The Psychology of Buying High and Selling Low – How Emotions Impact Your Investments

Whether it’s a stock, a cryptocurrency, foreign currency, derivatives, or any other financial investment, the goal is to buy low and sell high.  Following Warren Buffet’s two rules of investing – Rule Number 1: Never lose money, and Rule Number 2: Never forget rule number 1.  If you don’t sell at a price for lower than you have bought, you are sure to be a profitable investor.  This commonsensical strategy is obviously easier said than done, and those with money in the markets will tell you firsthand how difficult it can be to not panic sell an asset that they are watching crash in real-time.  For those who invest, it is worthwhile understanding market psychology, behavioral finance, and the driving force behind the rookie mistake of buying high and selling low.

What is the Problem with Investing or Trading?

Recent years have brought waves of retail investors into the stock market through platforms such as Robinhood, as well as into the cryptocurrency market through platforms such as Coinbase.  Investing in the stock market and cryptocurrency market has never been easier.  Anyone with a bank account can now invest hundreds or thousands of dollars at the click of a button from their phone or other digital device.  While technological innovations have brought great value, opportunity, equity and wealth to millions across the globe, it has also increased the propensity for mental health challenges such as anxiety or depression surrounding financial wellbeing.

While investing in the stock market or cryptocurrency market can come with incredible highs, both literally and figuratively, it can also come with devastating lows.  This is especially true when it comes to day trading, swing trading, cryptocurrency trading, or trading with leverage.  Financial investing can become problematic for select individuals who may find themselves displaying signs of an addiction or dependence.  Trading addiction and cryptocurrency addiction have many similarities to gambling addiction, which was recognized by the American Psychiatric Association in 2013 as being a disorder with similarities to substance use disorders.

Day trading addiction and cryptocurrency addiction manifest themselves in similar ways as other addictions such as in loss of interest in activities that were once pleasurable, loss of relationships, fluctuations in mood, and continuing to engage in the behavior despite an adverse impact on areas of your life such as career or hygiene, among many other symptoms. 

Trading addictions can come with greater financial consequences than most other addictions, leading individuals to lie, cheat, steal, take loans, sell assets, and trade money that they cannot afford to lose.  In extreme cases, investing in stock or cryptocurrency markets can lead to suicidal ideation and ultimately suicide.  Gambling addictions have the highest rate of suicide among all addictions, and this statistic may crossover into day trading addictions.

Why Do People Buy High and Sell Low?

Behavioral finance demonstrates a variety of psychological effects on how investors behave with respect to the markets.  One such area of study is why individuals buy shares of stock or cryptocurrency at record high prices, and why anyone would sell their shares of a company or cryptocurrency at a loss.

The psychology behind buying high can be boiled down to herd behavior.  Herd behavior is when a group of individuals collectively engage in a behavior, in this case buying a share of GameStop or purchasing Bitcoin, as examples.  When individuals engage in such a behavior suddenly, collectively and universally it gives the perception that they are doing something worthwhile, that the group might know something that you don’t, and this motivates others to join in.  The power of the collective can become overwhelming, thereby impacting emotions and market sentiment.

Herd behavior is one of the driving forces behind the Fear Of Missing Out, conventionally referred to as FOMO, or in this case FOMO Trading.  FOMO Trading is when an individual fears they may be missing out on a significant financial opportunity.  FOMO can have a significant influence on trading practices and can sway even seasoned financial investors leading to irrational exuberance.

FOMO leads to impulsivity, lack of long-term perspective, and trading without giving much thought or consideration.  In such cases, speculation and emotions overtake strategy and fundamentals.  FOMO is driven by fear, overconfidence, jealousy, greed, impatience, and anxiety, among a host of other psychological contributors.  FOMO Trading is exacerbated in fast-paced and volatile markets, such as with cryptocurrencies.  It can also be driven by streaks of investment wins, news, rumors, and social media speculation.

Savvy investors know that the time to hold a loss is when the price of an asset is much lower than fundamentals suggest it should be, but all too often individuals decide to cut their losses and succumb to selling low. Selling low, like buying high, can also be driven by crowd psychology as well as by fear and anxiety surrounding financial loss.

Individuals who sell at a loss are impacted by loss aversion.  Loss aversion is a behavioral bias in which individuals tend to experience more emotional pain from a loss than emotional pleasure they may feel from an equivalent gain.  In order to avoid emotional discomfort and financial loss individuals may impulsively sell their assets at a loss in order to avoid further detriment.

Despite these psychological implications, it is important to note that both buying high and selling low can both be sound financial decisions.  The former can lead to continued growth while the latter can lead to avoidance of further losses.  The analysis of behavioral finance herein is not financial advice, but rather serves to offer insight into how your mood and mindset may impact your financial decision-making process.  If you need help avoiding irrational financial decisions, certified financial planners or investment brokers can be beneficial.

How to Keep Emotions in Check and Maintain Strategy in Trading

Every individual is different, and every circumstance is unique, and therefore certain strategies may work better for certain individuals than others and at different times than others.  Some strategies to consider:

What is the Treatment for Day Trading Addiction or Cryptocurrency Addiction?

Since every individual is unique not every therapeutic approach will work the same for every individual.  If you are interested in seeking treatment for a day trading or cryptocurrency addiction it may be beneficial to begin with a comprehensive assessment by an addiction specialist in order for them to better understand your presenting problems, underlying issues, and your unique qualities in order to find the appropriate methods of treatment that might be right for you.

Generally speaking, Cognitive Behavioral Therapy (CBT) is considered to be the evidence-based gold-standard of treating a gambling addiction.  CBT focuses on challenging and changing unhealthy or unhelpful thoughts and feelings, and serves to help improve behaviors, emotional regulation, and coping skills.  Medications such as anti-depressants or mood stabilizers can also be helpful to treat problems that often coincide with gambling such as ADHD, anxiety and depression.  Additionally, mutual help groups such as Gamblers Anonymous or SMART Recovery may also be a helpful tool and form of support for individuals addicted to cryptocurrency.  Another resource to utilize if you or a loved one is struggling with cryptocurrency addiction is the Substance Abuse and Mental Health Service Administration which can be reached for free 24/7 confidential help at 1-800-662-4357.

There are also practical steps you can take such as blocking trading exchanges and cryptocurrency related material from your phone and computer.  You may also choose to have your funds monitored by a trusted loved one or moved to a loved one’s bank account in the early stages of recovery to help prevent impulses to trade.  It will also be very important to find other outlets of pleasure such as by re-engaging in social or leisure activities that were pleasurable in your past or engaging in a new hobby.  This will also help reduce feelings of boredom and loneliness that can often trigger a relapse.  Also, find mechanisms of self-care such as by focusing on your nutrition, exercise, hygiene, sleep and relaxation through sources such as reading or meditating.

Family members also should seek out professional help for themselves from an addiction professional that specializes in working with family members impacted by addiction.  Family members can also seek out mutual help groups for support such as Al-Anon, Gam-Anon, or SMART Recovery Family & Friends.

If you found this article useful, you may also enjoy our article titled, “Am I Addicted To Day Trading? – 10 Signs You Are Addicted To Day Trading and What To Do To Stop” as well as “Staring at Charts: Bitcoin and Cryptocurrency Addiction.”

For more information on NYC addiction treatment and to find the best addiction counselor, or for general therapy and mental health, or to inquire about Family Addiction Specialist’s private concierge sober coach Manhattan, recovery coach Manhattan, sober companion Manhattan, Manhattan addiction therapy services and/or our Manhattan teletherapy services (online therapy/virtual therapy), as well as our Manhattan hypnosis services in New York City please contact our undisclosed therapy office location in the Upper East Side of NYC today at (929) 220-2912.

Lin Sternlicht & Aaron Sternlicht

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