There’s often little logic in the movements of the market. This is because stocks move at the whim of human beings, who can often be illogical themselves and driven by emotions. With as many technical and fundamental analyses that are done on equities, one their most important influences is perhaps psychology. Realizing this can help you learn how to invest better.
Psychology is a vital, but under-appreciated element of stock trading. This is because most analysts are more mathematically focused. But those who ignore the human and social aspect of the market are making a serious mistake.
There are four different emotions which cause most investor’s decisions. They are greed, fear, hope and regret.
Greed is the desire for money and wealth. When a trader experiences greed, they are only able to think about how much money they have made from a stock and how much more they can make by keeping their position. The problem? Profit is not realized until after a position is closed. Until this happens, a trader only has the potential for profit. Greed can lead to an investor holding a stock for longer than they should, hoping to make more money… until it plummets.
Fear, which is probably the strongest of all human emotions, causes a trader to sell a position regardless of its price. Unlike other emotions, fear is a survival response. The Dow Jones Industrial Average (DJIA) in the U.S. took from 1983 until 2007 (24 years) to grow from 1,000 to 14,200, but it only took two years to lose 50% of its value (2007-2009). That’s the power of fear.
Fear can be beneficial if it gets you out of a poor trade. But it is dangerous if it causes investors to not buy a stock that would otherwise be profitable.
Hope, a feeling of expectation and desire, might be the second most dangerous emotion. It’s what keeps a trader in an unprofitable position. When a stock that has lost money is going up, investors will often stay in the “hope” of recouping past losses. This is dangerous because the market will do what it does, regardless of an investor’s wishes.
Regret is a feeling of disappointment over something that has happened. It can cause a loss of focus. While it’s natural to regret making a bad trade or missing a good one, an investor must simply learn from what went wrong and move on to the next opportunity. This is the only way to ever learn how to invest better.
For those who can learn to predict other’s emotions, market psychology can be a very powerful tool which can help you learn how to invest better. While some inexperienced investors may wonder whether to buy or sell a stock, you should ask “what are others doing?”.
- Reasons You Need to Invest in Asia Right Now - 28/05/2017
- Don’t Invest in Myanmar, Here’s Why - 25/05/2017
- Investing in Hong Kong Property: The Ultimate Guide - 21/05/2017
- Emerging Market ETFs Won’t Help Your Portfolio - 14/05/2017
- How to Invest in Cambodia: Asia’s Best Frontier Market - 08/05/2017
- Investing in Singapore Property: The Ultimate Guide - 02/05/2017
- Budget Airlines in ASEAN to Rule the Open Skies - 23/04/2017
- Investing in Myanmar Property: The Ultimate Guide - 08/04/2017
- Investing in Vietnam Property: The Ultimate Guide - 25/03/2017
- Investing in Malaysia Property: The Ultimate Guide - 12/03/2017