Every man was born a psychologist but not everyone is aware of that fact. Imagine having a superpower that you’re unaware of. It is basically useless until you know the depth of what you possess. Some people do find their strength rather early, and we’re not talking about studying psychology as a course but realizing their potential and using it to their advantage. You may find this kind of confusing. How is psychology a superpower? Now, imagine having an insight on how the human mind works. You can anticipate their next reaction to a particular situation and the eventual outcome. It’s like a sixth sense that helps you make the right decision to your favor. I guess we’re now clear on the supremacy of psychology.
If such privilege have been bestowed upon men, it’s no wonder that people use it to their advantage especially when trading or making investment decisions. The basic application of psychology can be seen in ‘bargaining’ during trading. A buyer who applies psychology to his trade knows the right time to pull out, for a bargain to be in his favor. As easy as the application of psychology sounds, it is not that easy. There are some technical skills that must be applied to make up what is called the t’rading psychology’. Be as hard as it may, it does get easier as a trader applies it continuously.
The use of psychology in investment decisions is also very advantageous. Arguably, more mental or psychological application is needed when making investment decisions than in trading. Investment decisions require clear instincts and mental calculations to know when and how to make the right decisions. Clearly, every business venture or investment decision comes with a futuristic presumption of making profit but such outcomes cannot be certain. How can a person clearly tell what would happen in the nearest or farthest future? It is all part of life but people make investments into outcomes that are unknown. The uncertainty of future outcomes, brings about making decisions based on instincts. If an investor sees to the nearest future that a company’s stocks may go up based on a perceived future event, he/ she would gladly invest in said company to acquire profit. But mare instincts are not enough when it comes to making investment decisions.
Before moving forward with the psychology role and it’s numerous roles in trading and investments, it would be wise and important to make clear the difference between economic calculations and mental calculations. Economic calculations deal mainly on basic laid down rules or steps that help in making futuristic decisions. They do not take into consideration human defects in character or decisions. The mental calculation is where the science of philosophy is fully applied. Regardless of what the economic calculations say, the mental calculations can give a negative report from the economical. Some things are not worth trading or investing in regardless of their predicted future profitability. Some traders or investors tend to make use of just one of these components but the wise ones know that using both, works like magic.
What key role does psychology play in Trading and Investments?
Psychology clearly and undeniably play a key part in decision making when it comes to trading and investment decisions. In business (trading and investment), decisions making is a core step to getting things done. Would things be done for or against something? Would a business decide to invest in a trade? At what amount would it be best profitable? At what rate would such investments not be affected by a fallback? At what opportunity cost? Decision making is a bridge that has to be crossed before trading or investments can be done.
In investment and trading, the decision made is the sole standard with which the psychological techniques are then further applied. How about we look at some key instances in both trading and investing where psychology plays a rather commendable role.
As stated earlier, psychology is strongly applied when it comes to bargaining in trade. When two people meet (not necessarily physical), one with the aim of selling and the other with the aim of buying a single product, a trading relationship is formed. Most times, in trading, bargaining is an inevitable part. The seller’s aim is to sell at a price in which they make the highest profit while the buyer’s goal is to buy at the lowest possible price.
Where does Psychology come to Play in Trade Bargaining?
Through decision making, both parties must have evaluated the value of said material to be traded and where they set their withdrawal line. The withdrawal line is the price above which either party sees the trade as non-profitable and hence, withdraw from the trade. Coming into the trade with a set goal, the trading parties may have also considered a list of possible reactions from their other trading party and come up with how to counter attack. Well, I guess those who got the name ‘trade war’ knew just what they were doing. The use of psychology helps a trader in knowing when the other party is about withdrawing and in making fast trading decisions. Most times, when bargaining falls in the middle, both parties go home fulfilled.
Trading and Investment Strategies that have come about due to the application of the Psychology role.
- Diversification– a mix of this and a blend of that is said to bring an acceptable result. Some psychologists advice not to put all your coins in one pocket because it would not lead to an unbearable loss.
- Sticking to your instincts– there are some traders that are seen as trade wizards today because they found what worked for them and stuck to it.
- Understanding fear– making hasty decisions based on recent happening could lead to more loss that would’ve been. In trade and investment psychology, fear is your worst enemy.
- Don’t let greed rule your decisions.
The psychology role is a huge tool in trade and investment, use it wisely.