The psychological factors involved in trading binary options
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[sc:BDSwissRBanner]For both beginners and traders with many years of experience, the biggest hurdle to successful stock market trading is the own psychology. Traders are human beings and are therefore subject to numerous behavioural tendencies that can block trading. The Neoclassical economic theory starts from the human being as a "homo oeconomicus" who thinks and acts rationally. This type of person would be the perfect trader, as they can weigh up the risks, are unemotional and always act in a controlled and rational manner. Although, at least for the economic sector Although it would be desirable for us to move closer to this model, the reality is very different.
In the meantime, the economy has second economic model of a human being. It paints a picture of an emotional and irrational person, who does not always make the most economically sensible decision. This branch of science is known as behavioural psychology. One field of behavioural psychology is the Stock market psychologyalso as Behavioural Finance known. The findings of behavioural finance are a real treat for traders. It summarises the behaviour of retailers and refers to the behavioural tendencies to which a retailer is exposed on a daily basis. Although the origin of these irrational behavioural tendencies stems from basic human instinct, traders can counteract them if they are aware of them.
For this reason, it is extremely important for traders to deal with their own behaviour and the scientific findings in order to be successful. In the following, the most important Behaviours and tendencies set out, and a proposal for overcoming this behaviour.
The recency bias - the wrong assessment of the whole
[sc:bo_vg_banner]One of the most well-known and widespread phenomena is the Recency Bias. It says that people are events, The company rates the events that took place in the recent past more highly than those that took place longer ago. If an event took place just a few hours ago, for example, it will have a stronger influence on our thinking than an event that happened a long time ago. In the everyday life we will notice this phenomenon particularly in relationships. People tend to forget the good things a friend or partner did for them a long time ago and often focus on the negative events, that have recently taken place. Of course, the principle works just as well the other way round. In reality, however, this distorted perception will not lead to serious difficulties.
In the context of trading, however, traders could have to book a loss in the double-digit percentage range if they do not familiarise themselves with the Recency Bias to deal with. For example, if a trader is currently on a winning streak of 3 or 4 consecutive trades, they will probably get the feeling that they are in a good position, that he was a particularly good trader. In the past, this feeling was essential for survival, as people went hunting with a heightened sense of self-confidence, for example. In trading, however, this false self-confidence can be fatal. Traders need to realise that it is never their own abilities that generate profit, but that the market generates the returns. The trader has random correctly positioned. Nevertheless, success on the stock market is not a coincidence but can be calculated.
So if the trader is in the throes of his emotions and already sees himself as the next "Wolf of Wall Street", he runs the risk of losing out on the next trade. high risk. In his misconceived self-confidence, he tends to make a trade that he would not have made in a "normal" state. It is possible that this trade will wipe out the profits he has previously made. It is interesting to note that he himself might be inclined to this attitude if his 20 trades before the winning streak were losing trades.
Conversely, the trader also tends to do the same in the event of a series of losses, as he is of the opinion that he needs to recoup the previous losses.
Tip: Traders should end the trading day if a winning or losing streak occurs. It will probably be the better decision to keep a cool head.
Distorted expectations - traders expect more than reality provides
Many traders tend to do this, expect more profits than are actually possible. These expectations are realised through certain Stories of successful traders, who have become very wealthy in a very short space of time. As a result, traders believe that they can make astronomical profits even with a small trading account. As a result, they are taking risks that are completely uneconomical and unrealistic. They dream of luxury and an extravagant lifestyle that they will be able to afford in the near future from the profits they make. In reality, however, they won't be able to achieve much with this attitude, because the stories are what they are, stories.
In practice, a trader who suffers from distorted expectations is likely to consistently take too much risk. For example, if he thinks about how much money he will make with the trade he is about to place, this will be an emotional trade. With high probability this trade will not bring the desired profit, but will rather lead to him losing a lot of money in a very short time. In any case, his previous analysis is probably negatively affected.
Furthermore, traders with distorted expectations will often suffer as a result, that they are wrong in their expectations. As soon as they realise that their trading is not bringing the desired success, they may risk even more. Some traders even tend to interpret certain chart patterns in this way, that they fit into the framework of their strategy, although this is not actually the case.
Switching - the premature change of strategies
Although it is understandable for experienced traders, it is a difficult nut to crack for beginners: Every strategy brings negative trades with it. As soon as traders realise that their strategy is not yielding the profits they had hoped for, they tend to change their strategy. However, it is quite natural for a strategy to have a certain Negative fluctuations and therefore losses are inevitable. If you use a strategy that has been statistically tested, you must not be distracted by losses, but must endure them, until the strategy yields profits. For most beginners, however, this is difficult to bear and so they tend to change strategy before it has even had a chance to develop.
Conclusion: The trader's biggest enemy - his own psyche
Not only the famous trader Dr Van Tharp, but actually all experienced traders will be able to confirm that the biggest hurdle on the way to becoming a successful trader Overcoming your own psyche is. If you can control your emotions, you can control your trades and are more likely to be successful [sc:bo_testsieger_promobox].
Simone Aescher is the founder and operator of the successful crypto blog aescher-ai.ch.
After studying business administration at the Frankfurt School of Finance, she gained over 5 years of professional experience in the financial sector. However, her passion has always been the financial markets and investments.
In 2019, Simone Aescher finally turned her hobby into a career and founded her blog. She shares her in-depth knowledge of shares, ETFs, cryptocurrencies and much more.
As an active trader, Simone is constantly testing new brokers, robo advisors and trading apps. With her honest product reviews, she helps her readers to separate the wheat from the chaff.
With her academic background, many years of experience and practical expertise as an investor, Simone Aescher combines the ideal prerequisites for competently analysing and evaluating the financial markets.