Traders are rational…
Rationality suggests that traders choose the most correct one as a result of the analysis they make while making an investment decision and they use this decision consistently.
So how rational are we as traders?
The most important feature that distinguishes human beings from other beings is the ability to feel and think. If you are not a robot or have a will of steel, you can see for yourself how rational you are in your transactions in the capital markets. Whether a transaction you make turns into profit or loss, that’s when emotions start to come into play. In this article, we touched on the fact that Forex Traders are not rational when making decisions and tried to explain 7 psychological tendencies that we should avoid in order to get a healthy profit from our investments.
Of course, self-confidence is important when making an investment decision, but too much of anything is harmful. Overconfidence causes traders to overconfidence in the information they have and as a result ignore possible risks. In addition, this tendency causes bad investment decisions, frequent trading, high risk taking, and as a result, returns to the investor as a loss. Don’t let your overconfidence blind you when evaluating your investments.
2. Excessive Optimism
In the case of over-optimism, traders believe that every trade they make will go according to their wishes. This situation can be compared to a tendency to overconfidence, but the possible harm is not overconfidence in information, but the optimistic psychological expectation of the transaction. If these optimistic expectations are not realized, investors will become stubborn with the trade they opened and their losses will increase even more. Always have a positive expectation from the transaction you open, but accept the situation when things do not go as desired.
3. Extreme Reaction
In the researches, it has been seen that the products that are widely mentioned in the market and that are the subject of news flows for a long time can have more value than the amount that should normally be. Traders who overreact to these news are making decisions based on the latest news feeds and trading accordingly, which is a false trend. Before entering a transaction, all macroeconomic variables of that asset must be considered.
Conservative-leaning traders always stick to their previous analysis and respond limitedly to data that changes over time. We can explain this situation as follows; Crude oil, which we analyzed and processed, changed its direction with the stock data and political events after a while. Our first analysis may certainly be correct, but we should not be late to respond to the changing data over time and develop a new action plan.
5. Avoidance of Loss and Regret
Loss aversion tendency is the situation where the happiness of profit from a transaction is not equal to the sadness caused by the loss of the same transaction. For example, the sadness caused by a loss of 100 TL from a transaction is much more than the joy of a 100 TL gain. In such a case, traders who do not want to regret tend to hold their positions in loss for a long time and close their positions in profit quickly. To avoid this trend, we need to set our profit and loss levels before trading and stick to that plan and make progress.
Traders often believe that the positive performance of a pair in the past will continue in the future, but no pair, commodity etc. It is not possible to perform the same performance forever. Definitely consider the past price movements in the trades you will open, but do not ignore the potential developments that will take place in the future.
In summary, it is an inevitable fact that we cannot be completely rational when making investment decisions due to human psychology. At this point, the important thing is to know ourselves well and to be able to manage this process well. Don’t be afraid to make mistakes! But admit your mistake and know why. This is how experience is gained…
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