Talking about the human nature behind volatility: How news stimulation affects a trader's psychology

I don’t know if you have heard the allusion of Zeng Shen’s murder. In ancient times, a person with the same name as Zeng Shen killed someone. A kind person told Zeng’s mother that “Zeng Shen killed someone”. Zeng Mu said, "My son will not kill people," and continued weaving. After a while, someone said again that "Zeng Shen killed people." Zeng's mother continued to weave, thinking how could such a good son kill someone? After a while, someone said again that "Zeng Shen killed someone." Now Zeng's mother became frightened, and she threw away her weaving utensils and fled over the wall. Applying this story to trading is how news stimuli affect a trader's psychology.

Prices will not always be in equilibrium in financial markets. It does not passively reflect economic fundamentals such as supply and demand, but can also affect economic fundamentals in other ways. People's views on the market are as non-objective as Zeng Mu's. They are always prejudiced or influenced by the economic environment around them to form a certain prejudice. There is a two-way and reflexive interactive process between this view and economic fundamentals, which leads to the loss of equilibrium in the market. Just like Zeng's mother, she always believed that her son would not kill people at first, but if there are too many people who pass it on, it will subtly affect Zeng's mother's view of her son's behavior at that time.

Every boom-bust cycle in the financial market, or every bubble, originally originated from some fundamental changes in the market, such as the popularity of the Internet. After these changes appear, people will predict the new trend and new direction of the market price based on these changes, and this kind of expectation inevitably contains elements of human bias, that is, it is either overly optimistic or overly pessimistic. maintain independent sobriety in the financial markets. Just like saying that the person who once participated in killing people really joined him in killing people?

Such a mistake would cause a tendency to exacerbate market prices, and the mistake itself would be strengthened and accepted by more and more people. For example, is the interpretation of the interest rate cut cycle excessively released? In the end, the gap between the real market conditions and the wrong perception is getting wider and wider, and this perception is finally unsustainable. For example, in 2007, the Shanghai Composite Index of China’s A-share market started at 2,675 points, and hit a record high of 6,124 points on October 16, a surge of 129 percentage points in less than ten months. At that time, the stock market was hotter than ever before. Have you ever wondered whether there is sustainability behind it? As people become more aware of previous misconceptions and disappointment becomes more common in the market, people will act in the opposite direction, which will eventually lead to the opposite impact on the market. (This is like a great mother fleeing over a wall)

The news, price and trading psychology are cross-interacting and interact with each other. The rising price will make more traders join the transaction. At this time, greed is greater than fear, and such a rising market The enthusiasm of investors also affects the stimulus of the news in turn. We can see that bullish news is overwhelming in the bull market, while bad news is blinded by our greed. In this way, under a self-reinforcing mutual influence, continuous with. But when everything changed, our panic came gradually. Who was the last straw that broke the camel's back?

The minds of our ordinary traders are always like Zeng Mu, who is affected by this kind of news and every transaction that affects us, so we can't extricate ourselves. Only those who jump out of this torrent of echoing others and observe the market with a calm and objective eye can stick to the sky that they should stick to.