Self-investment of your savings on the stock market is a big challenge for the investor and in the initial phase not every new investor realizes it. This is particularly true for the forward market participants where the leverage offered, and thus the investment risk, is much larger than on the spot market. The effectiveness of investing depends mainly on three factors: psychology, the system of concluding transactions and methods of managing the size of the position. Schematically depicted below.
Psychology is a very important, and perhaps the most important, factor of effective multiplication of your savings, unfortunately at the same time the least definable. However, paradoxically, the something on the capital market is less definable, it brings better investment results. Taking into account the emotional factor, we must distinguish three elements that make up the field of psychology in investing.
During the investment process, you must consistently repeat buy and sell orders when the previously developed investment rules indicate it. The investor’s task is only to correctly place orders, and a positive result will appear itself as time passes. However, the same consequence is not enough this process must be repeated for a longer period of time.
Even if we develop a very good transaction system, we will not achieve good results without perseverance in its application.
Observation of own emotions
For a stock market investor, and in particular a forward market participant, this is a key element of the investment process. The chart below explains why, from a psychological point of view, investing is a rather difficult decision-making process. The human psyche from an early age is shaped in such a way that he can undertake activities that provide him with a sense of security. Unfortunately, this mechanism often interferes with investing instead of helping. Many market participants confirm that if positions are open in a sense of security, they generally end up with a loss. On the other hand, positions that the investor has serious concerns about are usually profitable.
Psychological dimensions of investing
On the horizontal axis there is a level of fears when concluding a new transaction, on the vertical axis the probability of making a profit from this transaction. The relationship between these quantities can be presented in a very simplified way in a simple form.
The probability of profit increases along with the level of fears
Practical observations confirm roughly that the investor’s attitude at the moment of opening new positions is of great importance in achieving success. The investor of success searches for positions opening signals that will allow him to make a profit while accepting a greater risk at the time the transaction is made. Of course, the investor’s way of operating does not guarantee 100% accuracy, and only maximizes the probability of success. However, as we shall see further, this is a very important factor that increases our chances of achieving success in the capital market over a longer period of time.