5 Psychological Trading Traps

Let’s have a quick self-check by going through these 5 Trading Traps for investors and how to overcome them to be a better trader! 

1. Familiarity bias
   This trap says that the more we feel familiar with certain tokens or projects, the less necessary we think to do our own research. To overcome this bias, additional research is always required.

2. Sunk cost trap
   The more you have already invested into a project, the more you feel obliged to stay consistent with that investment. In economic theory, this is a sunk cost – an investment you cannot make undone. To overcome this bias, once you recognise something was a mistake, the sooner you correct it, the better.

3. Confirmation trap
   This trap says that you only look for information to confirm what you already believe. To overcome this bias, you must look for information that challenges your investment thesis. Eventually, you will come up with a list of pros and cons that you contrast with each other.

4. Extrapolation bias
   This trap says that you tend to believe that current trends will continue this way in the future. Always remember that the performance in the past is not the confirmation of its future performance. Furthermore, factors that affect project growth.

5. Loss aversion
   Psychological studies have shown that experiencing loss is more painful. The same you felt that losing $100 is more painful than gaining $100. This leads to panic selling when a major sell-off occurs. Remember, you only lose it if you sell the assets – otherwise, it is unrealised losses! 

 

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