Trading with CFD, Forex products and the behavioural economics_conscious small investors
More than 80% of retail investor accounts lose money when trading cfds. The reasons behind the wrong trading decisions can be detected using the methods of behavioral economics, and can thus be avoided. I think that we all have frail human qualities and wrong fixations, but by recognizing and then avoiding them and, of course, by applying appropriate risk management and trading strategy, we can achieve the set goal and profit.
National
Hungary
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Mainly urban
It refers to other types of transformations (soft investment)
No
No
Yes
As an individual
First name: Brigitta Last name: Bárdos Gender: Female Nationality: Hungary Address (country of permanent residence for individuals or address of the organisation)<br/>Street and number: Barcsay Jenő út 87 Town: Tata Postal code: 2890 Country: Hungary Direct Tel:+36704592431 E-mail:bardos.brigitta@gmail.com
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Yes
New European Bauhaus or European Commission websites
It is a fact that losses exceeding 80 percent occur on retail trading accounts in Hungary and in the member states of the European Union during trading with CFD and Forex products. Last year, in my master's thesis in finance, I investigated the causes of the loss using the tools of behavioral economics. In order to verify the hypotheses I formulated, I had conducted a primary research. It inc-luded an online survey questionnaire filled in by stock traders. The first hypothesis of the thesis was that irrational decision making is one of the primary causes of losses exceeding 80% in the accounts of the retail investors, which could not be clearly derived from the results obtained from the research, further investigations are required. According to my second hypothesis, retail investors’ attitudes such as overconfidence, fear of loss are fac-tors that are present and detectable in decision making. The third hypothesis suggests that people with higher education are less likely to make irrational investment decisions. Both conclusions have been confirmed by the results found in the conducted research. In addition to the technical knowledge required for trading, getting to know the tools of behavioral economics and introducing them to traders and brokerage firms is an excellent tool for avoiding losses. My goal is to conduct further research and develop methods to help trading. To make available these to as many traders as possible, both online and in person. I would like to create an investors club, where it would be possible to learn the methods that helps trading in person, as well as an online platform. The worth of the entire global forex trading market is estimated to approximately $2.4 quadrillion, around $2409 trillion.
There are approximately 10 million forex traders in the world today. Of those 10 million, 3.2 million are in Asia, and 1.5 million each in Europe and North America. Hungarian headcount data are not available.
community
risk aversion
learning
new methods
consciousness
One of the objectives of the initiative is to carry out further research among small investors with the tools of behavioral economics, in order to avoid losses. Creating educational material from the already available research results and distributing it as widely as possible among traders. Creation of a physical trader club and an online platform in order for research work, education, and learning to work efficiently.
As the financial markets have undergone tremendous development, with thousands of money market products available, it is necessary to achieve greater investor awareness. A mandatory warning about the existence of a risk is not enough.
It is also worth focusing on the results of behavioral science among brokerage firms, since if they could expand the range of their services by getting to know their customer base, their investment and trading habits, and their attitudes better, they could achieve higher profits and the image of brokerage firms could also improve. Not to mention that the traders belonging to their client base could also improve their losses of more than 80% on small investor accounts.
The goal of the initiative can be achieved by contacting small investors and brokerage firms in a targeted manner and distributing the prepared educational materials among them free of charge and accessible to everyone. The results achieved must be followed up with continuous contact.
The possibility of personal consultations should be provided both free of charge and on a business basis.
The long-term sustainability of the initiative depends on the business foundation. Establishment of a company, operation of a company trading account, involvement of paying customers.
It is also possible to build international relations.
The application of the theory of behavioral economics in practice helps to overcome the negative emotions that arise due to the losses suffered by having a positive effect on the awareness, self-knowledge and attitude of the trader. A trader can never be too cautious when trading. Incorporating it into your trading strategy, you must strive for disciplined risk management and capital protection, all in such a way that you dare to face yourself and develop all of these along the lines of your typical attitudes. The attitude towards risks is basically determined by the risk attitude, the tendency to take risks arising from the personality of the decision-maker. There are positive illusions that influence the attitude towards risks. For example, most people consider themselves better than others, they have "unrealistically positive views of themselves", which leads to overconfidence. The illusion of control occurs when we believe we can influence random events. In addition, unrealistic optimism can be observed when people believe that negative events happen to others rather than to them. There is no such thing as perfect rationality, i.e. there is no person who, in possession of all relevant information, only strives for individual utility maximization. The reason for this, in addition to the lack of complete information, is that the cognitive capacities of decision-makers hinder the processing of information. Therefore, decision-makers use mental operations, so-called heuristics, "they often simplify the problem and instead of rational analysis of the situation, they rely on their subjective feelings, prejudices, rules of thumb" Three such heuristics have been identified during empirical research: recall bias, representativeness bias, hanging and insufficient alignment rule (anchoring).
Educational material with a positive emotional return can be developed for the entire level of trading.
First of all, the goal is to create a training material that supports traders and is available for everyone free of charge. In addition, if we leave aside the money market and the stock exchange, every single day, in every area of life, every person finds himself/herself in the most varied decision-making situations where these behavioral factors appear. Greater decision-making awareness would be available to everyone through learning and teaching. All of this in such a way that, based on the numerous researches and experiments already carried out by the trend, it could be combined with a colorful, instructive, easily memorized, situation-related course material in which everyone can find situations and theories relevant to their own life, which makes it easier to understand.
Since this approach is new and not yet widespread today, it will take time for the approach and its positive side for trading to be recognized. Both individual traders and different brokerage firms.
If brokerage firms could expand their range of services by getting to know their own clientele, their investment and trading habits, and their attitudes better, they could achieve higher profits and the image of brokerage firms could also improve. Not to mention that the traders belonging to their client base could also improve their losses of more than 80% on small investor accounts.
If the first free educational material receives positive feedback, then you can start developing and selling a paid service.
In such a context, I have not yet come across a supporting initiative, the websites of brokerage firms publish articles and materials related to technical analysis, market analysis, and risk management. But for successful trading, you must also deal with the trader's personality and attitude.
In my already mentioned diploma thesis, I looked for an answer to the fact that losses exceeding 80% on small investor accounts are related to certain forms of human behavior and human factors. The questions formulated in the questionnaire focused primarily on the forms of behavior that influence stock market trading documented by behavioral economics. With the questionnaire research conducted among stock market traders, my goal was to reveal whether the knowledge acquired through their studies has an influencing effect on their decisions, and also to recognize human attitudes that could potentially serve as an explanation for non-rational decision-making.
To verify the hypotheses I formulated, I conducted primary research, which I published in the form of a questionnaire that can be filled out online.
Data collection was a huge challenge because there is no publicly accessible data available, brokerage firms have no chance of obtaining retail investor trading data, and retail investors are extremely difficult to reach. It is interesting that brokerage firms in our country show absolutely no willingness to participate in this kind of questionnaire survey. The request is usually denied citing data protection reasons, but in my opinion other factors may play a role. In Western countries, stock market research is already carried out by collecting data on investor habits through questionnaires.
In the end, we managed to contact two closed groups of retailers, and they helped us fill out the questionnaire. In addition, there are people in my own circle of acquaintances dealing with trading who also contributed to the filling out. The data was collected in the period from June to November 2021. All in all, 83 people is considered a small sample, but due to the already mentioned data collection limitations, I am still happy that so many respondents were found.
My goal is to carry out further research and prepare trading support materials.
Since my initiative is very new, unfortunately I cannot yet report on the planning and implementation at the above level.
Even at the university level, the attitude was divided because of the topic and the approach, in any case, I was given the opportunity to publish a publication, which is currently being prepared.
Reaching out to retailers is a difficult task, although there are retail groups and communities, it is difficult to locate and contact each individual. Brokerage companies show a dismissive attitude if you do not have a direct client relationship with them. But it is necessary to start spreading, teaching, and understanding the possible positive benefits of new approaches.
Explaining, spreading, teaching, and putting the theory into practice is another task ahead of me, for which I hope to receive as many helpful partners and support as possible at various levels and forums.
In the initiative, the new discipline of economics is behavioral economics, and small retail investors appear as actors in the financial market. It is a branch of economics that is enriched by valuable results from psychology and other social sciences.
It serves as a primary research area in the modeling of individual economic decisions - regardless of whether the decision-making takes place at an individual or institutional level - if we consider it important to assess the social and psychological factors behind each decision. This includes all consumer, borrower and investment decisions that have an impact on market prices, yields, distribution of resources, and collective well-being.
Behavioral economics is typically based on the rationality of individuals as economic agents and the obstacles to this. Research in this field is generally based on the approach of neoclassical economics, but based on the results of psychology. Behavioral economics uses and combines the principles of traditional economics to explain or predict the behavior of individuals and then to create policies based on their experiences.
The behavioral branch of economics has had the greatest impact in the field of finance, the reason for this being that finance has rigorously explained theories, such as the law of one price, and an extremely rich data set is available, including the daily price evolution of thousands of stocks going back several decades, which they are excellent for testing theories.
Exploiting the results of behavioral economics is also useful for financial companies, because the tendency can also be recognized in the behavior of professional investors that when they are in the red, they do not shy away from taking gambling-like risks to try to break even.
The innovative nature of the initiative is reflected in its approach to trading forex and cfd products. In that he approaches trading not only with material, market and economic knowledge related to products, and with technical tools that support trading, but also deals with the trader himself, the person. Learning a more complex approach can help reduce losses by providing both brokerages and traders with a better understanding of the human factors that influence decisions. The attitudes of small investors, such as overconfidence and fear of loss, are factors that are present and can be detected during decision-making, so its negative effects can be avoided with awareness and conscious work. As far as I know, there has never been an example of this kind of initiative in Hungary. The reason for this is the new nature of the discipline, as well as the aloofness of the brokerage firms, which can be seen even during data collection.
It's amazing that although the Forex market is known as the world's largest financial market for trading various currencies, libraries can be filled with books on stock market analysis. Although stock market psychology also appears, the human part has been relegated to the background, even though it is primarily people who make the decisions related to trading. The new approach, new research, and new models can definitely be highlighted as innovation, the goal of which is to popularize and gain acceptance.
If there is an opportunity for further research, materials to support trading are developed, personal consultations are carried out with traders and brokerage firms, the results achieved can be followed, then the methodology and materials can also be used in the corporate sector and education.
Irrational trading behavior can be detected, it is necessary to carry out surveys and research, as it would be possible to get closer to uncovering more complex stock market phenomena and mechanisms. Exchange rate forecasting is an evergreen topic during stock market trading, and results could be achieved in this direction as well.
The practical application of the theory of behavioral economics has not yet spread in our country, but some American brokerage firms are already incorporating the innovations of behavioral economics into their forecasting methods. In addition, investment strategies aimed at exploiting the anomalies caused by irrational behavior have also appeared, such as JP Morgan's two investment funds.
Because every single day, in all areas of life, people find themselves in the most varied decision-making situations where these behavioral factors appear. It would be worthwhile to include it in education, since greater decision-making awareness would be available to everyone through learning and teaching. All of this in such a way that, based on the research and experiments of the trend, it could be combined with a colorful, instructive, easy-to-memorize, situation-related course material, a less harsh discipline, and in addition, everyone can find situations and theories related to their own life in it, which makes it easier to understand.
Businesses also recognize that a deeper understanding of human behavior is just as important to successful business management as financial statements and operational management. After all, companies are also managed by human beings, and their employees and customers are also from them.
Carrying out further research and surveys, involving as many traders as possible. The research method is targeted questioning (based on the principles of behavioral economics), data analysis based on the answers received. Then, after it becomes visible which attitude needs to be developed, it can be managed in a targeted way.
Preparation of professional materials supporting trade. Ensuring participation in personal, online consultations supporting trade. Continuous follow-up and monitoring of the achieved results, making changes if necessary. Follow-up of international studies and research, continuous incorporation and application of their results in educational materials. Since the economy, money and capital markets are undergoing constant development and change, up-to-date, relevant information must be monitored and incorporated into trading support materials.
A global challenge is the loss of more than 80 percent on small investor accounts, which can be reduced by widely using the results of behavioral economics. As a local solution, the first goal is to reach individual small investors, small investor communities, and groups. The next step is to find and build relationships with brokerage firms present in the country. It can then be broadened by involving other financial market players, if they are open to accepting an initiative with a new approach.
In the following year, a place is planned to be rented or purchased, which could provide space for further research and the preparation of professional materials to help trade. As a club, it would provide opportunities for personal consultations and discussions, as well as providing a place for teaching. A website would be created, where prepared materials and studies could be published, and it would provide online contact. There are plans to establish a financial service company related to the topic. The company's income can come from the profitable operation of a company's trading account, which can also be suitable for illustration during educational activities. Another income-generating ability of the company is the organization of trainings and the provision of venues for groups of traders, depending on interest. If the company is profitable, job creation can also be achieved, as professionally qualified and motivated colleagues would be greatly needed. For the preparation and distribution of educational materials. Furthermore, building relationships and widely promoting the company's activities is a time-consuming activity. The nature of the activity would make it possible to employ employees with physical disabilities, which is unfortunately still not a sufficiently prioritized goal in the labor market in Hungary.
The most important planned result is the reduction of losses in relation to small investor accounts.Another key planned result of the initiative is the building of relationships between traders and the creation of communities. Furthermore, achieving an open communication in the direction of brokerage firms, because these days they rigidly refrain from even providing data, citing data protection reasons. The intended results would be interactions between brokerage firms and their clients.
Furthermore, the results of behavioral economics and the work of its representatives would gain greater recognition.This could pave the way for you to be involved
