The most problematic issues we face as a trader are the ones we don't even know exist. There are human tendencies that affect our trading, but we are often completely unaware that they affect us and our profits. While there are many human tendencies, we'll look at three that, if left unmanaged, can block the road to achieving our financial goals.
Human beings are emotional creatures, with psychological and cognitive errors that often affect our financial decisions for the worse.
The first step in overcoming our psychological failures is to recognize the types of mistakes we commonly make and how they can adversely affect our investment performance.
Sticking to your trading plan can test your resolve, but you have a better chance of success if your approach is based on a solid and objective framework, free from emotions or biases.
While there is no magic wand to overcome all of our business problems or difficulties, becoming aware of some possible underlying issues allows us to begin to monitor our thoughts and actions to be able to change our habits over time. potential psychological traps can allow us to change our habits, in the hope of generating more profits. Let’s take a look at three common psychological quirks that can often cause such problems.
We extract information from our surroundings to form an opinion or prejudice, which allows us to function and learn, in many cases. However, we must realize that while we may believe that we are forming an opinion based on factual evidence, this is often not the case. If a trader watches the economic news every day and forms an opinion that the market is rising, based on all the information available, he may think that he has come to this conclusion by stripping away the opinions of staff from the market. media and just listening to the media, the facts. However, this trader may still run into a problem: when the source of our information is distorted, our bias will suffer.
Facts can also be presented to give credence to prejudices or opinions, but we must remember that there is always another side to the story. Moreover, constant exposure to a single opinion or point of view will lead people to believe that it is the only practical position on the subject. As they have no rebuttal evidence, their opinion will be distorted by the information available.
Also known as fear of the unknown, avoiding what can happen or what is not entirely clear to us prevents us from doing a lot of things and can keep us locked in an unprofitable state. While this may sound silly to some, traders may fear making money. They may not know it, but traders often worry about expanding their comfort zone or just worry that their profits will be taken out of taxes. Inevitably, this can lead to self-sabotage.
Another source of bias can come from trading only in the industry you know best, even though that industry has experienced and is expected to continue to decline. The trader avoids an outcome because of the uncertainty associated with investing.
Another common tendency is to hold losers too long while selling the winners too quickly. When prices fluctuate, you need to take into account the magnitude of the movement to determine if the change is due to noise or a fundamental effect.
Abandoning trading too quickly is often the result of misunderstanding the performance of the stock. , investors taking a risk-averse mindset. On the other hand, when investors suffer a loss, they often become risk seekers, resulting in a loss of position. These deviations from rational behaviour lead to irrational actions, causing investors to lose potential gains due to psychological bias.
Anticipation is a powerful feeling. Anticipation is often associated with a “want” or “need” mentality. it can be a pleasant emotion. It can be so much fun that we focus on anticipating instead of achieving what we anticipate in the first place. Knowing that a million dollars will be showing up at your doorstep tomorrow would create a fantastic feeling of excitement and anticipation. It is possible to become “addicted” to this feeling and then postpone the payment.
Although cash delivered to the door is more than likely to be grabbed by the impatient owner when things are not so easy to find we can fall into using the sense of anticipation as a prize. of consolation. Watching billions of dollars change hands every day, but not having the confidence to follow a plan and take a share of the money can mean that we have subconsciously decided that dreaming of profits is enough. We want to be profitable, but “wanting” has become our goal, not profitability.
Once we’re conscious that we can be suffering from our very own psychology, we understand it can have an effect on our buying and selling on an unconscious level. Awareness is frequently sufficient to encourage extrude if we do in truth paintings to enhance our buying and selling.
There are numerous matters we can do to triumph over our mental roadblocks, starting with eliminating inputs that might be glaringly biased. Charts do not lie, however, our perceptions of them may. We stand a great risk of achievement if we stay on goal and are conscious of easy techniques that extract income from fee movements. Many brilliant investors keep away from the critiques of others, on the subject of the marketplace and understand that an opinion can be affecting their buying and selling.
Knowing how the markets perform and circulate will assist us to conquer our fear, or greed, whilst in trade. When we sense we’ve got entered the unknown territory in which we do not know the outcome, we make mistakes. However, if we’ve got a corporation understanding, as a minimum probabilistically, of ways the markets circulate, we can base our moves on goal decision-making.
Finally, we want to put out what we truly need, why we need it, and the way we’re going to get there. Listen in at the mind that runs thru your head properly whilst you make a mistake, and reflect on consideration on the perception at the back of it – then paintings to extrude that perception for your normal life.
