7 Market Psychology Topics Costing 96.3% of Traders Their Money
Understanding market psychology is critical for success in binary options trading, and believe it or not, most people aren’t privy to this information. The study of market psychology is also known as behavioral finance and attempts to explain why individuals or markets react to certain events the way they do. It also explains why many binary options traders make the same mistakes. Patterns tend to emerge and smart traders are able to spot these patterns and capitalize on them, while the rest get washed up on the shore and lose their hard-earned money.
The 7 Market Psychology Behavioral Economics that Matter
In understanding behavioral economics, it’s important to understand these key market driving elements:
- Market Trends
- Bubbles and Crashes
- Herd Instinct
- Noise Trading
- Overconfidence
- Paying Limited Attention
- Loss Aversion
1) Market Trends
One of the most compelling aspects of finance is the ability for markets to trend. Factors tend to line up to keep a trend in tact. Usually it involves several news items or data releases being on one side of the spectrum. The market tends to trend and following the direction of the data. Trends are further exacerbated by the market psychology of traders that have been betting against the trend being forced to “cover” or close out their losing bets.
2) Bubbles and Crashes
When a market trends too far, market bubbles and crashes happen. It is usually characterized by everyone being on the same side of the trade and having to get out at the same time. Usually bubbles and crashes are seen in hindsight as the market is suffering from what former Federal Reserve Chairman Alan Greenspan called “Irrational Exuberance”. The general market psychology of major players is overconfidence that nothing bad can happen and the opposite occurs.
3) Herd Instinct
One of the main causes of bubbles and crashes is herd instinct. Traders feel that since everyone is buying or selling that they should too. The term comes from herding cattle where each head of cattle is going in the same direction. The danger lies in what happens if the herd comes to a sudden halt.
4) Noise Trading
Noise trading is known as idiot trading. It simply means where one trader makes decisions that make absolutely no sense. We see this a lot in the markets and it tends to distort prices. This type of trader makes erratic decisions that moves markets and create a lot of volatility. The key for a strategic trader is not becoming a noise trader and learning how to capitalize on other trader’s mistakes.
5) Overconfidence
Overconfidence is all too common in the markets and we all have been guilty of this at some point in our trading careers. We know that we are right, but the market isn’t cooperating. The market is going in the complete opposite of our position and we ignore the warning signs. We will not always be right and the key to successful trading is spotting when we are wrong and closing out the position before a small loss becomes a big one!
6) Paying Limited Attention
Most amateur traders make this mistake. They don’t take their trading seriously enough and it leads to big losses. Trading is the path to financial freedom, but it won’t be if you don’t pay attention. Ditch digging will be your lifelong career if you become susceptible to this common market psychology trait.
7) Loss Aversion
It hurts to take a loss, but sometimes we need to. Big losses exhaust all financial and mental capital. Step back and re-evaluate. Live to trade another day. Many new and old traders refuse to accept the loss. Learning to take the loss is probably one of the most important lessons a trader can learn. If you can learn to take the loss, taking the profit will be that much easier!
These are a few highlights of the psychological factors that go into trading binary options. Learn when to spot these traits, learn how to trade them, and you’ll be trading like a pro in no time. If you time yourself correctly, you can ride the profits on the way up and on the way down and vice versa. Live to trade and trade to live!
