Positive Feedback

AAA

DEFINITION of 'Positive Feedback'

A self-perpetuating pattern of investment behavior. The herd mentality that causes investors to sell when the market is declining and buy when it's rising is an example of positive feedback. Positive feedback is the reason why market declines often lead to further market declines and increases lead to further increases. It is also a source of market volatility. When a cycle of positive feedback continues for too long, it can create an asset bubble or a market crash.

INVESTOPEDIA EXPLAINS 'Positive Feedback'

On an individual level, positive feedback can refer to a pattern of behavior in which a positive outcome, such as executing a profitable trade, gives an investor the confidence to pursue further positive outcomes. Developing a rational trading plan and sticking to it can help investors stay confident and maintain a positive feedback loop even when they execute the inevitable losing trade.

RELATED TERMS
  1. Indicator

    Indicators are statistics used to measure current conditions ...
  2. Negative Feedback

    A pattern of contrarian investment behavior. An investor using ...
  3. Negative Return

    This occurs when a company or business has a financial loss or ...
  4. Negative Assurance

    A representation that particular facts are believed to be accurate ...
  5. Tulipmania

    Tulipmania was the first major financial bubble. Investors began ...
  6. Negative Verification

    A system of confirming that a bank's records agree with a customer's ...
RELATED FAQS
  1. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  2. Is it better practice to use a stop order or a limit order?

    Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
  3. What is the difference between a buy limit and a sell stop order?

    A buy limit order is a specific type of buy order used to enter a market, while a sell-stop order is a sell order that can ... Read Full Answer >>
  4. What is the difference between a short squeeze and a long squeeze?

    A short squeeze and a long squeeze are situations that can force traders and investors out of their positions. A short squeeze ... Read Full Answer >>
  5. Why does the efficient market hypothesis state that technical analysis is bunk?

    The efficient market hypothesis (EMH) suggests that markets are informationally efficient. This means that historical prices ... Read Full Answer >>
  6. What does it mean to be absolutely risk averse?

    Some people are absolutely risk-averse, which means that they cannot tolerate sustaining any sort of loss, even a temporary ... Read Full Answer >>
Related Articles
  1. Options & Futures

    The Importance Of Trading Psychology And Discipline

    Find out how investing success can be more about your mindset and less about the markets.
  2. Trading Strategies

    Introduction to Types of Trading: Fundamental Traders

    Learn about the different traders and explore in detail the broader approach that focuses on company-specific events.
  3. Forex Education

    Using Feedback To Improve Your Trading

    Positive and negative trading experiences can affect the way you trade. Find out how.
  4. Forex Education

    Introduction to Types of Trading: Technical Traders

    Learn about the different traders and explore in detail the broader approach that looks to the past to predict the future.
  5. Active Trading

    Fundamental Analysis For Traders

    Find out how this method can be applied strategically to increase profit.
  6. Forex Education

    Lessons From A Trader's Diary

    Discover what this trader learned from his mistakes and how to uncover your own.
  7. Trading Strategies

    Uncovering Evidence Of Sector Rotation

    Stalk ETF performance lists over several weeks to uncover hidden institutional buying and selling strategies.
  8. Investing Basics

    End Yo-Yo Trading By Cultivating Discipline

    Lack of professional and personal discipline can impact self worth and market performance. Examine lifestyle choices like smoking, drug use, and overeating to improve performance.
  9. Trading Strategies

    Choose Abundance and Manage Your Trades Like A Pro

    Professional traders build skills to last a lifetime, not just through the next rally or selloff. Cultivate the psychology and skills that make a successful trader.
  10. Investing Basics

    The Casino Mentality In Trading

    Many new traders treat the market like a casino, placing unwise bets and hoping for the big win.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!