What is Investment Psychology?

By Claire

Investment psychology, in a nutshell, is the process by which an investor watches established levels of value in the market to make decisions for future investments. In other words, it is how investors think when considering whether to buy or sell stocks, or invest in any other way.

Investment psychology has been well-studied and there is an extensive amount of information available on the topic; however, to get a basic grasp of the concept, here are some of its main theories:

Contrarian Theory – This theory takes a look at why it seems people buy or sell stocks in contrast to how consumers spend their money. Consumers seem to buy when prices are low, while a common investor behaviour is to buy when prices are high. It also notes that some people playing the stock market simply follow the crowd to avoid making embarrassing mistakes alone.

Prospect Theory – This theory suggests that people will respond differently to the exact same situation depending on whether it is presented to them as a loss or a gain. Inside this theory is ‘loss aversion,’ which means that people are willing to take more risks if they feel it will help them avoid losses, but won’t do it as much to realize gains.

Regret Theory – This looks at the emotional reaction people have after making an error in judgement. This applies to having bought a stock that has now gone down, not buying one that went up, or selling at inopportune times.

Anchoring – This is an investor behaviour inherent in those who assume current prices are the correct prices because they lack better information. In this phenomenon, people give a recent experience too much credit, when in actuality, it may not occur again any time soon.

Market Over- or Under-Reaction – This is the market-wide consequence of investors relying too heavily on what they find in the news. As a result of the good or bad news they've learned, they may become too optimistic or pessimistic – and the prices in turn rise too high or fall too low, leading to extreme events like manias and crashes.

As many experts have discovered, playing the stock market not only involves the simple desire to buy or sell stocks; it also comes with it a whole world of investment psychology. But it’s not a bad thing because learning more about why people invest the way they do can help to better understand the unpredictability of the market and what it will likely do next.

Source: www.gobankingrates.com/

Quote for the day

"Jealousy is the result of one's lack of self-confidence, self-worth, and self-acceptance." - Sasha Azevedo

14 Qualities Good Traders Have That Most People Don’t Get

Being a good trader is about developing certain mental qualities. It is the process of constantly pushing yourself to grow better and stronger.

A profitable trader is not necessarily a good trader. Likewise, a good trader is also not necessarily a profitable one, yet a good trader ultimately finds himself with a much higher probability of being profitable/ of finding success in the long run.

This means that success, with the aforementioned qualities, becomes predictable, and repeatable.

So what are those qualities then?

1. Rather than succumbing to your emotions, you manage them skillfully, which helps you make wiser choices in trading.

Good traders understand how their emotions can influence their trading performance.

In an effort to make the best decisions possible, and to be constantly on top of their game, they understand the importance of being present and allowing themselves to feel their emotions from a place of freedom, without ever letting those emotions sway their decision and override their proven process.

A mindfulness practice is often the goo d traders’ best ally. The practice also helps them come to terms with things that are difficult to accept or to let go of.

2. You feel confident in your ability to adapt to change.

Change is all around us, not just in the market. Conditions are always changing.

Good traders know this and they focus on getting better at adapting to change, rather than resisting it. That’s where real peace lies.

Their focus is also on what they can control instead than what they can’t. And they know the difference.

3. Mistakes, although sometimes uncomfortable, make you deeply inquisitive and hungry for improvement.

You understand that we learn from every step we take. So you don’t punish yourself (and others) for your mistakes.

Trading is a tale of struggle, reassessment, and adaptation. You’ll fail, you’ll make mistakes, but you’ll learn.

Most;y likely, that’s how the progression will look like. And so, resilience, staying power and focus on growth are key elements on this journey.

4. You genuinely celebrate other people’s success.

Trading is a tough profession. Losses and drawdowns are challenging periods that cause many to break.

Good traders never compare their own results to others.

What’s more, they never try to belittle other fellow traders, wishing them to fail. They only display compassion, support, and understanding.

They don’t feel as though other people’s success somehow diminishes their own achievements. Losers think like that, and in return, losses and disappointments are what they keep reaping in their lives.

5. You are comfortable trading according to your rules.

Good traders make decisions with relative ease because they understand their rules and what they are trading and looking for in the market.

Their commitment to their trading plan and process is unshakable. They do not let other people’s opinions affect their judgment. They’ve learned to trust their own. And they catch their own fish.

6. You have a thorough understanding of your strategy, its probabilities, and your inherent tolerance to risk.

Your commitment to your trading strategy, plan and process is unshakable.

At this point, trading is not an intellectual game for you anymore. It’s not about learning grandiose theories, it’s about experience and practice – which you’ve done enough of.

You understand risk, and you know that managing it will not only preserve your capital; it will also protect your emotional well-being.

7. You focus on sharpening your skills, rather than showing them off.

While some people seek validation or recognition from other traders on Social Media (especially Twitter) for the trades they take, good traders are less concerned about gaining recognition. Instead, they’re intrinsically motivated to become better.

8. You view trading losses as opportunities for growth.

Good traders don’t waste time feeling sorry for themselves while giving away their power to the market. While losses cause some people to grow bitter, they make good traders grow better.

9. Good traders feel good about themselves, whether they win or lose.

For the good trader, failure is not the end of the world. It’s, again, an opportunity for growth. So they bounce back rather easily.

They also understand that success is equally as fleeting as failure. So good traders express gratitude for what they already have in life and what others take for granted.

Their self-worth depends on who they are, their character and the positive states of mind they choose to generate. Their self-worth is not found in what they have achieved or what people think of them.

10. You’re a master at delaying gratification.

Good traders view their trading goals as a marathon, not a sprint. They’re willing to tolerate short-term pain when it can provide long-term gain.

11. You’re an independent thinker.

Good traders think for themselves. No one acquires the skill of independent thinking merely by going to a college/university. In fact, the opposite is true — such a skill is often acquired via autodidacticism and direct experience.

12. You approach trading with openness and curiosity.

You can trade more effectively only if you let go of the fear of loss and wholeheartedly embrace its inevitability.
Only then can you fully prepare for it while staying open to the opportunities it also brings forth.

13. You do not obsess about money.

Trading for you is all about self-actualization and freedom. Money is just a way to gauge your progress on this path.

14. You’re open to learning.

Learning is always an ongoing quest for good traders.

If you didn’t recognize yourself in any of those 14 statements, rest assured, you can develop these qualities in a record period of time. 

Source: www.tradingcomposure.com/

Quote for the day

"Trade What’s Happening… Not What You Think Is Gonna Happen."– Doug Gregory

14 Signs that You're a good Trader

Good trading takes time to develop.

It is the process of pushing yourself to grow stronger and better mentally.

Here are 14 signs that you've developed into a good trader:

1. You balance discursive thoughts and emotions with mindfulness. Good traders understand how their thoughts and emotions can influence their end results. In an effort to make the best decisions possible, they balance and temper those with moments of mindfulness.

2. You feel confident in your ability to adapt to change. Good traders know that although change is uncomfortable, it is inherent to the markets more so to life. They focus on getting better at adapting to change, rather than resisting it.

3. You learn from your mistakes. Good traders take responsibility for their every action in the markets. They learn from them.

4. You balance self-acceptance with self-improvement. Good traders accept themselves for who they are while simultaneously recognizing their need for personal development. While they may admire figures like Paul Tudor Jones or Jesse Livermore, they do not try to emulate these people in their trading style. In that sense, they understand the necessity to adopt an approach that fits their unique personality.

5. You genuinely celebrate other people's success. Good traders don’t compare their results with others. They don’t feel as though other people’s success somehow diminishes their own achievements.

6. You are comfortable trading according to your rules. Good traders make decisions with relative ease because they understand their rules and what they are trading and looking for in the markets. They do not let other people’s opinions affect their judgement.

7. You focus on sharpening your skills, rather than showing them off. While some people seek validation or recognition from other traders on Social Media's (especially twitter) for the trades they take, good traders are less concerned about gaining recognition. Instead, they’re intrinsically motivated to become better.

8. You view trading losses as opportunities for growth. Good traders don't waste time feeling sorry for themselves while giving away their power to the markets. While losses cause some people to grow bitter, they make good traders grow better.

9. Your self-worth depends on who you are, not what you achieve. Good traders feel good about themselves, whether they win or lose.

10. You practice delayed gratification. Good traders view their trading goals as a marathon, not a sprint. They’re willing to tolerate short-term pain when it can provide long-term gain.

11. You bounce back from failure. Good traders don’t view failure as the end of the road. Instead, they use potential failures as opportunities to gain knowledge that will increase their chances of success in the future.

12. You express gratitude. Rather than exclaim they need more, good traders take whatever the markets are offering them in the moment however small the gains are. If they followed their plan to the letter, then what should or could have been doesn't matter!

13. You focus on what you can control. Good traders are effective in the markets for the mere reason that they devote their resources to that which they can control – and this does not include controlling the markets but their behaviour.

14. You're open to learning. Learning is always an ongoing quest for good traders.

Quote for the day

"For those who believe, no proof is necessary. For those who don't believe, no proof is possible." - Stuart Chase

Stock Market Trading - Successful or Unsuccessful? What to Believe

Frank Kollar, of Fibtimer.com, offers a list of beliefs that are generally shared by successful market timers as well as a list of beliefs that unsuccessful market timers often subscribe to. It is a good idea for traders to know which beliefs to follow and which ones to disregard.

Successful market timers—meaning profitable market timers—have several common beliefs that help them achieve consistent profits.

On the flip side of this, those who are unsuccessful also have a set of common beliefs.

It is a good idea to know which beliefs will help you to succeed as well as which ones you may have that need to be changed.

Beliefs of Successful Market Timers

1. I will not jump into a trade before or after a signal just so that I can be participating.

2. I recognize that discipline is not a concept, it is an absolute necessity. The markets have a way of removing money from undisciplined market timers.

3. I realize that what happens today, this week, or even this month, is not what is important. What is important is my success over time.

4. I realize that losses are part of trading. No strategy is without losses.

5. I accept that sometimes my investments will underperform the market, knowing that over time, they will outperform the market.

6. I know that following a timing strategy through good times and bad are what will make me successful.

7. I can follow a strategy for the long haul and stick with it, even when, at times, it is discouraging.

8. I accept that following a timing strategy will require me to make frequent trades that may seem like mistakes. A string of small losses will not make me quit.

9. I can ignore the mass media, which raise emotions and thus increase the risk of not executing a trade. It is often the trade that is hardest to take, that winds up being the most profitable.

10. The markets provide a constant stream of opportunities. If I miss an opportunity, another one will follow.

11. "Keeping losses small and letting profits ride" is not just a Wall Street saying.

Beliefs of Unsuccessful Market Timers

1. I must be trading all the time to be successful. I am uncomfortable when in cash.

2. If my strategy is not doing what I think it should, I will make a change immediately.

3. If I lose on this trade, I feel like a loser.

4. If the market is rallying, I must get in even though my strategy gave no signal for it.

5. I am unlucky.

6. I get very upset when I miss a rally or if I am in a bullish position when the market is declining.

7. I dread adverse news events and constantly worry that something will happen to make the markets go against me.

8. I can't afford to lose anything on this buy or sell signal.

9. I can't go broke taking small quick profits.

10. When this losing trade gets back to even, I'll dump it.

Final Notes on Unsuccessful Timers

Unsuccessful market timers tend to see the stock market as a place that will give them future riches and solve all their problems.

Unsuccessful market timers have difficulty coping with the reality of being wrong. When events don't live up to their hopes, they seek to ignore them.

"As a successful market timer, you have to move from a fearful mindset to a psychological state of confidence. "

If their timing strategy gives a sell signal and they have losses in that position, they have a difficult time executing the sell signal and they will hold the position so that they can exit when it gets back to break even.

When things go bad, they often exit with huge losses and blame the strategy, the timing service, the markets. Everyone but themselves.

Many market timers give up because they are usually too quick in judging small loses as a system that is not working.

Giving up is the most common way a market timer can lose. You will win only if you execute the timing strategy. Every trade.

Paper trading cannot simulate the psychological aspects of trading with real dollars. Once a market timer has experienced what it is like to keep trading through a draw down and how good it feels to follow the strategy through the good, the bad, and the ugly days, he or she will not be as easily swayed again by adverse markets.

Final Notes on Successful Timers

Successful market timers know how to follow a strategy. They know the stock market is not a game and the only way to succeed is with a plan.

As a successful market timer, you have to move from a fearful mindset to a psychological state of confidence.

You must use a strategy that builds confidence by keeping losses small and letting profits ride when the markets trend.

Do not focus too much on each individual buy and sell signal. It is where the strategy takes you over years of trading that is important.

Source: www.moneyshow.com/