Trading Psychology and Behavioural Finance and Why It Matters
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Summary: The stock market can get the better of our emotions, which is why learning about trading psychology and behavioural finance can help you understand (and control) your impulses, so you can invest with a clearer mind.
“The investor’s chief problem – and even his worst enemy – is likely to be himself,” said Benjamin Graham, the British-American economist.Investing can trigger a lot of emotions, no matter if you're an experienced trader or a first-time investor. Fear, anxiety, and stress about money can overwhelm even the calmest of individuals, especially when markets plunge.
So how can you invest without letting emotions cloud your judgement? How do you mute the noise of a world that seems to be in constant crisis mode, and act with clarity and reason- – so you can reach your financial goals?
Of course, there is no best strategy, but what if learning how to manage your emotions could help you become a more successful investor or trader?
What is Behavioural Finance?The study of the psychological aspects of investing and trading is often referred to as Behavioural Finance, or Trading Psychology. But what exactly does this mean? And why should you care?
Behavioural Finance is the study of why and how people make financial decisions (both the irrational and rational). This academic focus was created with the hope that maybe if we can understand why we make decisions against our own interests, perhaps we can make better, less biased choices the next time around.
Trading psychology refers to an investor’s emotional and mental state while making investments in the stock market or entering and exiting an investment platform. While every investor is different, the primary emotional catalysts associated with trading psychology include greed, fear, and regret. Also, positive emotions like confidence and pride can influence whether an investor secures a profit or sees heavy losses.
Key EmotionsFor example, feelings of greed can distract your judgement and rationality. This desire for wealth may trigger irrational investing, where you conduct high-risk investments or purchase shares without conducting proper fundamental and technical analysis.
Likewise, fear is a powerful emotion that can cause you to exit markets too soon. Investors may also refrain from taking risks because of the fear of loss. Fear can sometimes turn into panic, which can cause us to make anxious, impulsive, irrational decisions.
Positive emotions like confidence can also have negative implications when it is not balanced or reaches extreme levels. For example, one concept in behavioural finance is self-attribution. Self-attribution refers to an investor’s tendency to make decisions based on overconfidence in oneself, or a particular market, which may lead to heavy losses if investors wait too long, thinking the market will make a comeback.
Get to Know YourselfAn important part of managing your emotions when investing and trading is understanding what triggers you psychologically when stocks become volatile. Once you understand why you feel what you feel, then we recommend learning some strategies to help you cope, so you don’t react impulsively next time the markets turn.
Whether you are prone to anxiety, decision paralysis, fear, or even over-confidence, our series Mind Over Money was created to help you navigate the markets (more) mindfully during this unprecedented time in our world.
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