Making money is a worthy goal, no matter if you’re a materialist or not. The problem is that the very act of money-making often gets associated with greed or dishonest behavior, which has little ground in reality.
For instance, making enough can put you in a position to help others, seeing as how doing so often requires considerable resources. You could start a public kitchen or dog shelter with enough money. You could donate to a hospital or, at the very least, provide your own family with the kind of lifestyle that they deserve.
Then again, for more competitive people, it’s all about being able to earn more than the next person. Here, it’s not about accumulating wealth but actively earning through your prowess and virtue.
Some people’s ability to make money is based on their skills. However, others seem to make money no matter what they do. There’s something special about these people, and the answer might be hiding in their mindset.
Now, we’re not talking about channeling wealth through positive thinking. We’re talking about adopting a better outlook on the situation as a whole and identifying thought patterns that are holding you back. Nowhere is this as prominent as in trading, so here are some things to keep in mind.
What Is Trading Psychology?
While trading is supposed to be fact-based, for the majority of people it can be quite emotional. Some of the more reckless investors tend to gamble rather than trade. This is because gains, both on a trading platform and at a roulette table, activate the same centers in your brain. The same happens with losing.
For instance, if you’re trading right, you’re setting your stop loss at 1-2% of your total net value and your stop gain at 6-7% of your total trading budget value. In this scenario, you would make money even if you make just 25-30% of successful trades. This is a great business model, but it doesn’t sound very exciting, doesn’t it? Well, the first thing you need to do to make it is to abandon this gambler’s mentality and realize that “exciting” as a concept, has no place in trade.
In other words, you need to act like you’re running a business, with budgeting and forecasting, as well as contingency plans, and not like you’re placing a bet.
Then, there are all sorts of biases, like – positivity bias, that can make you pull all the wrong moves. Simply put, we’re more likely to believe that positive things are more likely to happen. It’s not optimism, it’s just how our mind works. The thing is that this is not grounded in reality, and making decisions based on this belief is bound to backfire.
To make the long story short, you need to understand the nature of trading and ensure that you move as far as possible from gambling-like behavior. For this, you’ll have to overcome so many behavior patterns that are, unfortunately, hard-coded into your psyche.
Why Is the Psychology of Trading So Important?
While it may seem as if the market is controlled by some sort of mythical force or higher interests, the truth is that it’s just a collective of humans acting as humans do in this environment. This means that all of the above-mentioned biases are not just a liability but also an opportunity. For instance, positivity bias is a real thing, and it motivates a large number of bullish investors. The knowledge of this can help you understand where the wind blows.
Another reason why understanding the psychology of trading is so important is that you can never become completely immune to these things. What does this mean? Well, it’s not like you can just decide to avoid this behavior that is (as we already said) hard-coded into you as a human being. Sooner or later, it’s bound to reemerge. At this point, you need to recognize and rectify it to avoid making mistakes.
What Are the Most Dominant Emotions?
Understanding human emotions usually imply that you’ll be able to understand what motivates them. Once you understand the motivation, you might be able to tell how they are going to act under their influence. For instance:
Greed:
When it comes to trading and money-making of any kind, it’s greed that comes to the forefront. This is not only a mortal sin but also a common denominator behind a lot of unethical or morally dubious decisions. Greed is simple, and you always need more.
Most commonly, once you start winning, you won’t be able to stop. This is exactly what stop-gain markers are there for. Once you combine greed with positivity bias, stopping a trade mid-successful run will seem like a waste.
Worse yet, if the asset in question continues rising in value after you pull out, this might impact your decision-making process in the future. So, next time, even though the value of the trade exceeded that 7% we mentioned earlier, you won’t pull out, seeing as how you’ll expect things to go like the last time. This is a dangerous combination of greed and positivity bias in action.
Fear:
Fear can work both ways. For instance, fear combined with positivity bias is the so-called fear of missing out (FOMO). So, what is FOMO in trading? This concept implies that you see a trade that has the potential to be huge, and you want to get in on it before it’s too late.
Now, this is not just a simple positivity bias. It’s also a concept with a competitive note to it. Namely, you’re not just afraid of not making money. You’re also afraid of not making money while everyone else is getting rich in the trade. In other words, it’s not just about not making it. It’s about being the only one who hasn’t made it.
Then there’s a fear in the traditional sense – fear of investing too much and losing more money than you can afford to. Fortunately, this can be solved by limiting your budget and placing stop orders.
Hope:
This is probably one of the most naïve biases seeing as how it draws motivation from all sides. You’re not just hoping that you’ll get this trade right. You’re also expecting these trades to change your life around and save all your financial problems.
As Arthur Schopenhauer so clearly stated – the world doesn’t care what we think. Well, it doesn’t care what we need either. You see, the fact that you need this next trade to be a massive success (to pay the rent) doesn’t increase your odds in the slightest.
Regret:
The last dominant emotion in trading is regret and what’s interesting about it is that it takes place retroactively.
- You make a mistake
- You regret this mistake
- Next time you act in a way that will avoid it
This will either make you too hesitant to place trades or make you jump on the first opportunity that seems like the FOMO from the last time. Either way, you’re now in the realm of emotions and no longer making your decisions based on data, which is always bad for a trader.
Wrap Up
Fighting your emotions is not easy, but it’s certainly possible. The point of this article was to reveal some behavior patterns that are affecting your trades without you even being aware of them. Now that you’re aware of them, you’ll have an easier time recognizing them. This allows you to reevaluate the situation and ask yourself: “Is this really a good/bad idea or am I just being too emotional about it.” You won’t always get it right, but sometimes, just by asking questions, you’ll already be on the right path.
