Not only the market situation but also psychological factors have a serious impact on the investment decision. Under their pressure, investors can fall into traps, and then the case will take an even more risky turn. Professional psychologists tell us what will help keep our minds sober.
Let’s talk about four psychological mistakes investors make and explore their causes and consequences with experts.
Falling Under the Influence of External Factors
“Are your actions motivated by fear or greed – or are you clear about what’s going on? Do you react to the media? Do you follow the crowd?” wrote Carl Richards in his book, The Psychology of Investment. Asking yourself, “Why did I do this and not that?” is actually important. “I’ll think about it another time, it’s already done anyway,” you probably often get that thought.
You are forced to risk your money in the near absence of relevant information. Under such conditions, you have a fear of failure and a strong inner uncertainty about the correctness of your actions. It’s natural that you have a desire to get as much external data as possible.
But more doesn’t mean better – it’s important to learn to make all trading decisions on your own. This is your own experience, and only in this way can you learn to trade.
Too much information from peers or news sites only makes the decision-making process more difficult. Some data starts to contradict others, and it’s easy to get lost in such a flow. So, you should only use sources that contain really important data.
Wanting to Avoid Negativity
You want to hide from problems, even realizing that this is rarely a good way out. The desire not to hurt yourself often prevails over reason. If a succession of losses comes, then subconsciously you may try to protect yourself by closing your eyes to them. Even if it’s not a question of losses, but simply excitement – when choosing papers, making deals and so on, you will inevitably have a desire to be in the comfort zone.
Like when you play online Roulette, loss doesn’t mean that you are a bad trader, a stupid person, or a loser. It’s important to analyze, determine the reasons for the loss of money and make the necessary changes in your trading, rather than falling into discontent and self-blame. If you are haunted by a string of losing trades, take a break from trading: give yourself time for your emotions to settle, and don’t trade until you feel emotionally stable.
Try to separate yourself from the result of your trading. Everyone has the right to make mistakes. He who does nothing is not wrong. Make trading decisions based on your trading plan or strategy, rather than on your emotions or intuition. This will greatly reduce emotional stress during trading.
Not Fix Losses
You want to “sit out” losses – wait until the currently unprofitable paper rises in value and pays off, and you get back the money you invested in it. If you view this not in terms of your chosen tactic, but in terms of your general attitude toward the case, it looks like a denial of the problem. “Everything is fine, you just have to wait a little bit!”
The desire to “wait out the losses” is a kind of “childhood disease” of most novice traders, in many respects such behavior is determined by the effect of loss aversion.
This phenomenon was first written about by the famous Daniel Kahneman and his associate Amos Tversky. Its essence is that we feel the pain of a loss about 2-2.5 times stronger than the joy of an equivalent profit. That is, we are much more upset if we lose $1,000 in a trade than we are happy about a $1,000 profit. This effect is the basis of the recommendation for beginning traders: calculate the size of the position so that the ratio of risk to potential profit is at least 1/2.5 or 1/3.
Psychologically, as long as a loss on a trade is not fixed, it’s as if there is no loss. Because there is a hypothetical chance that the price can turn in the right direction and it will be possible to exit the market at least to zero or with a minimum profit. But such a strategy will result in even larger losses.
Getting Trapped by Gambling
Trading on your last bit of savings is not a good idea. If you partly use the funds you borrowed or lent, but have a steady income that allows you to pay back what you borrowed, that’s one story. But another is when you’re trapped, borrowing and investing more and more, hoping that things will soon pick up and you’ll pay it all back.
The supposed ease of making money in the stock market makes you invest not only your own money but also borrowed money. Earning the first money you start to think that you are a chosen one, that you have found a gold mine and now you can easily solve all your money matters and maybe even help others.
But if, as you continue trading, you start to lose money, the tension builds up. You keep making mistakes and end up in an environment where, on the one hand, there are easy profitable trades and you can do a lot, and on the other hand, there is a lot of stress from losing other people’s money and having to pay it back.
As a result of the stress, you lose touch with reality and keep depositing more and more money. And the consciousness at this time, trying to avoid negativity, picks up the information that confirms the correctness of your decisions. As a result, you lose a large part of the deposit.
What to do? At the first realization of the fact that the deal is out of control, try as quickly as possible to get out of it, thus maximally saving the deposit for further trading. But, of course, it’s better not to fall into such traps at all, realizing their probability even before entering the trade.
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