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Trading Psychology

Classification of Traders by Trading Style

We have distinguished between an investor and a trader's mindset. However, there is a further classification of traders – active and passive whose characteristics differ widely, and so do their mindsets. 

 

Active traders are those who devise their own market strategies – identifying individual stocks, trends, patterns, using technical indicators, making predictions, et cetera. They use their own skill and intelligence to make profits in the market. Hence, they are more affected by psychology and the emotions that the field encompasses i.e., Fear, greed, hope and regret.  Attribution bias is especially prevalent in active traders’ mindsets wherein they try to take credit for profitable trades and shirk responsibility for bad buys/sales.

 

Passive traders are those who replicate the market as they believe that doing so will ensure maximum diversification and the best possible returns. Psychology doesn’t affect them as much but it does to some extent. The most common of emotions affecting these traders is regret when they choose to look backwards in cases where the market has been down but certain stocks have performed very well (E.g.: Falling market during the first wave of COVID but new highs for SRF Industries). At such a time, it is important to also remember the times when replicating the market has been extremely beneficial vis-à-vis focusing on a particular sector, index (E.g.: When the mid-cap index kept hitting new lows every day but the market was up due to the high-performing blue chips). 

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Units 4/10