cassiopeia
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I have just been reading an article in the Financial Times about crowd psychology. It’s the usual stuff about people being programmed to do exactly the opposite of what they should do in the stockmarket jungle, such as waiting in hope during a falling market or snatching at profits too quickly in a rising market. If true where have we inherited these traits from? why haven’t they been lost as a consequence of natural selection? and if these poor characteristics apply only to stockmarket decisions why is this so different than in normal life?
Humans are a tribal species, this has served him and his ancestors well through most of evolution. In most circumstances the power of the group is far greater than the sum of it’s parts so there is a tendency to stick together and copy one another. Perhaps the characteristic of panicking and rushing all at once is a natural reaction to confuse the predator, whilst to do nothing is a trait to avoid being seen and conserve energy. If so, these are poor survival instincts for the stockmarket.
We often hear advice such as “be a contrarian” and “the trend is your friend”, surely both of these cannot be correct. To me both these strategies are risky, the first could get you dragged down further, whilst the second often gets on the bandwagon too late. A much better way is to find the turning point just as opinion is beginning to change, although this can be very difficult in practice, so we have to combine this entry procedure with a system which will inherently produce profits by running gains and cutting losses. However, there is still an overwhelming urge to do nothing when confronted with losses and snatch profits when we shouldn’t, it’s those primeval emotions of indecision, fear and greed again.
I think more experienced traders eventually overcome these problems but are confronted with doubts about the validity of their strategy, as suggested in a previous thread. This makes one reluctant to enter the market rather than avoid stops. I think the only protection against this is to either use several strategies or/and employ an overall money management strategy where your exposure is related to your capital and risk.
Humans are a tribal species, this has served him and his ancestors well through most of evolution. In most circumstances the power of the group is far greater than the sum of it’s parts so there is a tendency to stick together and copy one another. Perhaps the characteristic of panicking and rushing all at once is a natural reaction to confuse the predator, whilst to do nothing is a trait to avoid being seen and conserve energy. If so, these are poor survival instincts for the stockmarket.
We often hear advice such as “be a contrarian” and “the trend is your friend”, surely both of these cannot be correct. To me both these strategies are risky, the first could get you dragged down further, whilst the second often gets on the bandwagon too late. A much better way is to find the turning point just as opinion is beginning to change, although this can be very difficult in practice, so we have to combine this entry procedure with a system which will inherently produce profits by running gains and cutting losses. However, there is still an overwhelming urge to do nothing when confronted with losses and snatch profits when we shouldn’t, it’s those primeval emotions of indecision, fear and greed again.
I think more experienced traders eventually overcome these problems but are confronted with doubts about the validity of their strategy, as suggested in a previous thread. This makes one reluctant to enter the market rather than avoid stops. I think the only protection against this is to either use several strategies or/and employ an overall money management strategy where your exposure is related to your capital and risk.