Just as an athlete achieves better results when he applies his coach's instructions, trading psychology (examines the psychological aspects that affect the behavior of traders) helps novice investors to progress faster, safer, and achieve better results.
In a report published by the Spanish site "Finanzasclarasyfaciles" (finanzasclarasyfaciles), author Rosa Estan says that relying on emotion in investment activity causes a high percentage of traders to withdraw from the market during the first months of their activity.
Also, the desire of beginners to make money quickly leads to many mistakes that professional investors take advantage of.
In fact, excessive optimism leads to a false sense of control over the market, and this way of thinking is completely illogical because money markets are characterized by constant fluctuations and are subject to many political and economic factors, according to the author.
Fear of loss is also considered one of the causes of emotional and impulsive behavior, which pushes the novice trader to take unpredictable decisions that harm his investments.
Does cognitive bias lead to investment failure?
The author affirms that most irrational decisions or "deviations" in human behavior are due to the wrong information that we store in our brains, and this in turn applies to economic decisions.
Behavioral economics studies this issue, and it has been scientifically proven by examining the brain and physiological response tests such as blood pressure, heart rate change, hand sweating, dry mouth, etc., that a person responds to loss at twice the rate of profit.
When an investor loses in the stock market, he feels the bitterness stimulated by the desire to "take revenge" and compensate for the lost money in any way, but what happens is that the market never cares about anyone who has lost his money, so when one investor loses, another investor wins.
Some buy stocks when the market recovers and sell them as soon as it falls, but that could have dire consequences (Getty Images)
The author adds that "confirmation bias" is in turn one of the behavior patterns common to investors, as certain decisions are made based on the ideas, news and past experiences that the investor gives great value and considers highly credible.
But that can make the investor in a lot of mistakes, as he biases - as the author says - to the "herd" again and again, and does what most people do without analyzing the market well.
For example, some people buy stocks when the market recovers and sell them as soon as it recedes, but this bias is behind the economic and speculative "bubbles", as happened in the real estate market in Spain in 1997, and in the United States in 2008, it often has dramatic consequences for thousands Families and businesses.
An example of cognitive bias in investment behavior, according to the author, is what is known as the framework effect, that is, the tendency to impart credibility to the opinions of people in higher political and economic positions.
According to the author, the novice investor should be aware of the impact of cognitive bias on his behavior, and make sure that his decisions are not based on news, impressions and statements of officials.
A novice investor should be in control of his emotions and possess a good knowledge of technical analysis and money management (European News Agency)
The risk of over-trading and not stopping losses
The author believes that excessive trading is one of the serious mistakes that novice investors make, as they imagine at some point that they are completely in control of the market, and this is not true at all.
Failure to take a timely decision to stop in the event of heavy losses is similar - from her point of view - to walking on a tightrope in high heights without any protection.
The author believes that the first rule that a novice investor must adhere to is to protect his money by avoiding over-trading, and not to venture to compensate for losses.
Managing emotions and facing stress
In order to succeed in investment activity in the medium and long term, the author says that a novice investor must know well the way the brain works by learning the principles of neuroeconomics to avoid emotional and hasty decisions.
He must also treat trading as an investment "tool" through which he can achieve steady profits over time, and he may also lose part of his money.
The novice investor must possess a good knowledge of technical analysis and money management, focus on his goals, control his emotions, and show a lot of discipline, in which case the investor can succeed in improving his financial position and achieving success.