When making decisions, our brains use various heuristics (labels, emotional experiences, and psychological filters) to reduce the time for analysis. Such psychological biases help filter information by picking one thing and ignoring everything else. Understanding what psychological biases are wont save you from making mistakes, but it can teach you to recognize these biases. Over time, this ability will help you repeat common mistakes less often.
Negative Psychosocial Biases And Emotions
This is the irrational belief that a series of profitable or losing trades determines the subsequent outcome. This process can be compared to playing at a legit online casino Philippines because gamblers also believe in this misconception. If a trader has made profitable trades several times in a row, he believes that the next trade will also be profitable.
Such a dangerous belief can create the illusion of a pattern where there is none. A series of profitable trades can often lead to greater losses due to an irrational increase in the volume of the position in the hope that the next trade will also be profitable.
Biased Attitude Towards the Last Result
This effect occurs when the trader focuses solely on recent trading decisions and results, regardless of whether they are successful or not. As a result, the trader may abandon logic and his or her trading strategy and instead begin to make decisions based on emotion.
If the last trade was profitable, the euphoria and desire to increase the position volume on the next trade appears. And vice versa – if the result of the last trade was negative, then there is a desire to return losses immediately. To avoid this trap, one has to approach each trade individually, without associating previous results with what can happen next.
The Bubble Effect
This occurs when mass hysteria of hope sets in and an asset rises only because most people buy it. Although the news and economic data show that there is no rational reason for the price to rise. But traders are simply afraid of not being able to make a profit. To avoid this effect, you need to make sure your trading and investment decisions are still based on fundamental data. In the world of finance, there is never security in numbers and complete certainty. However, when making investment decisions, a trader should rely on his or her own objective market analysis, trading strategy, and trading plan.
The Loss Effect
It appears after one significant loss or a series of losses. The trader stops following the trading plan and completely ignores his/her trading system. The fear of losing money again makes the trader less risk averse and causes him to refuse the next trades. Indecisiveness prevents the trader from taking advantage of favorable moments to make money.
Another manifestation of this effect is the setting of too short stops, which are not justified technically. But it’s getting harder and harder for the trader to lose money. And even those amounts which he can lose according to the rules of money management become too painful for him. As a result, the market simply “takes out” short stops and, despite the correctly chosen position, a loss is made instead of profit.
To calm down and recover from the losses, it’s necessary to take a pause, to take a break in trading. There is nothing terrible in this. It’s necessary to let your mind recover, and this requires time. A superfluous fuss and haste will only hinder and lead to new losses.
The Effect of “Undeserved” Money
The trader can make impressive profits on the account. But we must understand that all decisions are made relative to the internal reference point. For the trader, this point is the initial amount of the deposit. This is his means, and what he has earned is not his money, but virtual. The trader may not have a feeling that this money belongs to him.
Since profits are not seen as the trader’s own, this can lead to excessive euphoria and a departure from the trading plan and rules. The risk becomes easier: the trader feels that he or she isn’t risking his or her money, but with virtual money. In this case, too, a break in trading can help. When you open the terminal the next day, you will already perceive the whole amount as your own.
When It’s Necessary to Take a Break
- Hunger. It has a negative effect on decision-making.
- Anger. You are sure to transfer this feeling to the market.
- Sadness. During such periods, you will find it difficult to concentrate on trading.
- Fatigue. Your attention will be distracted, and you risk missing important details or market events.
What Else to Keep in Mind
It’s important to monitor your emotions, not only during trading but also before starting the trading day. If you don’t feel that you are in an emotionally stable state or if you feel that you are influenced by negative psychological biases, then it’s best not to trade on that day at all.