In the 12 months leading up to July 2022, the number of traders in the U.S. FX (foreign exchange) spot market was greater than before the Covid-19 pandemic. While investing has soared in popularity, challenging market conditions, chronic uncertainty and/or a history of trading losses have led to rising levels of stress among traders. With this in mind, City Index commissioned a survey of 3,000 participants to delve deeper into the trading psychology of new traders.
Among the results: More than a third of traders find that emotions influence their trading decisions on a moderate basis (35.3%), which is the most common response among all investors surveyed. Similarly, three in 10 traders reported that emotions play a role in some of their trading decisions, but not frequently (33.3%).
One in five traders felt that emotions frequently affect their trading decisions and are aware of their influence (20.2%). However, less than three in every 100 reported that their trading decisions are consistently influenced by emotions, with it being a significant factor in their approach (2.6%).
The real surprise is that the age group most likely to have its trading decisions consistently influenced by emotions were 41 to 60 year olds, with this sentiment selected by more than a third of this demographic (35.4%). In comparison, just 10.1% of 18 to 24 year olds, often typecast as less mature and less in control of their emotions, considered them to be a significant factor in their trading approach.
James Roy, a neuro expert at Brainworks Neurotherapy, commented on the psychology of trading and how emotions can influence our decision-making:
“Market participants frequently grapple with the repercussions of negative emotions, such as fear and greed. These emotions can distort rational decision-making by activating the amygdala, prompting impulsive actions and clouding judgment during periods of market volatility. The evolutionary roots of these emotional responses, tied to survival instincts, contribute to the challenges traders face in maintaining a disciplined and strategic approach.
“Recognizing and managing these emotional triggers is imperative for traders seeking to navigate the complexities of financial markets. Strategies that integrate emotional intelligence can help mitigate the impact of negative emotions, fostering a more rational and deliberate decision-making process. Acknowledging the psychological nuances inherent in trading allows individuals to cultivate a resilient mindset, promoting sustained success in the ever-evolving landscape of finance.”
