The demand to act in online trading

May 7, 2010

Fear may be magnified when we’re watching a volatile market too closely and begin to spin off into fantasy. While day traders need to be disciplined to stay focused on the numbers when they are trading, the greater majority of online investors do not need to watch the tape from minute to minute. They simply aren’t doing enough trading to warrant this kind of close scrutiny.

Avoiding panic reactions means learning when it is not in our best interest to watch the tape too closely. And when it is best to turn off the sound of the TV and not be further whipped into a frenzy by analysts and commentators.

In psychology research studies, this pressure we feel to take action is referred to as a demand characteristic. It is a behavior evoked just by being in a particular situation. So, just by the act of closely watching the market drop drastically, we may feel a demand to respond to the data by taking some action.

We feel the need to do something now and this impulse gets stronger the longer we watch. We think that if we take some kind of action, we are more in control, and if we don’t, we are passively allowing the market to control us.

This is a stronger influence than we may think. We may not even be aware how powerfully the situation is demanding that we respond. We know we are afraid but may not realize how automatically our fear pushes us to take action.

When we are not aware of a psychological motivator like this, it is easy to blindly step into the trap. Awareness of the demand, then, can help keep our foot out of the trap.