SEVEN GUILTS IN TRADING PSYCHOLOGY
1. Confirmation Bias: People pay close attention to information that confirms their beliefs and ignores information that contradicts it.
How to avoid: While preparing to execute the order, we try to find support reasons for the opposite direction. The second consideration can not be too careful.
2. The illusion of Control: The illusion of control is the tendency for people to overestimate their ability to control events. It occurs when someone uses a lot of market indicators/TA's method and places the truth on as many as possible.
How to avoid: Remember that "Simple is the best". The good-enough trading system on a simple level with a good-enough winning probability will help to exist in the full lying market.
3. Mental-Accounting Bias: The investor has 1000 USD initial capital and 200 USD profit. The psychology of investors usually tries to keep the capital of 1000 USD, while 200 USD will take away more risky investments with the thought that if they lose, they will only lose profits. However, in essence, 200 USD or 1000 USD are all our assets.
How to avoid:
- Convert the profit to hard assets, if the profit is enough big.
- Withdraw the profit periodically, only trade with the initial capital. We can review and reinvest into the capital every month/year.
4. Recency Bias: People analyze a stock that has good fundamentals, and now has a low valuation, but the market trend over the last few weeks is down. Most of them will be more inclined to the negative side and think that this is no longer an attractive investment. However, with experienced analysts, they will see the other long-term factors and see the decline as a temporary correction, even an opportunity to buy shares cheaply.
How to avoid: Let's see things from a wider perspective.
5. Herd Mentality:
- FOMO: Fear of missing out when seeing nearby someone get a lot of money.
- Be panicked when the market sharply decreases.
How to avoid:
- For short-term trading, be patient, do not chase the price. There are a lot of chances for the next trading.
- For long-term trading, make out some major support areas, and early enter orders with sufficient volume in order to avoid FOMO.
- For the problem of strongly competing for sales in the plunging market, stay away from illiquid assets.
6. Loss Aversion: Loss aversion refers to people’s tendency to prefer suffering huge losses with the expectation that the price will come back.
How to avoid: Make a plan for managing the capital. Everything is just probability, don't hesitate to cut your losses when guessing wrong.
Leave room for mistakes.
7. Overconfidence: The psychological problem occurs when an investor wins continuously, they will be more subjective and less disciplined.
How to avoid: Always keep a balanced mind!
For example, a good psychological investor usually set minimum and maximum profit targets by period (week, month, year). If the lowest goal hasn't been reached, confidence is superfluous. If the highest goal has been reached, the rest should be taken into account. Of course, goal setting must be consistent with the strategy and not overwhelming, it is impossible to set a 100% profit in a week.
How to avoid: While preparing to execute the order, we try to find support reasons for the opposite direction. The second consideration can not be too careful.
2. The illusion of Control: The illusion of control is the tendency for people to overestimate their ability to control events. It occurs when someone uses a lot of market indicators/TA's method and places the truth on as many as possible.
How to avoid: Remember that "Simple is the best". The good-enough trading system on a simple level with a good-enough winning probability will help to exist in the full lying market.
3. Mental-Accounting Bias: The investor has 1000 USD initial capital and 200 USD profit. The psychology of investors usually tries to keep the capital of 1000 USD, while 200 USD will take away more risky investments with the thought that if they lose, they will only lose profits. However, in essence, 200 USD or 1000 USD are all our assets.
How to avoid:
- Convert the profit to hard assets, if the profit is enough big.
- Withdraw the profit periodically, only trade with the initial capital. We can review and reinvest into the capital every month/year.
4. Recency Bias: People analyze a stock that has good fundamentals, and now has a low valuation, but the market trend over the last few weeks is down. Most of them will be more inclined to the negative side and think that this is no longer an attractive investment. However, with experienced analysts, they will see the other long-term factors and see the decline as a temporary correction, even an opportunity to buy shares cheaply.
How to avoid: Let's see things from a wider perspective.
5. Herd Mentality:
- FOMO: Fear of missing out when seeing nearby someone get a lot of money.
- Be panicked when the market sharply decreases.
How to avoid:
- For short-term trading, be patient, do not chase the price. There are a lot of chances for the next trading.
- For long-term trading, make out some major support areas, and early enter orders with sufficient volume in order to avoid FOMO.
- For the problem of strongly competing for sales in the plunging market, stay away from illiquid assets.
6. Loss Aversion: Loss aversion refers to people’s tendency to prefer suffering huge losses with the expectation that the price will come back.
How to avoid: Make a plan for managing the capital. Everything is just probability, don't hesitate to cut your losses when guessing wrong.
Leave room for mistakes.
7. Overconfidence: The psychological problem occurs when an investor wins continuously, they will be more subjective and less disciplined.
How to avoid: Always keep a balanced mind!
For example, a good psychological investor usually set minimum and maximum profit targets by period (week, month, year). If the lowest goal hasn't been reached, confidence is superfluous. If the highest goal has been reached, the rest should be taken into account. Of course, goal setting must be consistent with the strategy and not overwhelming, it is impossible to set a 100% profit in a week.
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