Analysis of four typical psychological Barriers in foreign exchange investment trading traders need to have certain analytical ability and a good state of mind when doing trading. Only when both are good can they become the best in precious metal trading and make long-term, sustained and stable profits. Here are four psychological barriers.
A better theoretical understanding of the trading mentality is conducive to the improvement of our trading ability.
I don’t know whether you realize it or not, whether in daily life or work, when faced with a choice or a decision to make, we will subconsciously choose the field we are familiar with, few people will choose the unfamiliar things.
The same is true for trading and investing. When faced with a choice, people tend to choose what they are familiar with.
Subconsciously, people feel more secure with the familiar.
This is actually a common psychological preference, and it’s what I’m going to talk to you about today.
The academic explanation for “fuzzy aversion” is that “in the context of all the uncertainty associated with risk, people tend to bet on known types of uncertainty rather than unknown types.”
It’s a mouthful, but the truth is that when making decisions, people tend to choose known risks and avoid and avoid unknown risks.
In investment or trading, people tend to choose areas they think they are familiar with.
Fuzzy aversion is a problem of psychological preference. When a person has such preference, he or she will subconsciously avoid “fuzzy” risks, which is called fuzzy aversion in behavioral finance.
For example, investors tend to prefer domestic stocks or stocks they are familiar with.
The Us-Based Vanguard Fund addressed the issue in a 2016 report.
When it comes to global asset allocation through equities, the most common and efficient approach is to invest according to the weighting of each country’s stock market.
For example, if the U.S. stock market has a roughly 51% weighting in the world’s developed markets, you should allocate 51% of your money to the U.S. stock market, and other countries should allocate the same amount.
Vanguard’s research, however, tells a different story.
As the chart below shows, investors in all five rich countries are overexposed to their own stocks.
Investors in the United States can be forgiven. After all, it has the largest share of the market in the world.
But in Canada, where the weighting of Canadian stocks in developed international markets makes sense, investors hold 3.4% of their country’s shares. In fact, they hold 59%.
This is true in Britain, Australia and Japan.
An academic at Yale University has also studied this issue and found that this preference is not just at the national level, but that investors are particularly fond of stocks in their own companies, their own industries and even their own cities.
This tendency leads to too much concentration of assets, but also with great risk.
Take a very realistic and cruel example: in 2000, the then American energy giant Enron went bankrupt due to massive financial fraud. At the time of its bankruptcy, 65 percent of the company’s pension was invested in one company’s stock, that is, the company’s own stock.
As a result, the company’s employees’ pensions were wiped out with Enron’s collapse.
Vague aversion can lead you to invest in areas or assets you know well, but that familiarity can be fatal to you.
Familiarity increases your affinity for a particular stock (asset) or how much you think you know about it, but it doesn’t necessarily help you earn higher returns.
Here’s why.
When you think of the word “familiarity,” the first thing many people might think of is Warren Buffett’s advice to invest in what you know and not touch what you don’t know.
Buffett did advise investing in what you know, and many people took that advice to heart, but how many people are as familiar with a particular stock as Buffett is.
In fact, many people struggle to succeed even if they choose to invest or trade in areas they know well. People tend to fall worse in areas they know well because of overconfidence or cognitive biases.
Familiarity can lead to overconfidence. When you choose what you think you know, it’s easy to fall into other psychological traps.
Because familiarity reduces your risk awareness, the more familiar you are, the safer you feel.
As mentioned above, investors in every country like their domestic listed companies, because most of them think that they are the most familiar and understand, so they are safer.
Previous research has shown that in all areas involving subjective judgment of one’s own ability, people’s subjective judgment of themselves is significantly better than the objective level of the group as a whole, namely overconfidence.
The same is true in investing, where the more information you have, the more likely you are to become overconfident.
As a result, we often find that many investors, faced with situations that seem more familiar to them, make the wrong decisions and may end up falling even worse.
On the contrary, if people have a better understanding of their own cognition and can objectively face their own limitations, they are more likely to realize their limitations, which can help them manage risks and bring them higher returns.
Are you really “familiar”?
In addition to overconfidence and neglect of risk management, there may be another reason why so many people stumble in areas they know well: You don’t really know a particular area or a particular stock.
Or maybe your familiarity is just scratching the surface.
Most of the time, people’s understanding of familiarity is only narrow understanding, can often touch, often see, are called familiar.
For example, you often see articles analyzing a certain stock on a public account, or you often listen to people around you talk about a certain stock, and then you know a little about it, say it is a familiar stock.
This is a very shallow level of familiarity, if only based on such knowledge to invest, in fact, it is not much different from unfamiliar.
The understanding of “familiarity” should contain two meanings, one is superficial familiarity, which is mentioned above;
For investors, the most important thing is deeper familiarity, that is, familiarity with the investment logic.
This requires a lot of homework, such as a thorough review of the company’s financial statements over the past few years, a thorough understanding of the company’s business development, any public information about the company, and even the future of the industry in which the company operates.
So it takes a lot of effort to achieve what Buffett calls familiarity.
It’s not as simple as knowing a company and saying you’re familiar with it.
Analysis of Four typical Psychological Barriers in Foreign exchange investment trading (I) The most fundamental psychological barrier in trading is how to deal with risk.
The two most basic rules for successful trading are: stop losses and hold on long. Don’t be willing to show up with small losses and turn them into big losses.
Execute routine decisions according to trading principles, including: use stop-loss orders to correct errors in judgment, protect profits, continue development, etc.
Think about these rules each morning and reflect on your trade at the end of the day.
If you don’t follow the rules, you should be vigilant to avoid making similar mistakes.
So you can take appropriate action in the future.
The second major psychological disorder is the inability to cope with psychological stress.
Psychological stress usually manifests itself in two forms: one is worry.
The second is the physiological natural reaction.
The right way to eliminate psychological stress is to try to identify the causes of stress and develop ways to relieve them.
Psychological stress often has a close relationship with the individual’s view of things.
Changing the way you look at things can sometimes relieve some of your psychological stress.
Successful traders view losing money differently than unsuccessful traders.
Most people get upset when they lose money, but successful speculators know that it is acceptable to lose money first in order to win.
(3) The third major psychological disorder is psychological conflict.
Everyone has conflicting ideas in their mind.
For example, wanting to make money but not willing to take risks.
In fact, only one must try to understand and reconcile the thoughts in one’s own heart.
(IV) The fourth major psychological barrier is that most traders let emotions rule the day.
In fact, any operation that causes problems is more or less emotional.
The easiest way to do this is to control your posture, breathing, and muscle relaxation.
By changing these factors, you might be able to change your mood.
Decision making is also a major psychological barrier.
There’s a great saying in The Three-Body Problem: weakness and ignorance are not obstacles to survival, arrogance is.
