6 wrong investment psychology in stock trading

June 20, 2021

In stock trading, it is necessary to trade using fundamental or technical methods. However, the most important thing is still the psychology of investors. If you do not maintain the psychology or "wrong" psychology, the risk level of investors is very high.

So what are the wrong investment psychology in stock trading?

In the famous book "Trading in The Zone" by author Mark Douglas, 95% of mistakes in trading stem from investors' fear or overconfidence.

Here are some common psychological mistakes in stock investing:

1. Overconfident

After a series of winning orders, traders often have an overconfident mindset that they can predict the market and control it. This is the most common psychological behavior in the stock market. It can obscure investors' rationality when making predictions.

When investors are overconfident, it will no longer be important to diversify their investment portfolios. This is one of the reasons why investors are so susceptible to fluctuations in stock valuations in the general market.

Confidence in analysis is essential. But if you are too confident it will affect your trading process.

2. Patchwork thinking

The patchwork mindset is also one of the investing psychology that is associated with overconfidence. The inconsistency in thinking makes it difficult for investors to change and accept new ones.

Suppose, you initially made a decision based on available information. Then you get other information that influences the original decision. Instead, however, you learn and analyze new information and link it back to original information; then you choose to focus on analyzing and editing the original old analysis. At this point, you are following the old way of thinking, analyzing in a patchy way.

This is also one of the main reasons, making investors confused by new information.

3. Dependency framework

The investor's level of risk is determined based on personal financial circumstances; investment time limit or the amount of capital invested. The dependent frame here refers to the trend of changing risk tolerance based on the general trend of the market.

For example, if traders don't want to take on high risk when the market goes down, they must also be willing to take more risk when the market starts to rally.

4. Fear of loss

When becoming an investor, no one likes the feeling of losing and losing money. However, being averse to the feeling of loss can make you lose more heavily.

For example, one of your investments may drop 20-25% for good reason. At this point, the common decision is to forget about the loss and keep investing. However, you cannot make the stock price go up again.

And the next thought will be very dangerous, because it often leads to other heavy losses. This action is like the "gamblers" trying to bet large amounts of money in the hope of regaining the lost capital.

5. Defense Mechanism

Investors often form a common sentiment that is the defense mechanism. Sometimes, there are investments that lose, you will think this is not your fault but the influence of the market or other factors. This mindset is formed because you are too confident in yourself. That will give you a defense mechanism for yourself. Investors will not accept their own shortcomings but begin to blame the market... If it continues for a long time, it will have bad consequences later.

6. Herd mentality

Herd mentality is also one of the common mistakes of investors in securities. Because of the lack of both knowledge and experience, new investors often follow the crowd without knowing what will happen next.

This often happens in the stock market. When the crowd buys the same type of stock, causing the share price to increase, it is easy to create a virtual price; push the market up. On the contrary, when investors are afraid of falling stock prices, it will lead to sell-offs to cut losses.

Therefore, we do not necessarily have to go against the crowd, but we may not follow them. Make your own independent decisions by preparing and improving your stock market knowledge. Accordingly, you can be independent in your investment decisions.

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