4/8/2024

3 psychological tricks that affect trading

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The most insidious obstacles traders face are actually hidden in the labyrinths of our own subconscious. Failure to understand the impact of certain human tendencies on trading activity and, as a result, on profits, can become a fatal obstacle to achieving financial goals.

In this article, we will look at three cognitive traps that can permanently block access to achieving the desired result.

Information bias

Human beings are inherently inclined to gather information from which to form an opinion or bias. In some cases, this allows us to function and develop effectively. However, it is important to realize that our judgments are not always based on impartial facts.

This idea is relevant not only for trading psychology: if the source of information is initially biased, this will inevitably affect the judgments formed on its basis. Facts can be presented in such a way as to reinforce a certain point of view, veiling alternative options.

You should always remember that there are two sides to every story. By limiting oneself to only one source of information, a person risks distorting his own picture of the world, without being able to familiarize himself with alternatives.

Fear of uncertainty

Fear of the unknown, or more simply put, the fear of what we don’t understand, can become a serious obstacle in trading, preventing us from realizing our potential.

Its typical manifestation in trading is to focus exclusively on an industry with which the trader is familiar, even if it is in decline. The uncertainty associated with investing in other, less familiar areas can deter potentially profitable deals.

It is not uncommon for traders to hold losing positions for too long and close profitable positions too quickly. When analyzing price movements, it is important to take into account their magnitude in order to distinguish short-term noise from long-term trends. Exiting trades too hastily may be a consequence of ignoring the trend and unwillingness to take risks.

A sense of anticipation

Anticipation is a powerful feeling often associated with a desire or need for something. We expect this to happen in the future, and the feeling of anticipation is always good. However, this pleasantness can become a trap: we focus on anticipation instead of achieving the goal.

You can become dependent on this feeling and thereby delay getting what you want. If it’s not so easy to get what we want, we can use the feeling of anticipation as a consolation prize. We want to make a profit, but our goal becomes the “desire” itself, and not the real profit.

How to deal with this?

Here are some methods to overcome psychological obstacles:

1. Avoid bias. Graphs don’t lie, but our perception of them can be wrong. To achieve success, it is important to remain objective and focus on simple strategies based on analysis of price movements. Many successful traders ignore other people’s opinions when it comes to the market and are able to recognize when it can negatively affect their trading.

2. Study market mechanisms. Understanding how markets work and move will help a trader overcome fear and greed while trading. Uncertainty and unclear results often lead to errors. On the contrary, a solid understanding, at least probabilistically, of market movements allows you to make decisions based on objective analysis.

3. State your goals. A clear definition of what you want, an understanding of the reasons that motivate you to achieve it, and the development of a specific action plan are necessary steps on the path to success.

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