The human brain resists change. That’s why many traders limit their portfolios to only a few known instruments.
However, this means they miss out on wider market opportunities, which in turn can adversely affect their portfolios’ performance. Here’s why encouraging your traders to diversify is essential for their overall profitability and your revenues.
Confirmation Bias
Confirmation bias makes traders look for information they believe in rather than open-mindedly researching an instrument. This is especially true for instruments they regularly trade. Investors might be reluctant to change their strategy once it has yielded good results. Therefore, they only look for market signs that reinforce their decision to take a position, rather than objectively exploring possibilities where their speculation might go wrong. In essence, they are ignoring the fact that markets are dynamic, and no two market conditions can be identical.
For example, the fundamental data of an instrument is not enough to make decisions, especially for day traders. This information is accumulated over time and is a generalised perspective on how an instrument “should” behave and not what the real-time market conditions are suggesting. Yet, fundamental analysis is essential to adequately assess why and how certain market events may impact an instrument’s price more significantly than others. However, it should not limit their vision.
Science of Curiosity
Curiosity is known to boost dopamine, creating new neural pathways, and activating the reward centre of the brain. When traders explore new instruments, they conduct thorough research, they learn more which in turn increases their thirst for more knowledge. There are no pre-existing beliefs to be challenged. That is why traders are more inclined to make decisions based on information that matches their beliefs when trading a new instrument. Traders will rely more on real-time data, like news updates, market sentiment and technical indicators, to verify and validate their speculations.
Encourage Conscious Decision Making
Decisions are made either on intuition or rationale. Naturally, when there is no preconceived notion about an instrument, decisions will be based on rationale. More importantly, when traders are exposed to more instruments, they build a habit of re-assessing their beliefs before taking a position rather than blindly acting on them. This is because, through their learning of a variety of instruments, their brain registers that beliefs need to change with changing market conditions and new information.
This pushes traders to look for knowledge to make decisions deliberately. As a broker, it is imperative that you make knowledge available so that your traders can make truly informed decisions. For instance, one such solution you can offer them is a comprehensive tool that gives every opportunity a combined score, based on its fundamental, sentimental and technical analysis. AI-powered opportunity scores give traders an idea of the risk-reward ratio associated with the instrument, alerting them to take only as much risk as their financial standing allows. Acuity’s Asset IQ does just that - it considers alternative data in addition to fundamental, sentiment, and technical data to deliver well-rounded signals for each instrument.
As traders explore new instruments, they also learn to use diverse trading tools that add value to their experiences. Traders who broaden their portfolios appreciate the diverse tools. All the technology that the brokerage has put together to offer better decision-making opportunities sees better utilisation.
The Need for Real-Time Data
Recent research has suggested that the historical inverse correlation between oil and the dollar is declining. However, this trend is still building and hasn’t solidified. Yet, offering this kind of information can help oil and forex traders make more informed decisions. However, under the influence of confirmation bias, traders who frequently trade either asset class may not even look for extra information to make decisions. They may end up missing out on this detail regarding a potential change in correlation. Their mindset makes them averse to added work to make the decision, like searching for contradicting reviews and then verifying them and, more importantly, doing away with their “beliefs.” But if they have real-time data, presented as visual graphs and charts, there is no need for extensive research to optimise market opportunities.
Conversely, a trader new to the oil markets will try to gather as much information as possible and factor in market sentiment and changing oil-dollar dynamics, making a more informed choice. Diversification makes traders keep their portfolios balanced with many inversely correlated and uncorrelated instruments. Over the past few years, uncertainty in the markets has grown significantly. New instruments, such as cryoptocurrencies have been launched, geopolitical tensions have escalated, de-dollarisation is on the horizon, and China started using the Yuan to trade oil. These are slowly impacting market dynamics. Additionally, risk-management has become more critical. Exploring new instruments to balance portfolios and hedge against risks is therefore increasingly gaining importance. Moreover, consistently discovering new instruments to trade cultivates an emotion-free trading psyche because engaging new activities means no pre-existing bias. Plus, discovering new things boosts curiosity and leads people to ask more questions. Greater rationality in trading decisions translates into better trading experiences and added revenue streams from the same client for the brokerage.
Acuity offers on-point investment data via cutting-edge solutions, such as NewsIQ and AssetIQ. Traders get detailed information and opportunity scores for every instrument. Additionally, AnalysisIQ enhances technical analysis capabilities. Schedule a demo with the Acuity experts to learn how to help your traders broaden their trading portfolios.
Trader Psychology,
Portfolio Optimisation
