The ability to manage your emotions when trading enables you to make sound trading decisions. This is why Trading psychology in a volatile market is very important to understand.
Avoid developing an emotional attachment to your trades. Consider how you feel about your home. When you own a home, you have a distinct relationship with it… Similarly, when you purchase a stock, the same is true.
Regrettably, the majority of individuals believe they own them. On the other hand, I avoid being emotional and remind myself to handle equities as if they were a money market account.
In other words, stocks are a kind of money market trading instrument in which you may invest or trade over time. Occasionally, it takes 10 minutes, occasionally an hour, and occasionally five hours. Perhaps five years, but I want to avoid the point at which ‘stocks’ becomes more than a number to me.” It is critical to view the equities you purchase objectively.
However, it may be impossible to resist developing an emotional connection to stocks at times. We spend considerable time analyzing the variables that influence the prices of the companies we carefully monitor, and it’s natural to have favorites. However, we must avoid being attached. Investing in stocks is simply a means to an end, nothing more.
The Money illusion in Trading Psychology
There is a phenomenon known as the “money illusion” in behavioral economics. In short, whether it comes to valuing stocks, currencies, or commodities, individuals often err on the side of preconceptions and emotion. Rather than calculating the “true” worth of stocks, currencies, or commodities with precision, people make judgments based on emotional connections and preconceptions.
When predicting whether a stock price will grow, for example, we may perceive particular industries or commodities as “hot” or “on the rise,” and our predictions may be based on these perceptions rather than on actual facts and objective examination of the stock’s “true” worth. Research demonstrates how traders’ predictions may be skewed by emotional preconceptions.
A group of senior business students enrolling in a securities analysis course were asked to make investment choices on the New York Stock Exchange for a variety of industry groupings, including computer software, medicines, and railways.
Unbeknownst to the respondents, half of the sector groupings were made up of high-performing companies (returns higher than 20%), while the other half was made up of underperforming firms.
The participants assigned a favorable or negative picture to each industrial category (for instance, value, activity, and strength). Additionally, they were asked to forecast the return on investment for each industrial sector.
The industry groupings that received the highest ratings from participants were deemed to have the greatest return as these groups knew the proper trading psychology in a volatile market.
However, a company’s image has no correlation with real market success, as assessed by the industry group’s weighted average returns. In other words, participants’ predictions were skewed by their ideas and emotional preconceptions about a specific industrial group’s “image” of power, expansion, and profit.
How often does emotional trading have an impact on your Trading Psychology ?
When determining the worth of products, a comparable judgment bias arises. For instance, infamous research in which children were instructed to measure the price of coins to identical cardboard disks, the volume of coins was perceived to be bigger. Money, especially at an early age, has a tendency to cloud our judgment. Early in life, we establish a connection to money and infuse it with meaning.
Money has emotional meaning, and we readily allow our judgments to be swayed by the value we put on it. Numerous studies have demonstrated that people are more concerned with particular cash amounts than with purchasing power.
For instance, studies have shown that individuals would choose a $1,000 rise during periods of high inflation, even if it resulted in a $2,000 raise in prices the next year, over the alternative of receiving no raise during periods of low inflation.
Our economic judgments are often skewed by our emotional preconceptions. Unless we do a thorough study of the worth of stocks, commodities, or currencies. Our judgments may be swayed by our preconceived emotional preconceptions when trading psychology in a volatile market.
Performed research across Europe at a period when the euro was seen to be weaker than the US dollar. When participants were asked to assess the cost of different items, they perceived things with prices stated in US dollars to be more valued than goods with the same prices expressed in euros.
The impact was reversed later in history when the US dollar was seen to be weaker than the euro. While it is normal for our prejudices to distort our judgment, a product or service has the same worth regardless of whether it is represented in dollars, euros, or lira. (It should be noted that participants were not asked to purchase euros or dollars; rather, they were asked to assess the worth of items with a price indicated in euros or dollars.)
Profitable trades are the result of objective trading choices.
Whenever it comes to making financial decisions, it’s all too easy to let our preconceived notions cloud our judgment. We learn at a very young age that money may be traded for products and services that we value. Money has been linked with security, safety, and pleasure throughout our lives.
The media is continually inundating us with the message that money is synonymous with security. Money provides security. More the money we have, the much more secure we will feel. It’s difficult to overcome these assumptions and get an impartial perspective on stocks. Numerous traders are drawn to trading by strong visions of riches.
The more money they earn, they think, the more prestige and independence they will acquire. While it is easy to associate money and earnings with security, doing so may introduce biases into trading choices. Trading profitably requires a rational, impartial mentality. It is critical that you attempt to objectify your transactions to the greatest extent feasible.
Keeping your emotions in check when trading
It takes work to eliminate emotional attachments from trading, but with enough preparation and forethought, you can master to trade rationally and easily. Perhaps the most critical technique is to keep your risk to a minimum on any particular transaction and to deal with money you can afford to lose. By using trading psychology in a volatile market you can keep your losses to a minimum.
By restricting your risk to a modest proportion of your trading money, you ensure that you can easily manage the worst-case situation. You will no longer be dealing with “frightened money,” and that you will feel more secure. If you believe that losing a transaction’s stake has no actual personal consequence, you will be able to handle the deal coldly.
Controlling fear is much simpler when there is really nothing to fear. Additionally, it is critical to evaluate earnings and losses in percentage terms. Rather than focusing on concrete images of real money. You are trading, which you will undoubtedly associate with what the money can be used for.
You will be able to focus more objectively on the trade if you observe profits and losses as abstract as potential, as simply points or abstract digits. This is a effective Trading psychology in a volatile market.
Meet Krishnaprasath Krishnamoorthy, a finance content writer with a wealth of knowledge and experience in the insurance, mortgage, taxation, law, and real estate industries.