You can teach anyone how to read a chart, how to look at the fundamentals of a company, and even give you a decent evaluation of that company. Learning to trade is one thing, but the psychology of trading is a completely different beast.
The psychology of trading is one of the prominent reasons as though why I love the stock market. If you are the self-reflective type you can learn a lot about yourself and others. It is best to ask yourself questions such as why do you sell for a loss when you know that your research is sound, even if you may have jumped in at the wrong time, or why did you buy the stock at the wrong time? Was it because you ended up chasing? or did you think you had found the bottom?
As part of the education section of the blog I am going to discuss some of the psychological aspects that play a role in our trading mentality / psychology of trading. Perhaps we can both learn about what makes us make the psychological mistakes that prone as to having more losing trades than winning ones.
For the first of these series of posts, I decided to talk about the psychological role of colours. Do you ever wonder why seeing red makes your whole body and mind react differently than for instance seeing blue or green? There is actually an evolutionary reason for that. You and I are genetically programmed to react different to colours.
Colour plays a significant role in an individual’s perceptual experience of the world. Colour has different effects on psychological functioning in variety of domains such as marketing [i], judgement[ii], food consumption[iii], sexuality[iv] and achievement [v]. It would hard to argue against the evolutionary purpose of seeing colours. If we there was no evolutionary advantage than we would not need to see such an extensive range of different colours. Thus, we can conclude that colour vision has evolved because it has contributed significantly to adaption and survival.
There is an increasing body of research that supports the notion that colour serves as a signal function for animals by facilitating fitness-relevant behaviours. Therefore, you could argue that humans have also evolved to respond to colour in a way that it represents a cognitive reinforcing or shaping of biological tendencies [vi].
In the 1940s Goldstein’s and colleagues seem to have set the ground work for conceptualization of colour and psychological functioning. In his writings, Goldstein (1942) explained that the body has inherent physiological reactions to colour that is reflected in physiological experience and functioning. According to him, red (and to a lesser degree yellow) are generally experiences as known to impair performance on activities where exactness is required, additionally they tend to be experienced as stimulating and disagreeable and focus individuals on the outward environment. Interestingly, colours such as green (and to a lesser degree blue) tend to be experienced as agreeable, quieting and tend to focus individuals inward[vii].
So, what about the colour red?
Recent research shows that the colour red impairs an individuals’ performance on challenging intellectual tasks in achievement situations. Generally, our performance is evaluated by the two possible outcomes, success (positive) or failure (negative). Thus, the colour red has become associated with undermined performance at a specific task[viii]. These findings were further highlighted in a Chinese study where red has a positive connotation for the general public, however, they found that red undermined the intellectual performance of students[ix].
Now that we have established that the colour red can actually hurt your performance, what can you do to avoid making the mistake of making an emotional decision rather than a rational one when it comes to trading? One thing that I have done is that I have changed the colours on my trading platform. My trading platforms no longer show red as a decreased value. I have green and blue, where green represents my gains, and blue represent my losses. You can also attempt to be mindful of your emotions and feelings. This will be the topic of another post.
I hope this post shed some light into a small segment of Human Emotion Theory as it applies to the stock market. To become a better trader, you must understand that psychological factors, such as emotions, hold significant weight in the decision-making process of all traders. Those who cannot master the psychology of trading will perish.
In a recent publication Andrew Lo from MIT and Dmitry Repin from Boston University, sampled the heart rate, blood pressure and skin conductance of ten professional traders over a course of a normal day. The found that even the veteran traders whom one would expect to be immune to market volatility showed heart palpitations during volatile events, in which the price fluctuations were all over the map [x].
So, no one is immune to the emotional rollercoaster of the stock market. What we can do is work to understand how we behave and why and try to be mindful of it. Use this as a reminder to help you improve your trading psychology.
- [i] Labrecque, L. L., & Milne, G. R. (2012). Exciting red and competent blue: The importance of color in marketing. Journal of the Academy of Marketing Science, 40, 711–727.
- [ii] Jiang, F., Lu, S., Yao, X., Yue, X., & Au, W. (2013). Up or down? How culture and color affect judgments. Journal of Behavioral Decision Making.
- [iii] Bruno, N., Martani, M., Corsini, C., & Oleari, C. (2013). The effect of the color red on consuming food does not depend on achromatic (Michelson) contrast and extends to rubbing cream on the skin. Appetite, 71, 307–313.
- [iv] Elliot, A. J., & Niesta, D. (2008). Romantic red: Red enhances men’s attraction to women. Journal of Personality and Social Psychology, 95, 1150–1164.
- [v] Elliot, A. J., Maier, M. A., Moller, A. C., Friedman, R., & Meinhardt, J. (2007). Color and psychological functioning: The effect of red on performance attainment. Journal of Experimental Psychology: General, 136, 154–168.
- [vi] Byrne, M., & Hilbert, D. R. (2003). Color realism and color science: Evolution and animal color vision. Behavioral and Brain Sciences, 26, 791–794.
- [vii] Goldstein, K. (1942). Some experimental observations concerning the influence of colors on the function of the organism. Occupational Therapy and Rehabilitation, 21, 147–151.
- [viii] Elliot, A. J., Maier, M. A., Moller, A. C., Friedman, R., & Meinhardt, J. (2007). Color and psychological functioning: The effect of red on performance attainment. Journal of Experimental Psychology: General, 136, 154–168.
- [ix] Shi, J., Zhang, C., Jiang, F. (2015). International Journal of Psychology, vol. 50(1), pp. 81-84 4
- [x] Lo, A. and Repin D. V., (2002). The psychophysical of real-time financial risk processing. Journal of Cognitive Neuroscience 14:3, pp. 323- 339