Psychological Factors Affecting Day Trading
As a day trader you might have experienced the role of emotions in moving the stock markets recently. With the spread of COVID-19 pandemic, even companies with strong fundamentals saw a marked drop in their stock prices. Some dropped to their 3 year lows. Why did this happen?
This article talks about the psychological factors which might affect your trading strategies. Being aware of these factors can help you as an individual investor as well as study the market during high volatility periods.
Although buyer’s remorse is an important term in the field of Cognitive Dissonance, it also has an interesting link with buyer’s and investor’s behavior in stock trading. Most of the time we find people regretting their trading decisions. A trader might feel that they bought/sold a stock too early or too late, or maybe now they prefer to buy something else.
Traders remorse is generally caused by some new information presenting itself. Maybe you saw the stock price go in a different direction than you expected, or maybe your highly-regarded friend told you something you didn’t know about the stock you just traded.
Having a good personal strategy is helpful to save yourself from remorse later. If you have a clear entry and exit criteria you can better control your positions and investments.
|Many times investors end up following a market trend, even when it goes against their own intraday trading strategy. This happens especially in a high volatile market - you get so confused by the overall market movement and predictions, that you focus less on your own insights. Following a herd is sometimes dangerous, and can cause post-trade anxiety.||
It is wise to be “Fearful when others are greedy and greedy when others are fearful.”
- Warren Buffet on his trading strategy
|Your friend told you how he made a big trade yesterday and made a neat profit. You go in the next day and try to do the same trade, resulting in not-so-stellar results. Enter FOMO, or Fear of Missing Out.||FOMO refers to the fear of missing out on big opportunities either due to some external info, or when stocks are highly volatile. FOMO makes traders anxious about the trades they didn’t take.|
FOMO is difficult to show on the trend lines - it only depicts a trader’s mindset. Relying on your strategy, keeping yourself updated on the market news and fundamentals is helpful here as well.
What can you do about it?
Create a comprehensive trading strategy
Trading with emotions is almost never a great idea. So how do you make sure you don’t fall prey to these emotional roller-coasters? Strong fundamental knowledge of the markets, and a good trading strategy.
A strategy based on which you’ll make your trading decisions can not only save you from market influence, but also make your process easier and quicker.
Brush up on market fundamentals
A sound understanding of the market fundamentals can go a long way in helping and reassuring you that you have a great strategy.
Get professional help
If you think you are stuck or are overlooking some crucial results, it might be a good idea to get help from a professional trader or consultant. Be careful who you chose to get help from - a proper vetting process will be helpful. See their past results, talk to your friends and read online reviews before making a commitment.
An automated trading software/platform can help you create a solid trading strategy. Some platforms can also trade on your behalf, taking the emotions out of the equation.
Creating data and trend-based strategies is now possible through these trading platforms. Trading techniques like Algorithmic Trading (or Algo Trading) can be a great solution for removing emotional barriers from your day trading process.
Besides these platforms are much more accurate than a manual trader. So you get a platform which is uncorrupted by human emotions, and makes trades at the exact moment for you. What’s not to love?