Emotions: The difference between a demo account and a real account: When A trader stops using his demo account and switches to a real account, he sometimes finds that his negotiating strategy becomes ineffective. How can it be? Is it Not operated on both accounts in the same way? Well, yes and No. There Is A key factor that makes the difference: our emotions. Although We do not mind losing virtual funds in a demo account, investing our own money implies a financial risk.
This risk affects our decision-making and leads to irrational behavior in trade. This is so common that it stands out as a separate field of study, known as behavioral finances. When do we succumb to irrational behavior and how to avoid operating at such times? Read on to get tips.
Develop Emotional Discipline
When we succeed in something, it can be natural to feel euphoria. But, this strong emotion prevents us from evaluating the market properly before making a new trade. For this reason, many successful operators prefer to take a break after earning great profits. Similarly, when we fail at something, we tend to feel frustrated. If you are on a losing streak, it might be convenient to pause and re-negotiate once you’re calm and focused. You Can Go one step further by setting a maximum level of loss for each operation. Make a plan, write it on a paper and keep it close while you operate. Once you reach this maximum level, you know it’s a sign to stop operating. To Learn more, read our article about what you should include in a trading plan.
Take responsibility for your decisions
Changing the responsibility to other operators who may have more experience can give us a feeling of greater confidence. That’s Why sometimes we tend to look for market forecasts and investment recommendations through relevant articles, blogs or any other source. However, the factors underlying these forecasts are already reflected in the price of the asset at the time of reading that article.
To give an illustration of what I mean, let’s take a look at the year of 1720, when Sir Isaac Newton possessed shares of the famous South Sea Company. Feeling that the market was going to reverse, he sold his shares, doubling his investment. It Was only a few months later when one of the most influential scientists of all time jumped at a much higher price, succumbing to optimistic forecasts. Eventually, he lost almost six times more than his initial investment, and he never spoke about South Sea Company in public.
With this in mind, there is nothing wrong With looking at the market from the perspective of others, as long as that perspective does not nullify your own judgment.
Making decisions based on market analysis
Having personal preferences for certain assets is common. However, these preferences may result in biased decisions, even if financial models suggest that such investment is unwise.
For example, a trader may choose to open a long position (buy) in a renewable energy company action rather than a fossil fuel company if it has a strong belief in the value of renewable energy, even if market analysis Indicates that a fossil fuel company’s actions should have a higher price increase. Such a business decision may seem irrational from an economic perspective. You may not be able to control market fluctuations, but you can make adjustments to the choice of your assets, which can have a positive impact on your earnings.