Have you ever wondered how the colors on the chart affect your trading? Color has a powerful effect on our psychology and emotional state. The psychological effect of color is based on the physiology of the nervous system that takes in information through our senses, processes this data, and triggers actions, such as making your muscles move. Any external factor perceived by the sense organs causes a more or less vivid irritation and inhibition as a response in the cerebral cortex.
Change in irritation and inhibition manifests itself in emotional shifts, mental comfort or discomfort. When the person perceives color, the visual brain center experiences irritation causing inhibitory forces to mobilize.
Based on the stimulation effect, spectral colors are divided into several groups:
- red, orange, and yellow correspond to excitement;
- blue, blue and violet are soothing (inhibiting) colors;
- green is neutral and could impose a dual impact on the psyche and emotions.
It’s vital to know that customizing your trading charts is not just about beautiful or contrasting features. A set of colors affects your inner state and decision-making process. Researchers are increasingly focusing on the effect of colors on traders’ behavior.
Let’s cite some points from the study created by the Swedish House of Finance — “In the Red: The Effects of Color on Investment Behavior”.
- Using a specific color could lead to avoiding the trading platform or delaying some financial decisions.
- Red color prolongs pessimistic expectations regarding negative stock returns while viewing the same information in black/blue stimulates thinking about reversals.
- Just as with traffic lights, red usually associates with STOP/HOLD/ATTENTION, while green is about GO/SAFE/VERIFIED.
- Similar experiments in China found less risk aversion tied to the red color. In China, red is associated with good fortune, festivals and the national flag.
Tips for overcoming color bias
- Use black-and-white charts. Try just two colors and see if it suits you.
- Consider using technical indicators such as the simple moving average (MA) to examine a stock’s performance as an alternative to red and green candlesticks.
- Monitor your state when interpreting information in various colors.
A multitude of factors shapes our everyday decisions. Are you interested in more great tips for novice traders?
