Greed and Fear are the two major emotions manifested in the trading industry. When reading charts, the wiggles you see in the lines are a reflection of the market acting greedy or fearful.
Understanding how they affect your trading mindset is vital.
As Mr. Buffett says “Remember that the stock market is a manic depressive.”
Trading with a practical mentality is key, but it isn’t natural for human beings to be robotic, or pragmatic 100% of the time, and for that reason traders and investors must put in an outstanding effort to control their emotions in order to behave lucidly (without being moved by sentiment).
There are numerous psychological trading mistakes, but I have chosen 3 of the most common cognitive biases in hopes that it will help you to seek within yourself, identify if you are making such mistakes and take charge. Or maybe share with someone who could benefit from it.
“Cognitive Bias is a type of error in thinking that occurs when people are processing and interpreting information in the world around them. The human brain is powerful but subject to limitations.” — VeryWellMind.com
Now, why should you care about this? Because it can save you money. No one is into trading simply because it is fun, we all want to make money, and this can help you to either make more or lose less.
So let’s take a look?
The FEAR OF MISSING OUT tells the trader that every opportunity is one that must be taken!
“This has to be the one!”
“This could be the one!”
“This is it”!
This psychological mistake can cause you to oversize your positions, overbuy.
One of the main reasons for this to happen is the community´s hype. Traders should learn from an early stage that they should never follow what others are doing and or saying, they must learn to quantify for themselves and decide on which to trade according to their own studies.
But most people when they see the hype on social media and chat rooms about a particular investment they tend to get into that market just so they DO NOT MISS OUT.
“The difference between successful people and really successful people is that really successful people say no to almost everything.” — Warren Buffett
One must learn that there will be many missed opportunities, and that is okay, you are supposed to be selective.
Overconfidence is nothing more than actual greed. This is a bias and irrational behavior that could lead one to lose more money than any other psychological trading mistake.
A researcher named James Montier found out that an astonishing 74% out of 300 traders felt they outperformed in tradings, delivering above-average results; and the remaining 26% felt they were average.
Now, we must recognize that 74% is a huge number (of cocky traders), don’t ya think? Notice there was a 0% of traders below the average line, they all felt confident somehow.
No wonder 90% of traders fail miserably in trading.
“Overconfidence reflects the tendency to overestimate or exaggerate one’s ability to successfully perform a given task, and it is a trait that is common among people in all professions and areas. To illustrate this, consider the number of times that you’ve participated in a competition or a contest with the attitude that you have what it takes to win, regardless of the number of competitors in the field or the fact that most competitions have only one winner.” — Investopedia.com
This kind of behavior will affect traders when choosing which market to invest and or how much to invest.
Keep in mind that biases are your worse enemies in the investment field.
In order to avoid overconfidence, traders and investors must keep in mind that even the most successful and professional traders have a hard time to achieve good returns. And this is the average for everyone. Good professional traders maintain a healthy daily mindset because they are aware that each day will bring its own challenges, unexpected ones. Some days will be good others will be bad, there are no super traders.
3. REVENGE TRADING
The revenge trading is a re-action to trading losses. Revenge? This sounds comical, yet it has nothing to do with taking revenge on no one though, but instead, it refers to traders who desperately try to make up for losses.
“I must make that money back!”
Maybe, it means taking revenge on the market, as if it had done you unjustly when the truth is: you did it upon yourself.
It is essential to create a bulletproof mindset especially against losses which has a much greater impact on traders and investors than gains.
A possible reason for the desperation could be the oversized positions, trading smaller can be a smart decision.
Do not trade under negative emotions like anxiety, anger, greed, fear, worry, doubt or any similar emotion.
One way to prevent revenge trading is to have a plan and stick to it. Whenever you have a bad day see it just like that, it´s a bad day, and all you have to do is continue on allowing the gains throughout a period of time to mount up.
You do not need to make extraordinary amounts of money daily in order to be successful, you can allow gains to build up, and it will as long as you have a plan.
Keep in mind there will always be losses, they are inevitable, and your focus should be towards the advantages of the profits.
Human psychology is a delicate thing, wrong, and unrealistic perceptions can set up traps that would cost you significantly.
Traders must focus on working through their emotions and psychology to acquire a solid mindset.
You can and should get a psychologist to help you, someone to help you with your daily mental health.
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Disclaimer: Our team works hard to bring you the best content in the cryptocurrency market, but it is only our point of view and not legal advice, and may be divergent from other opinions, so please do not make any decisions without concluding studies of your own to understand the profit possibilities and uncertainties involved at your own risk.