Psychology is an aspect that is often overlooked when it comes to investing, but it is definitely no less important. Learn about the psychological traps that will await you while operating on the market.
Psychology is an aspect that is often overlooked when it comes to investing. The eyes of novice investors are mainly focused on invested capital, ROIs, or various types of indicators. However, it is psychology that plays one of the most crucial roles determining eventual success in financial markets. Very often, your greatest enemy on the way to the top can be yourself and when entering the world of investments, you should be fully aware of the various emotional traps that will await you there. In this article, you will find some tips on how to deal with some of them.
HOPE
Every investor hopes that their investments will be profitable and that they have read the market correctly. However, it often happens that at some point the price moves in the opposite direction to the desired one. This may be the result of incorrect assumptions made in developing the investment strategy, or it may be due to temporary market turmoil. At such moments, it is extremely important to set yourself the maximum loss limit that you are ready to incur (eg. using Stop Loss defense orders). Do not always stick the path chosen at the beginning, hoping that suddenly fortune will start to favor you. Always keep your head cool and remember that losing is part of the game and that every failure can be learned from.
FEAR
It is quite common to feel fear when placing an order, especially among novice investors. This may result from lack of appropriate experience or sense of uncertainty. Fear alone is not a bad thing, it is completely normal and happens to experienced traders as well. However, it cannot block your ability to make decisions.
Correct reading of market moves, supported by proper knowledge, are the components of a successful investment. If you believe that your strategy meets these aspects and has a potential to be profitable – implement it! If, on the other hand, you are afraid that you will lose a large amount of money – before opening a position choose the amount that you are ready to lose in the event of a negative outcome of your decision and set a defensive Stop Loss order that will close the position at the loss level of your choice. Do not let fear influence your decisions and manage risk appropriately!
GREED
Undeniably, it is one of the most destructive emotions that can accompany an investor. Greed is often responsible for abandoning investment strategies, overholding positions or exposing oneself to high losses. Unfortunately, man in his nature feels constantly attracted to more and more sensations – in the case of investing, it is the amount of return on investment. Therefore, remember to always stick to the assumptions of your strategy and take profits and the level set before opening a position, because the market will not always move in the direction you expect. Do not let greed impact your investments, make a plan and stick to it.
STRATEGY IS THE KEY
Being driven by emotions, especially with dynamic price movements and strong fluctuations in the account balance, can make investing very difficult. It often leads to impulsive decisions that win over logical and rational judgment. That is why creating an investment plan is one of the most important aspects. Instead of being guided by emotions, the investor follows the guidelines of his strategy, opening positions only when all assumptions are met. This solution leaves no room for emotions which only create unnecessary confusion.
The above-mentioned emotions are one of the most common ones that accompany investing in financial markets. However, you should be aware that the range of these emotions is much greater. Before entering the market, make sure whether you are the kind of person who can put emotions aside and make conscious decisions, even when things do not go your way. Once you know the answer to this question, you will be ready!