While online trading is second nature to many investors, there is an assumption that the psychology of a stock market trader today is the same as that of 10 years ago, 20 years ago and further back. The reality is that the stock market is an ever-changing beast, and with these changes comes the need for investors and traders to adapt their psychology. As we work through the various changes in psychology, it will all become apparent.
Traditional Investor Psychology
Firstly, we will look at traditional investor psychology and then which factors influence stock market trends in the UK today, especially online traders looking for a quick turn:-
Risk appetite and risk aversion
These are two sides of the same coin, those willing to take a greater risk for greater potential reward and those investors who are risk averse no matter what the potential upside. Which are you?
Herd mentality and crowd behaviour
The herd mentality is extremely powerful in the world of online trading as online traders look to bank profits and move on to the next investment. You will notice that shares in an up-trend can suddenly turn downwards at the first sign of selling. Crowd behaviour is another word for herd mentality, whether you are following analysts' advice or new price trends.
Overconfidence and biases
Any online trader will, on the surface, show a degree of overconfidence and perhaps a bias towards a particular sector. As online trading now allows you to deal globally, 24/7, there is the chance to trade in New York, the Far East and the UK, and then it all starts again. Whether you have a bias towards technology shares, the NASDAQ, or you are looking towards the Far East, where economies appear much more robust, there are numerous options.
The more focused you are in a particular sector, the more confident or potentially overconfident you can become. Overconfidence/bias can also blind some investors to the reality of a situation that may not be changing in their favour. Akin to King Canute trying to hold back the sea, you will eventually have to admit defeat.
Fear and greed as emotional drivers
Fear and greed are, for many investors, their foundation, the fear of missing out and greed when it comes to squeezing every last dollar out of your investment. What can we say about this?
Well, in the words of Lord Rothschild:-
"The reason I am so rich is that I always sold too soon."
Need we say more?
Other factors influencing online trading psychology
Now we have the more traditional psychological elements of trading out of the way; it is time to look at some of the new variations:-
Technological Advancements and Changing Market Landscape
Technological advances are changing market landscapes, with online trading platforms now available to the masses. Issues such as social media and information overload, algorithmic trading and, for many traders, a shortened time span will impact their psychology and, ultimately, their trading returns. Not always for the better!
Behavioral Finance and the Shift in Investor Behavior
The behavioural finance concept looks at online traders and the generally flawed assumption that all decisions are rational. A strategy that seems perfectly reasonable in theory can look very different when it comes to real-life trading. A gut feeling, emotions, and general mood of the trader and their profit and loss account can make a difference in how online traders think – and react.
Volatility and Uncertainty: Psychological Challenges
Over the last few years, we have seen the great financial crisis of 2008/9, Brexit and the global pandemic, which have all had a very different impact on markets and investor sentiment. Volatility and uncertainty encourage emotion which is, for many people, the enemy of sensible trading. With this in mind, it is important to have coping mechanisms and ways to wind down and refocus before you go again. It is very easy to get caught in the moment and make a decision you live to regret, which could have a significant impact on your finances.
Rise of Behavioral Analytics and Emotional Intelligence
The introduction of AI and machine learning has had a massive impact on online trading and this will continue for many years. Behavioural analytics allow algorithms to not only look back at trading patterns and how emotions impacted the decisions of online traders, but they can, to a certain extent, predict your future moves. Is this a self-fulfilling prophecy?
As a trader, you need to learn self-awareness, self-regulation and the ability to make decisions under pressure and manage bias. It is crucial that you build resilience to emotive knee-jerk reactions and can also manage stress. If there is no stress, the likelihood is that your potential profit will be limited, with a direct correlation between stress and investment returns. No pain, no gain? No reward without risk?
Conclusion
These are just some of the issues to consider when looking at the psychology of online trading and how online traders conduct themselves. It is essential to be aware of the psychological aspect of online trading. Some online traders will see the pressures of today and those of yesteryear as opposites, but is this the reality?
There is a theory that trading times, the timescales we look at for short, medium and long-term investment, have all been condensed. This may create additional volatility and the opportunity to bank trading profits, but it also increases the psychological pressure on traders. Consequently, as an online trader, you need to learn how to wind down, walk away from the market, carryout your own research and try to remain as calm as possible when trading. In reality, easier said than done.