Financial anxiety in trading

In financial anxiety, our counterparty is large and institutional traders. They are the ones who decide how to play the market and other traders so that prices move in the way they want.

Behavioral economics is what affects a trader's emotions and excitement before they enter a trade or open a position. It can lead a trader to either enter a trade or be discouraged from doing so. This involves a kind of mental bias. For example, if someone has cancer and their doctor says there's a 70% chance of success and recovery with chemotherapy and a 30% chance of death with surgery, experience shows that most people choose the first option. However, both options have the same chance of recovery. This is an example of mental bias, and news in the market is often spread with the goal of affecting traders' emotions in the desired direction.

Traders may buy or sell due to events happening in the market, personal needs, profit motives, excitement, or other factors. In financial anxiety, we do not need to know why someone is buying or selling, but rather, we need to understand how their actions affect the price and what impact these actions will have on the price.

In behavioral economics, we examine trading volume to see how well it aligns with and follows the price.

Financial anxiety focuses on the behavior of a trader after entering a trade. For example, suppose you bought Bitcoin at $200. After a significant rise, say to $500, would you still hold it or sell it? Even though Bitcoin increased significantly in the future, at that moment, the trader evaluates the market situation and might think that since there has been a good rise, it may not rise much further, leading them to decide to sell.

In behavioral economics, the focus is on understanding how psychological factors influence trading decisions and market behaviors. Key aspects include:

Volume Analysis: This involves assessing trading volumes to determine whether they are supporting price movements or not. For example, if prices are rising but trading volumes are low, it might indicate a lack of conviction in the price movement, suggesting that the price rise might not be sustainable.

Market Sentiment: Traders often look at how market sentiment, driven by news, social media, and other external factors, affects trading volume and price movements. Behavioral economics helps in understanding these sentiment-driven actions.

Financial anxiety examines how traders' emotional states and psychological biases influence their trading decisions. This includes:

Decision-Making Under Pressure: Traders may experience anxiety or stress that affects their decision-making. For example, after a significant price increase, they might fear losing their gains and decide to sell prematurely.

Psychological Biases: Traders might fall victim to various biases such as:

Loss Aversion: The fear of losing gains might lead them to sell too early

Anchoring: They might hold onto a position because of a previous price point that they are fixated on, even if the market conditions have changed.

Overconfidence: After a successful trade, they might become overconfident and make riskier decisions.

Behavioral Patterns: How traders react to price movements can be influenced by their psychological state. For instance, a trader might sell after a significant gain, thinking that the price won’t increase further, despite potential for further growth.