Psychology of Investing

Psychology of Investing: how to deal with losses?

Loss of money in the stock market for most traders difficult pill to swallow. Increased loss can not only clean sweep account, but also undermine confidence. If you let the fear caused among you lose control, you will never succeed in this field. Aversion of pain is a powerful mechanism in the psyche of every human being and a negative impact on many areas of life, especially for investment.


Traders who allowed that fear to dictate to them what to do, they lose a lot of their strategies and turn out to be wrong. This results in the appearance of the syndrome called aversion to losses (loss aversion). This phase was discovered and proved psychologist and Nobel laureate Daniel Kahneman and Amos Tverskim. The idea is that people strongly prefer to avoid losses than to profit. When it comes to money in this case the money from investing in the market this trend is revealed with even greater force.

One of the first steps for this to be successful as a trader, is grinding its internal approach to trade. This means first of all to deal with their own aversion to losses. According Tverskiego and Kahneman our brain feels a loss more than doubled profits. There are signs that people are so determined to avoid the losses that most of us are ready to serve even gambling, if only to avoid them.

Despite this psychological tendency, there are several steps that can effectively reduce the fear of loss. The first is the realization that losses just happen. Even if you accept an effective strategy and remit it flawlessly, you are still passed on the laws of probability.

According to Peter Lynch, the American investor and businessman: "In this industry, if you're good, you're right six times out of ten. You will never have because nine times. If you suspect that the losses incurred by you affect more than just the law of probability, for example, inappropriate responses or poor strategy, take a break from investing. She will give you time to work through what happened and identify the source of losses. It's also a great time to refine the strategy and focus again.

The second step to minimize the aversion against loss is to learn as much as much as possible about the financial instruments and markets in which you operate. Well-informed trader is more reliable trader. One that is less susceptible to losses. This includes understanding the nuances of technical and fundamental analysis, the establishment of effective strategies and appropriate risk management, as well as to determine their expectations. Especially risk management this factor is absolutely crucial to the success of the investment. By identifying entry and exit points of the transaction, the use of stop-loss orders and precise definition of the level of capital landslides (drawdown) you ensure a better position to almost automatically minimize the risk of losses.

The third step is to maintain your motivation by constantly reminding myself why I have been a trader. Investing is a long process, which provided that it is done properly should bring you better results with time. One of the best remedies for the aversion to losses is to be successful. When you start making money as a trader, it is not fear will motivate you, but earnings in the form of money.


According to most people's aversion against loss is a sign of humanity. But as a trader you have to learn to minimize as much as possible to keep the focus on generating profit, not on avoiding losses. If you properly manage risk, you will not waste time thinking about how to avoid losses.

In the world of trading there is no room for denial. Every investor who has been successful, he reached the summit thanks to prudent action and motivation, not by avoiding blunders. Following the award, not pain, you improve your own psychology of investing.