Psychology and Financial Trading: An Insight into the Mind of Traders


[The following is a guest post]

According to a recent Wall Street Journal report, large corporate investors are increasingly losing faith in the stock market. More specifically, it suggests that investors are avoiding public markets as a medium through to execute orders, with the prevalence of algorithmic trading and other structural issues believed to be causing volatility and a wider fragmentation of the financial markets.

While this topic can be debated at length, it offers a fascinating insight into the psychology of trading and the individuals who risk their capital on the financial market. Traders are a particularly alert and decisive breed, for example, who are used to adapting in the face of evolution and operating within pressurised and changeable conditions.

In fact, the psychological make-up of the typical investor in an extremely interesting one, and one that includes multiple facets. Consider the following: –

An Understanding of Fear and the Appetite for Risk

Fear is a natural drive of success among financial market traders, but only if they are able to understand this emotion and use it as a way of determining their appetite for risk. Experienced traders boast an innate understanding of fear as a fundamental concept, which serves as a natural reaction to perceived threats such as market volatility and the depreciation of value. This enables them to quantify the specific problem and deal with it in a proactive way, rather than reacting in an emotional and ill-considered manner. In many cases, this comprehension can enable traders to clarify their approach to risk and determine a strategy that suits their philosophy.

The Concept of Greed and its Impact on Traders

Greed is one of the worst characteristics that a trader can have, as it often causes them to hold onto winning positions longer than they should do. They do this in the quest for even greater financial returns, but any experienced investor will testify to the importance of managing expectations and closing positions at the optimum time. While it is a natural human instinct to aspire and demand greater success in our endeavours, the key for traders is to develop focus and execute trades based on sound business decision making and in-depth market knowledge. Without this, they run the risk of incurring significant financial losses over a sustained period of time.

Discipline as a Core Trading Attribute

Our investment philosophy helps to shape the strategies that we employ when trading, especially when it comes to managing risk and closing positions. For those in the market for long-term gains in particular, it is imperative that they have the discipline to remain true to their strategy even as their chosen market begins to fluctuate. While online resources can be used to access daily news bulletins and breaking trends, for example, there is a pressing need for traders to use this information to underpin rather than consistently change their strategy. By remaining disciplined in their approach and showcasing confidence in their trading strategy, investors can resist short-term dips in the market and emerge with a handsome profit.

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