psychological traps

Psychological Traps To Avoid In The Stock Market

Psychological Thinking

 Investing in stocks can be a difficult and confusing thing to grasp for most people. There are financial words you don’t know, businesses you don’t understand, and investment strategies you need to learn. The sporadic nature of the market is probably the more complex and difficult aspect to comprehend. Frequent price fluctuations can be very confusing and cause investors to lose grip on their investment. Investing in the stock market is only partially based on your own personal knowledge and equally requires a psychological understanding of the market.

Warren Buffet who is the richest and most successful investor of all time, constantly emphasizes the importance of emotional control when investing. Having the ability to control your emotions and restrain yourself from panicking when the market turns against you, will serve as a great asset.

Psychological Buy & Hold

Buy and hold can also be associated with value investing. Warren Buffet is a master value investor who is famous for voraciously reading and analyzing different companies’ financial reports.

When the market takes a dive, Buffet knows his investment is healthy and that the drop in share prices has little to do with the company’s performance.

When the global financial crisis hit Wall Street in 2008, Berkshire Hathaway reported a loss of over $11 billion dollars. Buffet understood that markets would recuperate; he did not let himself be rilled up by the turmoil of the crisis and ended up buying discounted stocks. Can you imagine losing $11 billion dollars over the course of a year?

Trading With Emotion

So we have already discussed how to prepare for the psychological part of investing, but, what happens when even though you are aware of what you should do, you just can’t fight your emotional urges?

When I first started investing, all of my trades were based on emotion; it is likely that most new investors are too. Doing this is completely normal for someone just beginning to tangle into the art of trading. It is your money, after all, you want to protect it as best as you can while turning a profit. However, there are some very important things to avoid even as a beginner that will save you a lot of time and money.

Psychological Trap: Not Having A Plan

Having a plan every time you trade is absolutely necessary because it will separate you from being the novice to the professional. When you have a plan your investments are less likely to go wrong.

Do Not Turn a Trade Into An Investment

Secondly, turning a trade into an investment is simply a result of not following the first rule. When you don’t have a plan you end up buying stock without knowing how long to hold it for.

This is not a proper way to conduct an investment since you’re blindly entering trades. Furthermore, the reason people have for doing this is that if the share price falls, some think they can buy it back lower and wait for a price rebound. If you’re going to trade a stock, set a stop loss so that you could exit if the trade goes bad.

Avoid The Psychological Traps Of Analysts

Thirdly, buying based on different news reports is another trap inexperienced investors typically fall for. It’s not to say that keeping up with financial news is wrong, however, if you’re buying stocks based on the opinion of another person; purely on the assumption that they know more than you; then you’re doing yourself a disservice.

Again this doesn’t mean you shouldn’t take other people’s advice into consideration; it just means that you need to educate yourself more so that you can come to a reasonable conclusion yourself.

Financial analysts don’t have your particular goals as an investor in mind: you need to establish your goals first and differentiate them from other people’s trades. Remember though, you can always use the news as a reference but, try encompassing your own analysis of investing.

Figure Out The Type Of Investor You Want To Be

Bouncing around from day trading, swing trading, options trading, commodities trading, and value investing is not a good idea. Contrarily, this behavior will never get you anywhere in investing.

I know it’s tempting to master all of them and diversify your strategies. However, this will confuse you, as it will become more difficult to learn when you’re focusing on so many things at once.

Imagine if a basketball player decided one day he wanted to start learning tennis, that would seem pretty difficult right? Well, the same idea can be associated with investing, if you want to learn options then focus on options. Don’t try to be a jack of all trades, focus on a specific niche; then once you’ve mastered your niche, you can branch-off to something else.

More Money Will Not Make You Happier

Putting money above everything else in life is the biggest trap to fall into. Not only will it hinder your capacity to learn by affecting your judgment; but it will also result in you investing for the wrong reasons. You should invest your money simply because it’s logical to do so, and for no other reason.

Having your money in a savings account will get you nowhere, however, investing it will exponentially grow your account. Yet, don’t presume that having more money alone will make you a happier person, this is a false reality.

Happiness must be found through other venues; even Warren Buffett himself has admitted that tripling your net worth will not make you happier. So do yourself a favor and don’t make your happiness reliant on money: money will help you pursue your happiness, but it can’t buy it for you.

Hey there! I'm Alex, a freelance writer, and blogger. I started my journey towards FI in 2018, when I created this blog. I love talking about blogging, writing, personal finance, and internet entrepreneurship. If you enjoy my content, stick around, and we'll share ideas for reaching FI together!

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