Psychology of Investment

Psychology plays a big role in stock market investment. Understanding psychology can generate big wealth for investors. Term Trading Psychology is commonly used to describe the emotions and the mindset involved in investments. Colin Nicholson, the author of Building Wealth in the Stock Market has some insights on Trading Psychology. He says, “Winners think differently. It’s not how much you know, even though knowledge is essential. It’s not how hard you work, even though nothing worthwhile is achieved without hard work. The real difference lies in the way winners think”.

Two of the most common emotions discussed in Trading Psychology are greed and fear. Greed is the tendency to keep the winning position for a longer time than necessary. Greed is a natural human emotion and can be avoided with logical thinking and planning. For example, considering Stop Loss to avoid further losses when a stock continues to go down in price. Fear is the tendency to sell your securities to avoid potential financial losses. Investors feel fear in times of harsh economic conditions or bad news developed around the future of a company. Fear drives investors to liquidity their positions to avoid capital losses.

For maximum profit in investment, the investor should control fear and greed cycles. Furthermore, taking advantage of understanding fear and greed in other investors can result in more profits. There is a famous saying by Warren Buffer on fear and greed cycles in the stock market. He says, "Be fearful when others are greedy and greedy when others are fearful.”

To better use Trading Psychology, identify whether you are a long-term or a short-term investor. Additionally, define your risk tolerance and plan an exit strategy. In the end, investing in a recurring manner (gradually buying) instead of buying a lot of stock at the same time is a winning strategy.

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