By Boriss Gubaidulin, Admirals Africa Director
The term “behavioural finance” which took hold in the 1990s examined what role emotions play in investment decision-making. Why should psychology and trading be linked?
The simple answer is that we are hard-wired as humans to be emotional, and – let’s face it – when it comes to financial matters, emotional consideration come into play.
In investing, the two most powerful emotions have been identified as fear and greed. So much so that CNN Business created the Fear & Greed Index to measure exactly how emotions influence how much investors are willing to pay for stocks.
The index assumes that fear drives stocks lower while greed boosts stock values. In more recent years, similar indices have been developed, such as the Fear & Greed Index for Cryptocurrency trading.
If emotions are an inevitable part of trading, how can we harness the power of emotions to help and protect us instead of holding us back?
The first step is to understand your emotions. On a practical level, here we look at various behavioural biases which come into play. Once we understand these biases, we will be more capable of recognising unhealthy psychological patterns and states of mind, and better equipped to react in a way to protect ourselves.
The overconfidence bias
Watch out for trading euphoria. It’s not uncommon for traders to complete a winning streak and then believe that they can’t get anything wrong in the future. To believe this would be unwise and will only end in failure. Make sure you always analyse your trading sessions and look at your wins and losses in detail. Reviewing your trades in an honest way is a key aspect of beating your emotions in trading psychology.
Learn to be comfortable with accepting that mistakes are inevitable, especially in the early stages. It’s all part of the learning curve and the development of your trading psychology.
The anchoring bias
Anchoring is a tendency to rely on what is already known to a trader for decision making in the future, instead of considering new situations and the changes that they can bring.
At times, anchoring tends to cause traders to rely on obsolete and irrelevant information, which of course won’t help you trade successfully. In practical terms, the anchoring bias manifests itself in traders holding losing positions open for too long, simply because they fail to consider the options that are outside of their comfort zone.
The confirmation bias
The confirmation bias means looking for information to support a decision you have made, even if it wasn’t the best decision. This is simply a way of justifying your actions and strategies. The problem is that, by doing this, you’re not actually learning and improving your methods, and are likely to continue making the same trading mistakes.
The loss aversion bias
The loss aversion bias can be explained as such: when considering options before making a choice, we are likely more willing to give preference to a lower possible loss over a higher possible reward.
Fear is a much more powerful motivator than greed. In practice, a trader with a loss aversion bias is more akin to cutting profits when they are still low, while allowing bigger drawdowns.
It is important to note that emotional self-knowledge cannot be done in isolation – make sure you support your trading journey and personal development with continual learning through a reputable partner, with a solid reputation backed by superior knowledge.
It is also important to know that online trading carries risk – make sure you deal with a reputable broker
Risk management and education: the role and importance of a licensed, reputable broker
Risk management and education are vital components when trading in Contracts for Difference (CFDs). Admirals, the global neobroker who recently established its presence in Africa, emphasizes the importance of choosing a reputable broker to help guide you through your trading journey.
With more than 20 years’ experience, Admirals offers a comprehensive educational package, that can help you learn how to properly mitigate your risk. Here’s how:
1. Solid risk management
Develop, implement, and adhere to sound risk management strategies based on setting stop-loss orders, healthy portfolio diversification, and the appropriate position size according to your risk appetite. Admiral’s four-point risk management process involves the following:
- Identify the risks
- Analyse those risks
- Find solutions to minimise those risks and
- Consistently manage and apply those solutions to your trading.
2. Continuous learning
The financial markets are constantly evolving, and staying updated on market news, economic events, and trading techniques is important. Admirals offers a wealth of educational resources, including webinars, articles, and video tutorials to help traders stay informed and improve their skills.
3. Practicing with a demo account
Before diving into live trading, it is essential to practice in a risk-free environment. Admirals provides a demo account that allows you to test your strategies and familiarize yourself with the trading platform without risking real money.
4. Advanced trading platforms
Admirals offers MetaTrader 4 and MetaTrader 5, providing you with powerful tools and features to optimize your trading strategies and stay on top of market movements.
5. Dedicated customer support
Admirals offers localized support to assist you on your trading journey and to help you navigate the financial markets with ease. A team of customer support representatives is available to assist you.
6. Wide Market Access
Admirals offers a range of more than 3700 CFD assets to trade, including CFDs on forex, stocks, commodities, stock indices, bonds and ETFs, allowing for a diversified portfolio and access to global markets.
Admirals continues to expand globally to provide its clients around the globe with advanced trading tools, access to financial security and various customer care policies. Admirals is licensed in the Seychelles, UK, Cyprus, South Africa, Australia, Jordan, Canada and Kenya.
In conclusion, risk management, continuous education and choosing a reputable broker like Admirals are important components in CFD trading. By prioritising these elements and leveraging the education and support provided by Admirals, you can embark on your journey in the ever-changing financial markets with more confidence.
Trading involves risk.