In this article, we’re going to discuss a mind hack that can not only be useful for you in the stock market but can act as a financial lesson for you. The article is based on a lesson which was taught to me when I was learning about the financial markets back in the day. At that point of time, I didn’t realise the actual meaning of it, but 3 years down the line, when I recall that class and that lesson particularly, it all makes sense now.
Alright, so in the lesson, my professor was telling us students about what is a stock market and why do people fear it. He then went on explaining why did people often bombed their account. How trading and investing in the market become gambling and so on. To give you a gist of the whole context, let me explain to you the whole physcology of a retail investor.
The retail investor wants to gain quick profits with minimal losses. Before that the question we must ask ourselves is that how does the retail investor know that there is money to be made in the market. Why? Even though maximum number of people are making losses. Why is this soon-to-be retail trader so convinced about his success when all others are failing?
The reason is simple. The incoming retail trader thinks of trading as gambling. The person wants to try their luck as well, and thinks that even if they lose their investment, it wouldn’t matter! Mainly because their investment is not that much (we are talking about 50 to 500$). What happens is that after they’ve made their investment and could see their positions going up, greed takes over. This emotion makes them appreciate their decision and they invest more and more.
The investment amount multiplies as their positions keep on surging.
However, this fantasy dream soon breaks and dawn hits upon them when the next day they see their position in Red. In just one move all of their profits went poof! Hope is what comes next. Hoping that when the stock would again go up so that you can square off your positions immediately once the loss% turns to zero. This is the Fear talking now.
What happens is that the next day the stock tanks further. The trader is now in some serious loss. The fear overcomes their thought process and they immediately close their positions thinking that the stock would go down more.
This story actually stands true for every 1 trader out of 5. The learning from this is pretty simple. However, to implement that learning can be a difficult task.
And finally the learning:
Participating in the stock market is not about making money or finding the right time to make an investment.
You can only make huge profits off the market if you’re good at managing your money. Hence think of this as a money management skill.