indicator. However, if we have a sound trading strategy but are still losing money, we must examine ourselves and our own psyche to find a solution.

When we deal with our own brains, our impartiality is often warped, and we are unable to effectively solve the situation. The actual issue is obscured by prejudices and trivialities. A trader who does not keep to a trading strategy is an example of this. They fail to see that “not adhering to it” is the issue, so they constantly modify techniques, assuming that is where the mistake lies.

Awareness Is Power

While there is no silver bullet to solve all of our issues or trading difficulties, being aware of troubling thoughts and behaviors is the first step a trader must take. Being aware of possible psychological hazards allows us to adjust our routines, resulting in higher earnings. Let’s take a look at three frequent psychological oddities that may sometimes lead to such issues.

1. Sensory-Derived Bias

In many circumstances, we draw information from our surroundings to build an opinion or bias, which helps us to operate and learn. However, we must recognize that, although we may assume we are basing our decisions on factual facts, we often are not. If a trader monitors the business news every day and reaches the impression that the market is rising based on all available information, they may believe they arrived at this conclusion by ignoring the media’s opinions and simply listening to the facts. However, this trader may still encounter a problem: if the source of our information is skewed, our own bias will be influenced.

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Even facts may be offered to support a prejudice or perspective, but we must keep in mind that there is always another side to every story. Furthermore, prolonged exposure to a particular point of view or perspective will encourage people to feel that this is the only viable position on the issue. They will be swayed by the available information because they lack counterevidence.

2. Avoiding the Vague

Avoiding what may occur, or what is not completely obvious to us, hinders us from doing many things and may keep us trapped in an unproductive position. While it may seem absurd to others, traders may really be afraid of generating money. Traders often worry about extending their comfort zone or just fearing that their gains will be taken away by taxes, even if they are not aware of it. This will inevitably lead to self-sabotage.

Another cause of bias might include trading exclusively in the industry with which one is most acquainted, even if that business has been deteriorating and is expected to continue dropping. Because of the uncertainty involved with the investment, the trader is avoiding a result.

Another prevalent propensity is to hang on to losers for too long while selling winnings too fast. When prices vary, we must consider the size of the movement to establish if the change is due to noise or a fundamental influence. Pulling out of deals too soon typically stems from disregarding the security’s trend as investors adopt a risk-averse mindset.

When investors suffer a loss, they may become risk takers, resulting in an overstated losing position. Because of psychological biases, these departures from rational conduct lead to illogical acts, leading investors to lose out on possible rewards.

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3. Tangibility of Anticipation

Anticipation is a strong emotion. Anticipation is often coupled with a “I want” or “I need” mindset. What we expect will occur in the future, yet the sensation of anticipation is present now and may be a pleasurable mood. It might be so delightful that we concentrate on experiencing anticipation rather than obtaining what we are expecting in the first place. Knowing that a million dollars would be on your doorstep tomorrow would fill you with joy and expectation. It is easy to grow “addicted” to this sensation and hence postpone paying.

While the enthusiastic householder is more likely to grasp simple money brought to the door, when things aren’t quite as easy to come by, we might fall into the trap of utilizing the sensation of anticipation as a consolation reward. Seeing billions of dollars change hands every day but lacking the guts to follow through on a plan and receive a cut of the profits might indicate that we have unconsciously concluded that fantasizing about earnings is sufficient. We want to be profitable, but “wanting” has replaced “profitability” as our aim.

What to Do About It

When we recognize that we may be influenced by our own psychology, we know that it may influence our trading on a subconscious level. If we try to improve our trading, awareness is frequently enough to motivate change.

There are various things we may do to overcome our psychological obstacles, starting with eliminating blatantly biased stimuli. Charts do not lie, but our interpretations of them do. We have the greatest chance of success if we stay objective and concentrate on basic techniques that benefit from market swings. When it comes to the market, many outstanding traders ignore the views of others and recognize when an opinion may be influencing their trading.

Understanding how markets work and move can help us overcome our anxiety or greed while trading. We make errors when we believe we have entered new terrain with no way of knowing what will happen. However, if we have a strong grasp of how the markets operate, at least probabilistically, we may base our actions on objective decision-making.

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Finally, we must define what we really want, why we desire it, and how we intend to get it. Listen to the ideas that go through your brain shortly after you make a mistake, consider the belief that underpins them, and then seek to modify that belief in your daily life.

Why Is It Important to Understand Psychology in Markets?

Many investors are emotional and reacting, with fear and greed being major players. According to some experts, greed and fear have the ability to impact our brains in such a manner that we are forced to disregard common sense and self-control, resulting in transformation. Fear and greed may be potent motivators when it comes to people and money.

What Are Some Psychological Quirks That We Can Fall Victim To?

Using our senses and cognitive abilities to absorb information might be erroneous, full of heuristics, and leave us with blind spots. Humans, too, dislike ambiguity and may fill in the holes with incorrect or biased information. Another characteristic that keeps people’s emotions high is anticipation, which fuels both greed and dread or anxiety.

How Can Traders Overcome Their Psychological Failings?

The trick is to be conscious and acknowledge that everyone, including yourself, is prone to these peculiarities. The first step is to recognize your own limits. Then, develop a specific plan or approach and adhere to it.

The Bottom Line

Even when we do not believe we are trading on biased information, our biases might have an impact on our trading. Also, when a result looks ambiguous, we make mistakes in our assessment, even though we have a general idea of how the market should behave. Our expectations might sometimes be an impediment to getting what we believe we desire. To help us with these possible issues, we may eliminate biased inputs, obtain a better grasp of market probabilities, and identify what we really want from our trading.

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