What Is the Psychology of Investing And How To Manage It?

psyche-518161_640They say that online trading and investment is all about psychology. Humane psychology is the reason why more than 90% of all investors do not succeed making profits on a regular basis. Is it really so? Lets make some research in psychology of investing and what are the main psychological obstacles that prevent many investors from being successful.

Risk

One of the main problems for each investor is fighting the risks. Everyone knows the main rule of a successful investment strategy: cut your losses and let your profits grow, but in reality only a few investors actually perform it, and this is just a matter of psychology!

For example, if you want to make money, and this is important to most investors, then, most likely you will have problems to allow small losses. Furthermore, the losses will grow, and it will become even more difficult for you to accept them. As a result, losses are becoming huge, and you’re forced to take them because before you were not able to accept a small loss. And vise-versa, if you have a profit, you want to take it right now. The bigger is your profit, the more difficult it is to resist the temptation to take it.

The truth is that most people reject the risk when it comes to profits; they prefer a guaranteed small profit instead of a reasonable expectation of its growth. But when dealing with losses, they desperately risk their investment, taking unreasonable decisions instead of taking a minor loss. As a result the outcome is opposite: they cut the profits and let the losses grow.

Psychologists recommend treating online trading and investing as a game, where you need to follow its rules in order to win: limit the risks and let the profits grow.

Stress

The next important obstacle to a successful investment is stress. Our brain has a limited capacity for perception. If you are too much worried, your brain is overloaded and you are not able to make good decisions.

Usually stressful and worried people do not try to make any decisions at all. They either prefer following the crowd, or take someone’s advice. In investment such situation may lead to losses. Even after stress is over, for some time a person can not make appropriate decisions, because stress takes a lot of energy and your body needs time to refill it.

Most people are worried a lot about their losses. However, successful investors know that losses are an essential part of profitable trading. It is recommended to reconsider your attitude to losses, so that it would not lead to stress. You have to understand that stressful situations exist because we create them and perceive them as such. Do not be afraid of losses, they inevitably accompany any investor and are part of any investment strategy.

Internal conflicts

The third major problem of investing is internal conflicts. Investors have different motivations for their actions: to make money, obtain self confidence, to support their family, etc., which, when identified, are beginning to act on a subconscious level, creating a pattern of behavior. Sometimes this can lead to an internal conflict. In order to resolve this conflict, it is enough to realize that our goals and objectives are not consistent with each other, and make a kind of “negotiation” between the two.

There was an investor, whose father was a very successful businessman. However, he drank a lot and was not a good example for the boy. When the boy grew up, he made up his mind not to be like his father. He was making $75K a year, but not more, as it was against his principles, not to be like his father. After some psychological therapy, he was able to earn $650K in just two months. Half of all investors have a similar problem. To solve them, they just need to “make negotiations” within themselves.

Emotional control

The next thing you need to learn to do is to control your emotions. Most investors allow their emotions to interfere in the trading process. Most often it is seen as a lack of patience, irritation to the market, fear (at the worst possible moment) and unjustified optimism about what can happen.

The truth is that the best traders have not only analytical skills, but also know how to control their negative emotions. The best thing to do is to start relaxing breathing, meditation, and all that can change your inner state. For example, a good method to overcome it is to look at yourself from the outside. Pay attention on how you are sitting at the table, what actions you are taking, what expression is on your face, what emotions are reflected on it. And then imagine in detail, how you would like to see yourself. Copy this image.

Decisions

And finally, it is a problem of decision making. People generally believe that in investment they can use the same methods of decision-making, as in everyday life. However, this is not true.

For example, when we want to buy a new car, we are spending weeks on selection of a particular brand and model. And very often, we are doing the same in the financial market as well. But here this way of decision-making does not work, as it takes too much time. We can not afford making decisions for a long time when trading in the financial markets, because things are changing too fast and sometimes decisions are required immediately.

A good solution for this situation is to develop an investment strategy that will give signals to action. The best strategy should let you pre-define your actions in a given situation and give you time to react. But the main thing in investing is not lies in the strategy, but in self control.

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Posted in Investing, Singapore Trading

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