I would like to take a look insight into psychology in trading because I think it is fundamental if you want to invest in financial markets.
I know a lot of people who trade, guys who work for investment banks, others are professionals and a small part are amateurs who love the thrill of Wall Street.
Listening to them I can notice different personalities, moods and ways of acting, it is true that today transactions are carried out at 70% by robot-traders but let’s not forget: computers are programmed by humans.
Understanding individuals’s psycology is key to earning money when trading. Months ago I did an article on behavioral finance, emphasizing the importance of this science that studies behaviors and why people condition markets.
Our psychology leads us to make irrational decisions, again there is no universal recipe, so behavioral finance can not schematize irrational processes but study different moods as:
- Fear
- Panic
- Euphoria
- Anger
- Disappointment
- Will
I’m focusing on studying cycles and I’m learning how human behaviors affect prices, this can be seen through patterns’s formation that reflect psychology.
If you want to read an interesting book I recommend “Thinking Fast and Slow” by Daniel Kahneman where the aversion to losses is explained. Trader after closing loss-making trades, lives in a state of disappointment, then since he does not like to lose reacts with anger by increasing the operation (overtrading) that very often results in a disaster.
I was forgetting the fear after suffering losses, trader loses self-confidence and psychologically struggles to open a position. Imagine the investor how many positive or negative emotions he develops in front of the computer?
I am aware that psychology in trading represents more than 50%, I can assure you that it is not easy to manage emotions, after so many years I also have difficulty in making decisions in delicate moments.
An example, my head tells me to continue and money management doesn’t, what do I do? After 10 years I will always follow money management.
Today finance is changing, many investors prefer to use algorithms to limit psychological part, technological advances as data analysis allows investors to quantify news, social networks turning them into sentiment information.
Unfortunately, it is not enough to read the books of Kahneman or Alexander Elder, but it is essential to know yourself according to the markets’s metamorphosis.
If you can help yourself with technology is better, there are software that does a part of the work for us like Thomson Reuters MarketPsch Index, which analyzes real-time macroeconomic data from around the world, but in the end the last decision you will have to take it yourself not the computer.
