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Certain factors affect one’s trading strategy. One of them is social pressure. But what exactly is social pressure in trading? And how can it influence trading decisions?
In the following text we explain what this is all about, how social pressure makes itself felt and how you can prevent it from having a negative impact on trading success.
What does social pressure mean and what role does it play in trade decisions?
Social pressures are external influences that can in turn direct the trader’s psychology. This can create pressure to perform, which can lead traders to feel compelled to take more risk than necessary.
External factors and their influence on trading behavior
The next sections show which external factors are involved and what role they play exactly:
Competition in trading
Competition or competition is present in many areas – including trading. This creates pressure to be better than the competitor – for example, by making more profits than another trader.
However, this pressure is often unnecessary and in a way “homemade”. Competitiveness can lead to sometimes impulsive decisions being made to outperform a competitor.
It is not uncommon for good intentions and one’s own trading strategies to be thrown overboard, which can ultimately develop into a boomerang. Even in supposed competitive situations and in competition, you should behave in a disciplined manner and not want to win at any price.
News in trading
Another pressure situation can arise from news. Because sometimes news can influence trading behavior by leading to decisions that would have been different without the respective message.
Therefore, it is particularly important for traders to be able to classify the news correctly in order not to be subject to some behavioral biases in trading such as confirmation errors or availability bias.
Rumors in trading
Rumors can mislead your own trading strategy. They tempt traders to make mistakes that can ultimately have a negative impact on the result.
Rumors lead to characteristics such as greed or fear gaining the upper hand before the assumptions that have arisen have even been verified. Overzealous sales can happen this way.
It is therefore important to know the source of the rumors and to check the information that has been disseminated before making important decisions.
Herd behavior in trading
Herd behavior is “human”. That is why it also happens when trading that you follow other investors in their decisions without sticking to your own plans and analyses. The herd behavior creates the pressure to “swim with the crowd”.
There are a few examples of herd behavior in economics where investors have ended up taking heavy losses.
This was particularly the case when the IT industry was at its peak in the 1990s. Even then, many traders were subject to herd behavior in order not to miss their chance at big business.
Avoiding the negative effects of social pressure when trading
As explained in the previous sections, social pressure can often have a negative impact on trading. But what can a trader do to avoid letting this part of stock market psychology become a disadvantage?
Competitiveness is all about patience and discipline. The competition itself is nothing unusual. However, traders must not be tempted to become impatient in the face of competition and thus make wrong decisions just to outperform the competitor.
It is therefore important to stick to your own previously defined trading strategies and only deviate from them if there is no other option. This applies in particular to risk management.
The news is similar. These can also cause pressure situations if they are accepted unfiltered and unverified. A good spread of trustworthy sources is crucial here.
Relying on just one can limit one’s perspective of the market situation. It therefore does not hurt to find sources that illuminate the market from different perspectives.
Reputable sources are essential if you don’t want to fall into the trap of the rumor mill. Because rumors can also lead traders to make ill-considered decisions that ultimately have a negative impact on their own trading behavior.
All information should first be verified using reliable sources. And until then, the motto is: keep calm, even if it is almost impossible to fight with so-called fake news these days.
Calmness is also the trump card when it comes to herd behavior. A position does not necessarily make sense just because other traders are trading according to a certain pattern. It is important to withstand the pressure and to maintain your own trading strategy.
Social pressure is an important factor when it comes to trading psychology. The trick is to resist these stressful situations as best you can and impose your own trading strategies and risk management.
If you want to learn trading, you should face the social pressure and not lightly leave your own path.