Risk management for individual traders in financial market

Abstract

When participating in the financial market, few investors can sustainably succeed in the market, most of them often make psychological mistakes that lead to failure. The article applies theories and synthesizes empirical studies to analyze common mistakes of individual traders based on the theory of behavioral finance, including: prospect theory, herding effect, house money effect, sunk costs, and overconfidence. The article uses qualitative methods combined with descriptive statistics on a sample of 120 individual investors who are directly trading on the financial market, using a convenience sampling method. The results show that the disposition effect has the strongest impact on investors' decisions, specifically, 81.3% of investors often close their profit positions too soon while the trend is still continuing. Hesitating when making decisions or trading with weak signal, being influenced by others also have a strong impact on the trader, the rest of the factors have a moderate impact. From those results, the article analyzes that the main cause of psychological deviations is "fear" inside each person. Investors close their profit positions early because of the regret aversion if losing that profit, they hesitate to make decisions because of the fear of making mistakes, affected by the herd effect is due to the isolation aversion. On that basis, the article proposes solutions to help investors control psychological factors to survive and succeed in their trading activities, the solution emphasizes self-discipline, planning, and a constant learning process.