Day trading is a dynamic and stressful process that implies quick decision-making, which can hardly be efficient even when based on comparatively accurate information. Because of the market's frequent ups and downs, traders get an emotional opportunity.
If it is the pleasure of a successful trade or the pressure of loss, then such emotions are possible to ruin trade and affect its efficiency in the long run. This article focuses on the major psychological issues of day trading and the knowledge of how these issues affect behavior in trading.
Fear of Missing Out (FOMO)
Day traders experience the fear of missing out; when a specific stock starts shooting up, there is always pressure to make the next move. Social media, news outlets, and trading forums facilitate this fear since traders narrate real-life experiences of making huge profits and rapid market changes. FOMO makes traders enter trades without going over details concerning the asset or the condition in the market.
Overconfidence Bias
Day trading, as a profession, involves assuming significant risks on behalf of the trader while using other people’s money. Overconfidence refers to the situation whereby the trader seems to have more information or proficiency than the actual amount, and the trader tends to over-risk.
Overconfidence is more lethal because the share market is highly volatile throughout the day, and what a professional trader thinks will happen at a particular time may not actually happen.
Loss Aversion
The loss aversion theory is defined as the instinct that makes people lose focus on gaining equivalent amounts and endeavor to avoid loss instead. In the case of day traders, this may result in a failure to exit a position, even when the trader knows well that the position is not going to be profitable. A trader may also tend to stay in a losing position because of the belief that the market price will snap back up. The fear of loss makes many traders irrational. For example, one is likely to fund another position if they are in a negative trade or hold on to a stock for a much longer time than is required.
Confirmation Bias
Confirmation bias is the result of the cognitive process whereby one looks for information that supports one’s belief or ignores information that does not help that belief. Businesses and traders specifically may confine their attention to fundamental or technical analysis that favors their trading strategy and disregard the other's point.
For instance, if a trader expects a specific stock to go up, he would only focus on reading articles or opinions that show the stock will, in fact, go up regardless of signals that the market might be headed downward. Confirmation bias can effectively hinder traders' ability to make the right market decisions.
Emotional Rollercoaster
Day trading is characterized by moments of high and low feelings because of the leading emotional states like joy from winning trades and grief from losing ones. Even though the trading does not involve drugs or alcohol, the boost of adrenaline resulting from a prosperous trade triggers dopamine, the feel-good hormone that can make traders, even those with small accounts, become addicted to trading. This rush can compel traders to take unnecessary risks.
