Investments should not be the first thing you make once stepping foot into the trading world. Instead, you should be preparing yourself for what’s ahead of you.
Trading psychology is a good start, and we’ll tell you all about it below.
What is Trading Psychology?
The whole concept of trading psychology revolves around the behaviors and emotions in trading.
You’re making a commitment through investing. This means simple things like downtrends and losses can cause bursts of emotions. Which leads to behaviors based on said emotions later on and puts you on the losing end.
Reasons like these are precisely why it’s important to understand the whole stock market psychology.
Common emotionally-driven behaviors boil down to two: greed and fear. These two are part of Forex psychology which is a concept connected to trading psychology itself.
The unrestrained thirst for wealth called greed clouds the rationality and judgment of most investors. On the other hand, the impending unpleasantness of fear leads them to make rash decisions.
One of the most beneficial pieces of knowledge in trading is behavioral finance. Which consists of five concepts:
Mental accounting refers to the ability to allocate money for essential purposes.
Herd behavior indicates the likelihood of investors following trends and bandwagon.
The emotional gap is what we call the behaviors and decisions one makes while experiencing strong emotions.
Anchoring is a commitment to a spending level based on reference.
And lastly, self-attribution is the word for investors who make negative decisions due to overconfidence.
Since there is no actual way to know the market’s outcomes, investors make use of technical analysis to foresee the coming changes and establish security.
In trading psychology, we discussed how big changes in investments can cause emotion-based behaviors. This can easily be avoided or lessened with the use of technical analysis.
One of the best examples would be charting techniques, indicators, and even concepts like candlestick psychology and day trading psychology. These spot trends and patterns predict the outcomes of specific investments.
However, it is important to note that these are only predictions. Technical analyses are not at all absolutely accurate.