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Psychological Preposition of Human Mindsets Associated with Trading
 

Every aspect of human life is within the realm of mental capacity, which encompasses the ability to handle situations and is showcased in our day-to-day activities. As humans, we depict 4 various natural propositions that categorically affect our lives. These 4 main psychological characteristics can result in unfavorable circumstances. Entering the trading world, the effect of these natural propositions can be massive. Thus, knowing the situation in place would enable evasion of the outcome.

 

• Loss Aversion Bias:

This is the ability to avoid problems out of fear of facing them. This can strongly affect the decision-making process concerning any matter that exists. The higher the cost of doing business, the more likely you are to make a profit. The act of preferring to avoid loss rather than gain is a ludicrous behavior that can affect your financial status.

 

Impact of Loss Aversion Bias

The feeling that comes with the bias is we humans tend to even discern the nastier emotions that arise due to loss, but we feel good when we get to win. This logical feeling occurs in such a way that the vigor of feelings felt during losses is greater than that felt during wins. With this, the act of trading to win will be more important than losing. Making a profit through capital is your main reason for trading, not just keeping money in the bank. With this in mind, you can't allow this bias to keep you in a box of fear. The breakeven effect is the kind of effect that makes one do everything to go back to break, no matter the intensity of trading. They do not mind suffering damage because they hate losing. They keep taking the higher risk just to not suffer a loss during trading. This scenario has been studied among traders; therefore, be aware of the risk you are taking, especially if you are low on capital.

 

To limit this prejudice, several techniques can be followed:

 

• Knowledge: The idea and proficiency of this bias are the first initiatives to solve the problem. Having an awareness of how the brains are connected to be susceptible to losses rather than gains will help in knowing how to go about the bias.

 

• Framing: Having a positive thought about the surrounding situation is also a necessary step to take. Redefining the manner in which we approach loss and gain can also help in lessening the loss aversion bias. We should focus our minds on positive changes that can arise in our daily lives.

 

• Diversification: Risk can be managed by magnifying your assets. Asset diversification can reduce losses and help maintain people's mindsets toward the fear of loss. It will help prevent you from thinking negatively.

 

• Long-time viewpoint: With this phenomenon, every human can prevent the loss-aversion bias because they will be able to see far beyond the present situation. This will give you the awareness of the idea that profitable business can only occur due to the small losses it must undergo. Knowing this will give you the right pattern for making reasonable decisions.

 

• Specialist guidance: You may be an advisor concerning business identity. Some people are certified for this role. They will give you the steps and help you analyze your business patterns about risk and profit, thereby yielding good results at the end of the day.

 

Following the listed techniques requires regular practice and action on principle. With frequent effort, you get to be more conscious, and you tend to make more reasonable decisions and evade the fear-loss system.

 

 

• Sunk Cost Bias:

The predisposition of this psychological effect is a thought of not wasting effort. To get a better idea of this sunk cost bias, let's illustrate a scenario where you are asked to contribute money for a particular project, the initial money budgeted for the project was not enough and the project has already taken place. At the moment, you may think to drop off it but you can't get back your money. Then you were asked to add more money for the completion. The reasonable decision would be questioning if you should add more money considering the fact the project was not well planned. This bias shows during trading when you have incurred some loss and you risk more money just to get your money back. You won't just want your money to vanish like that. That is the ideology that comes to mind and meanwhile, the loss is extraneous. There are chances that not every trader has undergone this experience.  Another way is It also comes in the form of time waste. The thought of you trading for days, weeks, or months without actually making a profit would make you think you have wasted time, meanwhile, you end up continuing the business because you have invested time. This is sunk cost as it is insignificant in decision-making.

 

 

Impact of Sunk Cost Bias

The impact of the bias can also occur during drawdown, which also affects decisions at the point. The decisions will come from the losses incurred. The mindset would tell you to provide further input, thereby taking another huge risk that you shouldn't have taken. The fact is the loss incurred is not relevant to the decision.

 

How to limit the Bias

Be mindful of your present decision based on emotion or instinct. Take a wider view and ask questions about the decision you would make if you didn't suffer any loss. If yes, then evade the sunk cost bias decision system. Go with the decision you will make on a good day.

 

• Result Bias:

This is the kind of bias that results in a decision being generated based on the outcome of any event. Nevertheless, decisions are supposed to be made with knowledge of the viewpoint of the situation. A trader who made a loss on a business would think the loss occurred due to the decision made, therefore making it seem it was a bad decision while the positive outcome was from the viewpoint of a good decision. In reality, the result after the decision is irrelevant. Thus, having the belief that it is relevant is an outcome bias. What is relevant is the information known before the result, which should be the driving force behind making a decision.

 

 

Impact of the Result Bias

The principle of this tends to affect human thought because you regard mistakes as not losses, and you disregard the rules guiding the right trading procedure. Doing things outside the rules that later yield good results is not good because, in the long run, it can cause bad effects.

 

How to limit

Follow the right process of things even if it would still end in loss.

 

• Recency Bias:

Making a result seem more important than it stands is a form of recency bias. This often shows itself when you measure your market on the present price, causing a disvalue to other market that have been out before it. When the price is high, you think the market will do well, while the other way around you think it won't do well. You make the present price of the new market important when it is just one of the numerous markets you have. This also shows itself when we base a decision on the recent trade result. Instead of looking at the bigger picture, we focus more on the recent trade.

 

Impact of Recency Bias

When the recent trade result yields losses, we categorize all of our trading in the same aspect, and then we put our main attention on it when it is irrelevant to the trading. This can affect decision-making. We now have to see our business as a failure, and we may even begin to compare with others, which is a step towards the collapse of the business.

 

How to limit

• Do not be ignorant of the trap. With the result and the market status, be intentional about your business and also be aware of this bias.

• Just know that the business can go in any form and does not spoil anything. By doing this, you will be prudent in your decision-making.

 

In conclusion, to improve trading skills, the best way is to do a live market. Test your trading skills before inputting your capital so as not to suffer losses, and also engage and partner with reputable trade-funded institutions. Be consistent, and a high return on profit and success are ensured. Be aware of the psychological traps in trading activity and work towards avoiding the effects it can bring.