ONLINE TRADING: WHAT DOES PSYCHOLOGY HAVE TO DO WITH IT?

By Boriss Gubaidulin

The term behavioural finance which gained popularity in the 1990s examines the role emotions play in investment decision-making. Why should psychology and trading be linked? The simple answer is that we are hard-wired as humans to be emotional.  Let’s face it – when it comes to financial matters, emotional consideration come into play.

 While investing, the two most powerful emotions have been identified as fear and greed. So much so that CNN Business created the Fear and Greed Index to measure how emotions influence the amount of money investors are willing to pay for stocks. The index assumes that fear drives stocks lower while greed boosts their value. In the recent years, similar indices have been developed, for instance, the Fear and Greed Index for Cryptocurrency trading.

If emotions are an inevitable part of trading, how can we harness their   power to help and protect us instead of holding us back? The first step is to understand your emotions. On a practical level, here we look at various behavioural biases which come into play. Once we understand these biases, we will be more capable of recognising unhealthy psychological patterns and states of mind. We will also be better equipped to react in a way that protects us.

The overconfidence bias

Watch out for trading euphoria. It is not uncommon for traders to complete a winning streak and then believe that they can’t get anything wrong in the future. To believe this would be unwise and will only end in failure. Make sure you always analyse your trading sessions and look at your wins and losses in detail. Reviewing your trades in an honest way is a key aspect of beating your emotions in trading psychology.

Learn to be comfortable with accepting that mistakes are inevitable, especially in the early stages. It’s all part of the learning curve and the development of your trading psychology.

The anchoring bias

Anchoring is a tendency to rely on what is already known to a trader for decision making in the future, instead of considering new situations and the changes that they can bring. At times, anchoring tends to cause traders to rely on obsolete and irrelevant information, which of course won’t help you trade successfully. In practical terms, the anchoring bias manifests itself in traders holding losing positions open for too long, simply because they fail to consider the options that are outside   their comfort zone.

The confirmation bias

The confirmation bias means looking for information to support a decision you have made, even if it wasn’t the best. This is simply a way of justifying your actions and strategies. The problem is that, by doing this, you’re not actually learning and improving your methods, and are likely to continue making the same trading mistakes.

The loss aversion bias

The loss aversion bias can be explained as such: when considering options before making a choice, we are likely more willing to give preference to a lower possible loss over a higher possible reward. Fear is a much more powerful motivator than greed. In practice, a trader with a loss aversion bias is more akin to cutting profits when they are still low, while allowing bigger drawdowns.

It is important to note that emotional self-knowledge cannot be done in isolation – make sure you support your trading journey and personal development with continual learning through a reputable partner, with a solid reputation backed by superior knowledge.

It is also important to know that online trading carries risk – make sure you deal with a reputable broker

  A comprehensive educational package

First is solid risk management.  Develop, implement and adhere to sound risk management strategies based on setting stop-loss orders, healthy portfolio diversification and the appropriate position size according to your risk appetite. Admirals’s four-point risk management process involves the following: identify the risks, analyse them, find solutions to minimise them and consistently manage and apply those solutions to your trading.

The other important consideration is continuous learning.  The financial markets are constantly evolving. Therefore, staying updated on market news, economic events  and trading techniques is important. Admirals offers a wealth of educational resources, including webinars, articles  and video tutorials to help traders stay informed and improve their skills.

Practising with a demo account is also important.  Before diving into live trading, it is essential to practice in a risk-free environment. Admirals provide a demo account that allows you to test your strategies and familiarize yourself with the trading platform without risking real money.

You should also use   advanced trading platforms. Admirals offers MetaTrader 4 and MetaTrader 5, providing you with powerful tools and features to optimize your trading strategies and stay on top of market movements.

 Dedicated customer support also plays an important role.  Admirals offers localized support to assist you on your trading journey and to help you navigate the financial markets with ease. A team of customer support representatives is available to assist you.

 Finally is  wide market access.  Admirals offers a range of more than 3700 CFD assets to trade, including CFDs on forex, stocks, commodities, stock indices, bonds and ETFs, allowing for a diversified portfolio and access to global markets.

Admirals continues to expand globally to provide its clients around the globe with advanced trading tools, access to financial security and various customer care policies.  The firm   is licensed in the Seychelles, UK, Cyprus, South Africa, Australia, Jordan, Canada and Kenya.

In conclusion, risk management, continuous education and choosing a reputable broker like Admirals are important components in CFD trading. By prioritising these elements and leveraging the education and support provided by Admirals, you can embark on your journey in the ever-changing financial markets with more confidence.

The writer  is  the director,   Admirals Africa