This weekend, let’s digress into the murky world of psychology! Murky only because it is not often as clear as the clean world of technical analysis that can provide crystal clear buy and sell points! And murky because it involves something less tangible than fundamental or technical due diligence. Instead, it demands an understanding of the human psyche and how we can be affected by different behaviors and circumstances. In this section, we will share with you some findings from leading psychologists and we encourage you to relate the findings to your own stock market trading. If possible, look honestly at your own trading activity and try to improve from the observations noted below.
In stock market trading, understanding the psychology of the crowd is critically important when attempting to improve your own trading activites. Psychologists are aware that the psychology of a crowd differs from that of the separate individuals composing that crowd. It is generally considered that there is a crowd of separate individuals and a composite crowd in which the emotional natures of the units seem to blend and fuse. The change arises from the influence of attention or deep emotional appeals, or common interest. Think only of the fear that dominates traders’ minds and drives their actions when big sell-offs occur. The predominant characteristics of this "composite-mindedness" of a crowd are the evidences of extreme suggestibility (hitting the panic button and selling all positions!), response to appeals to emotion (fear-driven panic sales), vivid imagination (it could get worse!) and action arising from imitation (everyone else is selling so I should too!)
Professor Frederick Morgan Davenport once noted
"The crowd is united and governed by emotion rather than by reason. The explanation of this is that the attention of the crowd is always directed by the circumstances of the occasion"
And Emile Durkheim observed in his psychological research that the average individual is "intimidated by the mass" of the crowd around him, or before him, and experiences that peculiar psychological influence exerted by the mere number of people as against his individual self…..a suggestible person (may be) brought under the direct fire of the imitative suggestions of those on all sides who are experiencing emotional activities and who are manifesting them outwardly….
Human beings in times of panic, fright, or deep emotion of any kind, manifest the imitative tendency of sheep, and the tendency of cattle and horses to ‘stampede’ under imitation"
In times of stock market calm, evaluate each position in your virtual portfolio, question the risk you are accepting and combine the risks with all other positions in your account in order to evaluate whether the composite risk is tolerable. Performing this analysis at regular intervals is crucial to long-term trading success because the market dips tend to surprise the most savvy and experienced of traders when they appear. And knowing your risk and being comfortable with it means you can trade your account; no longer do you have to react to what everybody else is doing. By controlling your virtual portfolio, your financial future lies in your hands. If you ever experienced the pain of selling positions in the past that since have recovered and would have made you wealthy, please take time to think about the comments in this article. Trading successfully is not just about knowledge and money management, but it is about mastering your own mind and your own actions in the context of smart virtual portfolio management.
Optionsage @ StockandOptionTrades
