Trading instincts

Trading outcomes are impacted by a variety of factors, not least of all one’s mental state of mind. This is why the study of trading psychology has become all the rage. It’s an area that plays a huge role in financial decision making.

Because feelings have a way of overriding rational behaviour, particularly in the context of trading. And this is because trading tends to evoke passionate responses in reaction to high levels of stress and anxiety.

It’s no surprise that trading is often described as exhilarating, but this rush of endorphins doesn’t also always result in positive outcomes. In fact, it can often lead to irrational choices and biased thinking, resulting in an unexpected and tragic loss of money. Big money! Huge!

Meshed into this world of emotive trading is trading instincts. You know, those gut feelings or niggling intuition telling you do this or do that? Instincts that often get mistaken for objective truth, resulting in adverse decision making processes if not rooted in experience or knowledge.

And therein lies the fundamental basis of what trading instincts should be based on. They are something that should be developed over a significant period of time, once sufficient experience has been gained or education acquired.

In other words, while seasoned traders can trust their instincts, novices lack the same certainty in theirs at the start.

However, regardless of level of expertise, one must be mindful of the fact that instincts may be impacted by bias. It’s knowing how to distinguish between objectivity and subjectivity that will increase a trader’s potential for success. So, what are some psychological factors pertinent to trading instincts that a trader should be aware of?

Is based on the fact that opinions are the result of biased information.

What does this mean exactly though?

Well, we live our daily lives acquiring information from a variety of external sources. We use this information to make day to day decisions.

However, we neglect to consider how biased this data could be. This stands particularly true if we listen to one viewpoint on a particular subject over and over, without considering other contrasting stances.

We then have a case of making decisions based on one side of a story, i.e. biased decisions.

Has to do with the fear of the unknown. It’s choosing not to do something that’s unfamiliar to us.

In the context of trading, this may exhibit itself in risk averse behaviours resulting in missed trading opportunities.

Avoiding the vague may also come about due to the fear of losing money due to poor financial decision making.

Additionally, it can also be as a result of making money. Yes. Making money.

As this then results in the trader becoming fearful of losing those gains, be it through unexpected market volatility, or even tax.

Is an unusual component of one’s trading psychology.

It has to do with focusing on the thrill of achieving a goal rather than attaining what you set out to achieve.

It’s becoming consumed with the excitement of the ‘what if’ rather than being focused on the actual goal.

Interestingly, this feeling of anticipation is also impacted by external factors like the collective psychology of market participants.

Sensory-derived bias

Is based on the fact that opinions are the result of biased information. What does this mean exactly though? Well, we live our daily lives acquiring information from a variety of external sources. We use this information to make day to day decisions. However, we neglect to consider how biased this data could be. This stands particularly true if we listen to one viewpoint on a particular subject over and over, without considering other contrasting stances. We then have a case of making decisions based on one side of a story, i.e. biased decisions.

Avoiding the vague

Has to do with the fear of the unknown. It’s choosing not to do something that’s unfamiliar to us. In the context of trading, this may exhibit itself in risk averse behaviours resulting in missed trading opportunities. Avoiding the vague may also come about due to the fear of losing money due to poor financial decision making. Additionally, it can also be as a result of making money. Yes. Making money. As this then results in the trader becoming fearful of losing those gains, be it through unexpected market volatility, or even tax.

Tangibility of anticipation

Is an unusual component of one’s trading psychology. It has to do with focusing on the thrill of achieving a goal rather than attaining what you set out to achieve. It’s becoming consumed with the excitement of the ‘what if’ rather than being focused on the actual goal. Interestingly, this feeling of anticipation is also impacted by external factors like the collective psychology of market participants.

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Trading instincts

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