Can psychology improve your trading performance? – Guest Editorial

Becca Cattlin

In this research, IG Group takes a close look at emotions and cognitive biases, learned behaviours that work within the subconscious part of the brain and inform decision-making, and their relationship with trading

Becca Catlin is a contributor within the subject of financial services for publicly listed online trading and investments provider IG Group. Her research and publication covers a range of financial markets, risk management and the effects of politics on markets. Becca has also looked at how psychology impacts the decisions that financial professionals make.

The goal of forex trading is simple: to earn a profit. While there are a variety of ways that you can improve your chances of building your capital, one of the most important steps is understanding the impact that psychology has on the way you make decisions.

According to the efficient market hypothesis (EMH), financial markets are completely rational, as market participants always make the most logical decisions, in order to achieve the greatest results.

However, IG Group’s ‘Psychology of Trading’ research showed that despite being correct in their predictions more than 50% of the time, traders tend to lose significantly more money than they win. This is because, in reality, no trader is completely rational all of the time.

We’re all products of our environment, our decisions and our psychology. This means that in order to act rationally, and make the most advantageous decisions, it is vital to understand your mindset and the way it influences your time spent trading financial markets.

There are so many different aspects of the human mind that can influence the decision-making process. But we’re going to take a look at two key aspects of psychology that can help you to improve your forex trading performance, these are:

1. Cognitive biases
2. Emotions

1: Cognitive biases

Cognitive biases are learned behaviours that work within the subconscious part of the brain and inform decision-making. They are mental shortcuts that can cause involuntary responses to particular stimuli.

For example, the availability bias is a mental shortcut that prioritises information that is more easily accessed. This can lead to trading based on completely false information, which will increase the risk of failure.

Another example is the loss-aversion bias, which is the desire to avoid loss over and above the desire for greater gain. Of course some awareness of risk is absolutely necessary when it comes to trading, but the loss-aversion bias can actually lead traders to hold on to their losing trades for too long – out of a reluctance to accept any loss – despite this exacerbating the situation.

Often, traders are completely unaware of the cognitive biases that influence them, which is what makes them so damaging to trading performance. By educating yourself on the cognitive biases that can affect you and being proactive about the information you are using in your pre-trade analysis, you can start to limit the influence they have on your trading performance.

2: Emotions

There is a famous saying amongst traders that ‘the markets are driven by fear and greed’. Although these are probably the most prevalent emotional influences, there are a lot more emotions that can impact a trader’s performance.

For example, hope can be both a positive and a negative influence. While it is important to maintain a level of optimism when trading, it’s important not to let this go too far. We can see the negative impact that hope can have in the above IG data – it shows that traders hold on to their trades for too long out of hope that they would turn around, which ended up causing them to take on more loss.

A way to improve your trading performance and limit the impact of emotions is to keep a trading diary. This will mean you can be aware of the emotions that you feel, acknowledge them and learn from them.

Behavioural finance is no longer reserved for academics and professional traders, and should form a vital component of every traders’ toolbox.

To learn more about other psychological factors that can influence your trading, read IG’s full guide or watch their video on mastering psychology.

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

 

Read this next

blockdag

BlockDAG’s Impressive 30,000x ROI Potential and Moon-Based Keynote Captivate Solana And Bitcoin Cash Crypto Investors

Discover BlockDAG’s impressive moon keynote launch and its promise of a 30,000x ROI that is drawing investors from Solana and Bitcoin Cash.

Market News

This is it, the USD Strength has Come to an End

In the aftermath of Israel’s retaliatory strikes in Iran, the currency markets have entered a phase of heightened volatility, reflecting the intricate interplay between geopolitical tensions and economic fundamentals.

blockdag

BlockDAG Leads DeFi Innovation with $19M Presale, Overshadowing Cardano and Binance Coin With 30,000x ROI and DAG Structure

Learn about BlockDAG’s growth in its presale, surpassing $19M, and its impact on the DeFi landscape, overshadowing movements in Cardano and Binance Coin (BNB).

blockdag

BlockDAG Offering a Fresh Take on Meme Coin Development Amid Solana’s Challenges and Floki Inu’s Price Fluctuations With 30,000x ROI

Dive into how BlockDAG’s innovative presale, low-code platforms, and potential 30,000x ROI, outperform Solana’s technical hurdles and Floki Inu’s market predictions.

blockdag

BlockDAG Excels With $2.2M In Miner Sales And Moonshot Teaser, Overshadowing Litecoin’s Rally And Dogwifhat’s Market Highs

Explore how BlockDAG’s $2 million Miner Sales & Moonshot Teaser eclipse the Litecoin price recovery and the Dogwifhat all-time high.

blockdag

BlockDAG Leads Top 6 Cryptocurrencies to Buy in 2024 with a Potential Price Surge to $10 Leaving Cosmos, BNB, and Ethereum Behind

Discover the top six cryptocurrencies in 2024, including BDAG’s remarkable growth potential, BNB’s durability, Cosmos’ connectivity, and ETH’s eco-friendly advances.

Retail FX

Weekly Roundup: Prop firm arbitrarily accounts, Interactive Brokers’ CFDs in Japan

FX, Fintech and cryptocurrency markets have been bustling with activity over the past week, as is often the case. Keep yourself informed and ahead of the curve with a curated selection of crucial stories and developments that are most relevant to those engaged in the markets.

blockdag

BlockDAG Redefines Crypto Mining as Presale Tops $18.5M, Outshining Ethereum ETF & Dogecoin Dynamics

The recent approval of the first Ethereum ETF in Hong Kong underscores a significant advancement in the cryptocurrency’s mainstream acceptance. While Ethereum continues to attract institutional attention, the Dogecoin price prediction suggests a possible resurgence, despite its current undervaluation from past highs.

Digital Assets

Bitcoin halving is done: ViaBTC mines historic block 840K

The Bitcoin network has confirmed its fourth-ever halving block, mined by the cryptocurrency pool ViaBTC, according to data from Blockchain.com. This significant event in the Bitcoin ecosystem reduced the mining reward by half, a deflationary measure occurring approximately every four years to control the issuance of new bitcoins and curb inflation.

<