Investing success has been continually encompassed by fiscal status, current events, mathematics, and of course, luck. However, human psychology is an equally significant, yet unventured aspect that many investors do not recognize in themselves while trading. As much as the external factors matter, the most important part of successful investing that you could actually control may boil down to yourself. Here are some psychological trading behaviors that you should look for in yourself the next time you plan on placing a trade.
Emotional Trading
Could fluctuations in your emotions be more detrimental than fluctuations in the market? The answer is yes. Impulsive decision making due to fear of loss or overconfidence about gains could often have the opposite effect through panic selling or buying too many shares during the bear market. Short-term variations in the market could act as background noise that is hampering your long-term investment success, leading to emotional trading. Additionally, many investors who experience losses might indulge in revenge trading, which is the act of overcompensating a loss through buying excessive shares without a set plan.
FOMO
Articles titled “Top 10 Stocks That Will Skyrocket in July 2023” may be the reason why your investments are not going anywhere. There are hundreds of speculative articles that utilize clickbait titles to fuel investors’ fear of missing out, influencing them into jumping on a certain stock’s bandwagon to secure a gain. However, no one can predict the future of a stock, and this is just a marketing strategy.
Herd Mentality
2021’s GameStop phenomenon was the epitome of how human psychology drove stocks and how following the herd could be a very dangerous strategy for investment. Conversations about buying or selling GameStop on websites such as Reddit led to many amateur investors believing strangers’ advice on the internet solely because thousands of people were following the same strategy.
Bias
Bias is our brain’s unconscious tendency to understand material quicker with less information. Traders who fail to find and follow accurate research will often subconsciously submit to some biases such as confirmation bias, recency bias, and loss aversion bias. Investors who view the stock market’s behavior as a self-fulfilling prophecy will fall prey to confirmation bias by only consuming research supporting their beliefs. This tunnel vision trading strategy does not embrace the unpredictability of the market. On the other hand, traders with a recency bias would generalize short-term trends as a pattern that would continue in the long-term as well. These investments could have a bullish trend at the moment due to a current event, for example, but could take a sharp bearish turn in the future. Finally, loss-aversion trading follows a tip-toe approach around larger investments, usually after a significant loss. Trading solely to avoid losses causes investors to stop viewing investing as a big picture.