Trading Psychology-Why Is It Important?
The importance of having the right psychological approach to trading is crucial for long-term success.
Although trading can be highly quantitative, the relevance of trading psychology should not be overlooked.
Trading psychology can be defined as “the emotions and mental state that help to dictate success or failure in trading securities”. There are generally two different emotions that can alter a trader’s decision-making process — fear and greed.
We will discuss the reasons behind the manifestation of both emotions, their implications and explore how we can leverage technology to deal with them.
There are two main types of fear in trading — fear of loss and fear of missing out.
Fear of loss in trading stems from the doubts that appear when a trade goes south and posts negative returns. Struck with the thought that their hard-earned earnings are being depleted, fearful traders sell their positions immediately to cut their losses.
Such a sale could immature and back-fire should the stock recover and reverse its downtrend.
This applies to winning trades too. For the fear of the stock reversing its uptrend, traders sell the stock before it is given time to mature and hit its true valuation. This results in them missing out on potential profits.
On the other hand, the fear of missing out is the feeling a trader experiences when they think they might be missing out on big market opportunities.
This compels traders to adopt the herd mentality and follow the actions of the majority. Sources of this fear can range from newsworthy events to sudden market movements.
For example, the recent record Bitcoin rally drew many first-time retail investors to invest in the cryptocurrency due to the fear of missing out on potential gains. Soon after hitting a record high, the digital asset fell by more than 20% — resulting in heavy losses for these new traders.
In contrast, greed can drive traders to hold onto the stock for too long. This could be detrimental should the price trend reverse and erase away potential profits. Therefore, traders need to fight against greed and sell the position at the right time.
A case in point was the bursting of the dot-com bubble in the early 2000s. The bubble formed as a result of a rapid rise in U.S. technology stock equity valuations — fuelled by investments in internet-based companies during the bull market in the late 1990s.
Though these companies were grossly overvalued with unsustainable business models, investors still maintained their positions in these tech companies. Eventually, the bubble burst, and the NASDAQ index fell by 76% within 2 years.
Greed applies for losing stocks too. A greedy trader would maintain blind faith in a position that is decreasing in value and could even double-down on it with the hope it would turn around.
In the rare instance that it does, such a decision would pay off. However, should it not recover, the trader would be staring at a huge loss.
Having learned the implications of fear and greed in trading, the key to eradicating these emotions is to leverage technology for decision-making.
Unlike humans, technologies such as AI trading bots eliminate emotions and adopt a rule-based approach to trading. This ensures emotions such as fear and greed do not negatively implicate the decision-making process.
SnapBots(www.snapbots.io) provides an AI bot that detects advanced trading signals and acts on them to execute trades according to guidelines set out by the user.
History has shown that humans are not well equipped to execute trades without allowing our emotions to impair our decision-making. We need to leverage the advancement of technology and utilize solutions such as SnapBots to augment our decision-making and execute better trades.
About Snap Wallet
Snap Wallet is a secure cryptocurrency wallet that is powered by AI deep learning bots. Currently, Snap Wallet supports major cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Tether (USDT), and SNAP (SNAP). Through Snap Wallet, users not only store their cryptocurrencies but also stake, choosing between three low-risk trading strategies.
Once staking is activated, users’ assets will be traded by bots 24/7 until the end of the staking period.
SNAP is short for SnapBots Token based on Ethereum and that is used in SnapBots blockchain-based AI bots’ economy.
SnapBots(www.snapbots.io) is an artificial intelligence (AI) research firm based in BVI with global users. Driven by its focus on fields of machine learning and deep learning, it aims to supply trading bots as a service.
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