“Man is not a rational animal; he is a rationalizing animal.”
Robert A. Heinlein
Jeff had been here before. After working real hard, he had finally gotten funded, traded well for a while, and then it all fell apart – again. And he lost the funding he had worked so hard to get. He had cycled through this pattern a couple of times over the last several years so he was no stranger to it. Each time, he thought he had it beaten. Jeff would double down on his effort, work real hard at getting his head back together, and trade confidently.
Then “it”, ever so subtly, would creep back into his trading and, before he knew it, he started making mistakes he...
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Articles
Discomfort is a human condition. From conception, our system continuously undergoes cell division and development of blood, bone, tissue, nerves, muscle, internal organs and brain cells that make life outside the womb and eventual survival possible. In the first few years the level of growth is exponential; in fact, normal infants will double their birth weight by about 5 months. At puberty, like a weed, teens will undergo massive changes in their bodies as growth surges and muscles begin to take permanent shape. This is not without physical and emotional discomfort as the teen adapts incrementally to the collective mental, emotional and physical modifications. These are examples of normal growth that happens in the course of...
The moment that real capital is put at risk in trading, everything changes. Trading goes from an intellectual exercise where loss is abstract and not personal to a visceral experience where potential loss unhinges the rational mind and primitive emotional responses take charge of the trading mind. After experiencing real losses, the emotional survival brain even starts anticipating potential losses (rather than gains) and hijacks the trading mind BEFORE action decisions are made. If you have dealt with fear of entering a trade or fear of pulling the trigger on a perfectly good set-up, you have experienced the baffling power survival emotions have over rational thought.
Or if you have perceived that a trade could be getting away...
The incessant intraday struggle stock market between the bulls and the bears is what drives market rallies and precipitates market declines. Regardless of the style of analysis or system employed by traders, one primary aim of their trading endeavors is to understand the degree of control held by the bulls or bears at any given time and to predict who should hold power in the near to distant future. Unfortunately, traders' natural desire to follow the crowds often gets in the way of seeing this clearly. Here we'll take a look at how psychology and behavioral finance propel bull and bear markets.
The Force of Emotion
One way to see the market is as a disorganized crowd of individuals whose sole common purpose is to ascertain the future...
There it is, that unfinished Macro Trade Plan that you committed to finishing before your next live trade, that stack of books that you promised yourself you’d read and the list of unfinished to-dos that go back weeks. You find yourself thinking, “What is wrong with me, why can’t I follow through with at least the stuff that is important?” Yes, this is all too familiar because it happens over and over, and you may feel powerless to stop it. In fact, it may be the story of your life. You’ve missed deadlines, squandered resources and embarrassed yourself all because you didn’t follow through… you procrastinate.
Procrastination – putting something off till a later time or date – appears to haunt many a trader’s life. It can ease up on...
Republicans -- to be precise, 74 percent, according to a CBS News poll -- think it’s very or somewhat likely Donald Trump’s offices were wiretapped, even though the White House has offered no evidence to back up the president’s claim that his predecessor ordered the monitoring.
I just love data points like this. They say so much about humans as a species -- how we process information, our inability to look dispassionately at a situation, the ever-present cognitive errors, even the challenges of reaching a simple, rational conclusion based on evidence.
There are lessons here for investors who want to better understand how their own minds operate, and how they can manage their own behavior. Each of these bullet points applies equally to...
The power of beliefs is a double-edged sword that can cut both ways. It can help you and it can hurt you. Take the placebo effect and the fact that physicians have been doling out sugar pills forever with amazing results. Or, I’m sure you’ve no doubt heard about people that were diagnosed with some horrible and incurable disease only to go into spontaneous remission or have the condition turn around overnight! It’s incredible, isn’t it? It all speaks to the awesome nature of holding a strong focus of belief on health and well-being and, presto-chango, you’re cured. Well, that’s the way it often seems.
Yes, there’s no doubt that a strong belief in yourself in any context is going to, in many cases, be the difference between...
Many investors, professional and otherwise, believe that market moves can be predicted and that making frequent moves in and out of markets and investments will lead to greater returns. However, the data tells a different story, which is that market timing and frequent trading are harmful to your portfolio and will significantly reduce your overall return. Let’s begin by examining market timing.
The data below comes from research done by Terrance Odean, Ph.D., of Cal Berkeley, entitled, “Do Investors Trade Too Much?” Dr Odean discovered that amateur investors performed poorly after they made a trade (Either a buy or a sell, both speculative and non-speculative.) Thus, the stocks they sold did much better than the stocks they bought...
I believe that I can say the following without equivocation… throngs of traders around the planet continue to do the same disastrous things over and over while continuing to expect different results. They are moving stops, chasing trades, doubling down on losers, exiting trades prematurely and just generally digging a major hole in their portfolios that they may never recover from.
The Definition of Insanity
This horrible situation has been accepted as the definition of “insanity”. In other words, by engaging in the same processes and trading mistakes consistently you will remain in that rut; you’ll remain in a trading funk because there is no way that your outcomes will change if you keep doing the same thing. Furthermore, there is...
Many books offering investing advice discuss how investor psychology plays a key role in determining an individual’s success in building and maintaining a strong portfolio. Investors need to be aware of their own personality traits and how those qualities could affect their decision-making process. Successful investors take advantage of their positive traits that lead to advantageous investing decisions, and either control or eliminate negative attitudes that cause bad investment decisions. A bad decision about when to sell a stock can cause a significant loss.
Bad Habits and Big Mistakes
While some bad habits can lead to flawed decisions about buying stocks, other bad habits lead to mistakes in selling or not selling investments. Many...
One of the biggest challenges to our own success can be our own instinctive behavioral biases. In previously discussing behavioral finance, we focused on four common personality types of investors.
Now let's focus on the common behavioral biases that affect our investment decisions.
The concept of behavioral finance helps us recognize our natural biases that lead us to making illogical and often irrational decisions when it comes to investments and finances. A prime example of this is the concept of prospect theory, which is the idea that as humans, our emotional response to perceived losses is different than to that of perceived gains. According to prospect theory, losses for an investor feel twice as painful as gains feel good. Some...
Trading in the financial markets is stimulating, exciting and engrossing. But one can become addicted, just like with actual casino gambling or illegal drugs. Like any severe addiction, this can cost you your job, relationships and, of course, your financial resources. In this article we will consider what causes such addiction, the symptoms and how to break out of the downward spiral. Our focus is on the brain and understanding how its reward systems can literally train you to trade compulsively and dangerously.
German financial psychologist Norman Welz works constantly with these issues, as well as with the people affected, and his input and recommendations are reflected below.
The Temptations of Trading
You can make a lot of money...
Compare the average investor’s returns around the world to the average Wall Street firm’s returns. I think we would all agree that the average Wall Street firm is making the lion’s share of the money, while the average investor hardly ever comes close to achieving their financial goals. Next, think about what the average investor does in the markets; they “buy stock”. Now, think about Wall Street’s primary business; they “sell stock”. Hmm… One group is selling and producing very high returns each year, and the other, who is buying, struggles financially. And, this is happening in a market that typically goes up. Understand that I am not at all suggesting the average investor should stop buying stocks and start selling. What I am...
Have you ever initiated a “revenge” trade? Most traders are well aware of this issue; but some of you may need an explanation.
What is Revenge Trading?
A revenge trade is a reaction to one or more losses. Let’s say that you had a good profit run of a couple of months. Your gains were in the 30% category and you were riding high and frequently breaking out into the trader “happy dance”. Then one morning you were feeling quite full of yourself with an illusion of infallibility. In other words, you felt that due to your string of wins you couldn’t lose. Your confidence had exceeded your competence. This irrational exuberance or trader’s euphoria clouded your vision and diffused your focus. Just then the price action inched toward...
Making investments can be a fun way to pass the time on a rainy day, but it can just as quickly destroy one's livelihood. Financial markets are cold and unfeeling; they do not forgive easily and are not to be trifled with. The line between "hobby" and "addiction" is a thin one. Compulsive trading will ratchet up your transaction costs, stress level and time spent away from the important things in life.
An Online Brokerage Account
Prior to the advent of the online brokerage, prospective investors had to go through financial intermediaries with access to stock exchanges, otherwise known as brokerage firms. The process, being arduous and costly, was a textbook opportunity for middlemen to step in and lower the transaction costs. In 1969...
There are many characteristics and skills required by traders in order for them to be successful in the financial markets. The ability to understand the inner workings of a company, its fundamentals and the ability to determine the direction of the trend are a few of the key traits needed, but not one of these is as important as the ability to contain emotions and maintain discipline.
Trading Psychology
The psychological aspect of trading is extremely important, and the reason for that is fairly simple: A trader is often darting in and out of stocks on short notice, and is forced to make quick decisions. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so that they stick with...
Your trading has a lot of nuances; those small or seemingly insignificant behaviors that in the final analysis make big differences. Consider the documentation process. Firstly, let’s acknowledge that it is critical to measure and keep a scorecard for your trades. If you are not measuring and memorializing your trades you’ve got some bigger issues; but if you are tracking your mechanical and internal data, then this missive is for you. Yes, recording your process is a critical cog to successful planning and follow-through; and you must consider many questions using the concept of appreciate inquiry to effect this progression. The topic of these questions revolve around the plan analysis, time frames, indicators, moving averages...
With the 2016 Presidential election just months away, the question often asked is: "How will the upcoming election affect the financial markets?" It's a fair and understandable question.
Elections generate world wide attention in the major economies around the world. There is no exception when considering the world's largest economy, the United States. The country will choose a new president in November and usher in a new era of the Free World. Such an event is significant to financial markets and to illustrate the point, one doesn't need to look very far. Many economists study such events for patterns and nuances trying to determine if there is a predictable relationship between elections and financial markets.
It may surprise you to...
When volume is high, those traders unlucky enough to be losing money in their positions feel the sharp sting of their losses. In order to alleviate the pain, these traders quickly close their positions (at a loss). As losers exit the market, a trend based on high volume is likely to be short lived. But a trend based on moderate volume can last an extremely long time since small losses can accumulate over time into what may become very large losses. The longest trends are probably driven by markets either going nowhere, changing moderately or even moving both up and down day after day, forming only a gradual trend, which is apparent when viewed in retrospect.
But there's still more to the volume story that pertains to market psychology...
Introduction
Many traders think that to make consistent profits in the markets, all you need is a holy grail. From my experience, a trading methodology or system is only one of the ingredients of success. The advancement of technology blinds us into thinking that all we need to be successful is state-of-the-art kit and the latest software. After all, banks fit into this category and they tend to do pretty well. However, technical wizardry is only of value if you know what to do with it. Does Warren Buffett rely on the latest technology to make his investments, or does he put his faith and his money into time tested principles of yesteryear? Modern technology is a useful tool for many traders, but to ensure it’s used wisely and to full...
Psychopaths are people who don’t care about social rules and the media has made well known for committing awful crimes. Whilst this is true, it is also the case that many successful businessmen, lawyers, politicians and also traders share the same characteristics.
Of course successful people don’t usually commit crimes but they use the same skills when they deal with some problems in a work environment. For example, they focus on their goal, don’t care what other people think about them and do everything they can to achieve their goal.
Oxford University psychologist, Kevin Dutton explored the similarities between psychopaths and successful people and discovered that many, if not all, successful traders share psychopathic...
Your brain is the most awesome mechanism in the Universe … as we know it. Babies, both pre- and post-natal are metaphorical sponges of data and information. Also, brains have the ability to adapt to disease and injury by having one part of the brain take over the functions of another part of the brain that has been compromised; for example disabling injuries to the speech centers of the left brain can be “learned” by the right brain as a compensatory measure. Additionally, as late as about 30 – 40 years ago it was thought that once brain cells were lost or destroyed through any number of ways, not the least of which being alcohol intoxication, the conventional wisdom was that you would not and could not recover, that brain cells once...
OK…So, you’re in a trade and you hear a loud voice that sounds suspiciously like your mother say, “… No, don’t do that, you’ll lose!” But, even though the voice resonates in your head, this is in fact the only place that it can be heard; because it’s coming from you. Thoughts are part and parcel to the trading process. There are mechanical thoughts, for example: “…This zone is too tight so let me check the level on another time frame.” These thoughts have to do with the mechanics of your trade, as in your plan, rationale, set-ups, rules, target and stops; to name a few. There are also internal thoughts, for example: “I always screw up with these supply zones and it probably won’t be any different now.” Of course, internal thoughts are...
Traders will find it next to impossible to work their way through the typical book on trading without being exposed to the subject of "controlling one's emotions". Indeed, the conventional wisdom demands that controlling one's emotions is absolutely essential to trading success. And, technically, that's true. If one has them. But, contrary to conventional wisdom, emotions are not an unavoidable component to trading (granted, those who insist that emotions are unavoidable consider the selection of a shirt or of sunny-side up vs over easy to be emotional decisions, but this is about neurotic behavior: addictive, compulsive, illogical, irrational, obsessive, self-defeating, self-damaging behavior; revenge trading is neurotic behavior...
In this article I will give you methods which will increase your trading discipline most of which are based on scientific discoveries which are unknown for most traders. This should enhance your ability to gain a trading edge over others competing in the same markets.
1. Find a strategy and create a trading plan
Many traders just use some indicators and price action formations and make random decisions based on that. But it doesn’t work and when you don’t have a plan then first you need to define how to trade. It is proven that you have some resources of energy which you use on making decisions. But there is little sense in using this energy every day on defining “how to trade”. You should use it only once (when you choose your...
"All economic movements, by their very nature, are motivated by crowd psychology." -- Financier Bernard Baruch
At times, a market will appear to move based on fundamentals, while at other times, the same market will move in the opposite direction on the same news! The key to understanding the highest probability move is to understand the psychology associated with that market. You must also understand that markets move in trends but reverse at extreme levels of bullishness (tops) and bearishness (bottoms). This characteristic is best explained through the words of the English economist Arthur C. Pigou. He explained that "an error of optimism tends to create a certain measure of psychological interdependence until it leads to a crisis...
One of the main problems new traders have when they begin their journey down the education path to self-empowerment is that they skip the most important first step, how to properly “think” money and markets. Many of my articles deal with thinking about the trading side of the equation; everything from the mechanics of when to buy and sell to understanding the psychology of you and the person on the other side of your trade. Today, let’s take a walk through the history of one of the best trending markets in the world, Forex. It is an important first step in properly thinking the Forex markets, which is key when attaining an edge in anything we do. The more prepared we are, the more we understand, the better the results.
Strong economies...
Psychology: Most traders neglect one of the most important parts of trading: The psychology of the game. How mentally prepared are you for the trials and tribulations that are important in the trading activity?
After a few trading experiences it becomes obvious how important your mental approach (psychology) is to the market. In fact, your trading success, the difference between winning and losing, depends upon your mental attitude. It is the main factor, before anything else, that determines whether you win or lose.
It is obvious how much training is necessary to learn the technical aspects of trading. Hundreds of books and courses have been written on every tiny aspect of trading, each with something worthwhile. The internet...
Movement in price is based simply on supply, demand and the human behavior relationship that exists in any market. And, clearly, opportunity always arises when this equation is out of balance. Whether trading the S&P, buying a house, a car or a Michael Jordan rookie card, how we make money buying and selling never changes.
My Path
Let me begin by saying that I have never read a trading book from cover to cover. Also, I started my career on the floor of the Chicago Mercantile Exchange (CME), not looking at a screen-based chart for the first year. On top of that, from an early age I was always taught not to accept something as true just because someone says so. What I do is apply simple logic to everything that presents a challenge, and...
Over the years my views, comments and evidence against technical analysis have been called controversial by many on the retail side of the business (although most professionals I talk to view them as perfectly reasonable). So, I thought, if I’m to be viewed as controversial I might as well go the whole way and I’m sure that this article will really get the technical analysts reaching for their quills!
I am a big fan of Derren Brown, who for those of you who don’t know, demonstrates psychic readings, hypnosis, conversing with passed loved ones as a medium and other similar skills, yet he does not believe that these techniques have any validity. What he shows is that those who perform these activities do not posses supernatural or...