How and why does emotion drive the markets?

While it may seem that investing and trading are emotionless endeavours, this is rarely the case. For a long time, there have been plenty of theories circulating that strong emotions largely drive the markets. For example, fear, greed and desperation – and what’s interesting here is that these drivers are all negative!

The fact is, all trading and investing – at least based on decades of precedent – involve some kind of emotion. While it’s worth doing plenty of research (such as looking into the pros & cons of trading gold, for example), you are going to have a hard time removing emotion from your decision-making. However, thousands of traders who make money do it every day – and technology is helping us all the while.

Let’s take a quick look at how and why the markets are still so tethered to human emotion.

People buy and sell based on caution and opportunity

When it comes to the markets, traders only ever do one of three things – buy, hold and sell. While many traders follow these routes through intensive statistical analysis and research, many more will buy and sell, at least, based on their own fears and projections.

If one such trader sees that their stock is dipping, or that a competitor stock is either taking the edge (or dipping due to industry issues), they may feel motivated to sell. It’s much akin to the analogy of ‘leaving a sinking ship’. Those who are brave and have faith in the stock will likely hold or even buy more. However, the fear of losing all your money and all your investment will encourage you to sell up and move on as soon as possible.

Many of us also buy stock when we notice that the getting’s good. If a particular brand has a great week in the news, or if interest appears to be picking up leading to slow, steady spikes, then people are more likely to want to get involved. Much of this ‘follows the crowd’ to an extent, and some may even see it as greedy opportunism. However, if you don’t buy, you don’t stand to make a profit. It’s just how the markets work.

Of course, it is easy to say that you could remove your humanity from the process completely and just buy and sell based on algorithms and precedents. It’s perfectly possible. However, the most experienced and successful traders will tell you that this is likely to take years of training and care.

So – is there any easier way to remove emotion from trading altogether?

Robo-advisors might hold the key

Enter, then, the robo-advisor. Robo-advisors have emerged in recent years as useful resources in helping us fight against emotional investing. After all, emotional investing and trading can be harmful. It can lead to us wasting money on fear or greedy hunches – and when it comes to metering our very human natures when trading online, we need to fall back on the support of our old friends, artificial intelligence.

AI advisors are becoming commonplace through trading apps that are widely available to the public. Robo-advisors that are accessible through a trading platform app, for example, will invest and sell on your behalf. All you typically do to set it going is let it know your parameters and your attitude to risk. From there, you can entrust the program to buy and sell without the trappings of emotion. The app will then simply make decisions based on data and algorithm, rather than on gut instinct.

This method has worked well for many traders so far, however, it will remain to be seen how effective robo-advisors are in the long haul. There are still going to be some traders who prefer to go with their guts, or who may already have systems in place that they feel give them the results they’re looking for.

However, regardless of how you invest and trade, it’s worth remembering that volatility is all but guaranteed. Cryptocurrency such as Bitcoin, for example, is rarely easy to predict. Therefore, when entering into any kind of market, it’s important to balance strong emotions with research and grounding in statistics.

Unfortunately, none of us are truly psychic as to how the markets are going to travel up or down at any given moment. Therefore, take your daily trading nice and steady – and be sure to read into the data as much as into your gut feeling!

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EWN

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