Four Common Behavior Biases Highlighted with Mantra to Avoid Them

Four Common Behavior Biases Highlighted with Mantra to Avoid Them

Traders need to know all information relevant to a specific stock, which has the potential to cause market movement. Today, supercomputers dominate market because they are programmed to trade positions, when right keywords get flagged.

A fake negative tweet can instantly trigger market crash. Fortunately, high frequency traders and long-term investors take advantage of these market inefficiencies. Stock markets include human and human programmed computers, so inefficiencies are expected.

Disciplined traders are inclined to trade with behavioral bias, at times. This causes them to act emotionally. It is a new study field called ‘Behavioral finance’. Psychological theory and conventional economics are blended to create resourceful options trading strategies.

It is a fact that investors possess behavior bias, which impacts their investing decisions a lot than practical data.

Four common behavior biases highlighted

Overconfidence

Overconfidence in your information quality and your capability to respond at the right moment to gain more makes you a brash trader. You trade frequently and forget to diversify your portfolio properly. In addition, it is studied that the more active a trader is the less money they earn.

Mantra to avoid overconfidence

Invest more and trade less is the solution. When you enter stock market, you are trading against institutional investors, computers, and worldwide veteran traders. Overwhelmingly, the odds are in their favor. Therefore, increasing your timeframe, reflecting the indexes and making the most of dividends, you will certainly build wealth, soon. Avoid the feel that your intuition and information is right.

Avoid the feel of regret

A specific trade you believed to be priced worked against you but the feel that ‘I am right’ did not allow you to sell it, when loss was small. The direction constantly moved against but you held the position until majority of the underlying asset was lost.

Human go to illogical lengths to avoid the feel of regret. Traders possibly sell winning positions very early but clutch a losing position for long.

Mantra to avoid regret

Create stringent trading rules including an entry-exit strategy, set stop loss, etc. Never break these rules and avoid trading on emotions.

Limited awareness

Multiple stocks are available, but a trader hardly has time or wish to study each. Humans make satisfactory decision on the basis of limited knowledge rather than making efficient decision.

Therefore, they consider stocks, which catch their attention either across the websites, friends, family, and financial media.

Mantra to avoid limitations

Media hugely affects trading activities. learn to research and appraise well-known and less familiar stocks, there is a possibility that you may uncover lucrative trades in advance. Never allow media blast affect your decision but use it as an information point among many.

Running after trends

Traders still believe that past performance is indicative of future outcomes. Humans have a knack for identifying patterns and believing them to be valid. They forget that stock market is more random. It is found that decisions taken on past performance are poor.

Mantra to avoid chasing trend

If you are able to find a trend then the possibility that market has already indentified and exploited it, before you. Therefore, you enter at highs to watch stock value retreat. To exploit this nefficiency, sell when others are confident and buy when they fear. Chasing the herd hardly brings better gains.

All the types of behavioral biases cannot be avoided but the effect on trading activities can be minimized.