Archive for the trader psychology Category

Quote from “The Psychology Of Trading” | Steenbarger

Posted in book recommendation, education, trader psychology on 2011-06-25 by Strategesis

From Amazon.com (pg 48):

Many traders attempt to predict the market and look for prices to follow. Great traders understand the market’s language and follow along…you can best apprehend the market’s messages by attending to your own volatility.

There is a myth among beginning…traders that consummate professionals check their emotions at the door and operate under strict logic and reason. Is it possible to shut off your feelings in such a manner? Would this even be desirable?

…A number of studies have investigated individuals with brain lesions who display what would seem to be a trader’s dream: Their reasoning mind remains intact, even as their capacity for feeling is blunted. The result is not a superrational, intelligent being, such as Mr. Spock from the old Star Trek series. …

Why is this? It appears that feelings are one’s guide to the value and the meaning of events. …

…the successful trader feels the markets, but does not become lost in those feelings. Emotions are information, no less than a wide-range bar on a chart. Indeed, a strong emotion can be thought of as a personal volatility breakout. Just as an experienced trader becomes exquisitely sensitive to the patterns emerging from the tape, traders who know themselves will attend to their own patterns. ….the real market you’re trading is the market called Self.

Don’t ignore your emotions. Observe them. Use them as trading filters and trading signals:

The more giddy you are with success, the more likely you are to do something wrong—perhaps an ill-adivised entry, or perhaps staying in a trade too long.

The more you feel dejected and unworthy, the more likely you are to miss a trade you should have taken.

The more you disbelieve what you see the market doing, the more likely you are to trade counter-trend when you shouldn’t, or stay in a trade when you should immediately exit at the market, or to fail to enter a trade you should be entering.

So be aware of your emotions, have trading rules that determine what you will do in response to those emotions, and then do what the rules say, not what your emotions would have you do.

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Book Recommendation: “The Psychology of Trading” by Brett Steenbarger

Posted in book recommendation, trader psychology on 2011-06-18 by Strategesis

From Amazon.com:

Behavior is patterned. Beginning with this premise, noted clinical psychologist and active trader Dr. Brett Steenbarger opens the therapist’s door, demonstrating how traders can identify, interrupt, and change the problem patterns that interfere with successful trading. In The Psychology of Trading, Dr. Steenbarger draws upon real-life case studies and offers hands-on techniques for emotional change to assist traders in becoming their own therapists. Themes that set The Psychology of Trading apart include:

  • “Trading from the couch” by utilizing emotions as valuable market data
  • Identifying and building solution patterns that capture hidden trading expertise
  • Techniques for assessing and trading against the emotions of market participants
  • Methods for building focus and concentration for more automatic and trustworthy trading decisions
  • Creating shifts in states of consciousness to rapidly exit anxious, impulsive, depressed, and guilty frames of mind

In an engaging manner that provides practical solutions to real trading problems, Dr. Steenbarger walks you through the most common cognitive and emotional tendencies that distort efforts at identifying and trading market patterns. He then describes specific skills derived from years of brief therapy practice to help you become an effective observer of these tendencies and gain control over them. By blending state-of-the-art research from psychology and cognitive neuroscience with detailed case studies, The Psychology of Trading provides you with the intellectual and emotional ammunition to face yourself and transform your approach to risk and reward.

Overcoming Cognitive Biases in Trading

Posted in education, trader psychology on 2011-04-02 by Strategesis

From Trader Feed:

A cardinal concept from behavioral finance is that we do not process information about risk, reward, and uncertainty in a purely objective manner.

A key idea in psychology is that you are less likely to fall prey to information-processing biases if you are fully aware of those biases.

Continued

Deep Practice

Posted in education, trader psychology on 2011-02-21 by Strategesis

Deep Practice is a proces of acquiring “guru,” “grandmaster” or “best of breed” skill or talent. A synopsis of the process is as follows:

  1. Select a goal
  2. Attempt to achieve the goal
  3. Analyze your performance, focusing especially on whatever you did wrong or imperfectly, and identifying the necessary changes to eliminate the problems or improve the performance
  4. Repeat as long as you can identify problems of deficiencies in your performance

References:

The 7 Deadly Sins of Trading — And How To Overcome Them

Posted in education, trader psychology on 2011-01-29 by Strategesis

From E-MiniWatch.com:

Remember the 1995 movie Se7en with Brad Pitt, Morgan Freeman and Gwyneth Paltrow? A serial killer is on the loose, picking his victims because they represent the worst of human behavior – the Seven Deadly Sins. There are murders to punish Greed, Gluttony, Sloth, Lust, Pride and finally Envy and Wrath in the final scene.

Well, when it comes to trading, I’ve got my own list of worst trading behavior – my own 7 Deadly Sins of Trading if you like:

1. Trying to pick tops or bottoms (“Billy, Don’t Be a Hero” playing in my head)
2. My gut says we’re going to break out (Professionals love fading breakouts)
3. No confirmation from my Volume indicators (wait for everything to line up)
4. Hesitating on entry (typically when the trade is “hard” to take)
5. Canceling my stop (OMG, the biggest Sin of them all!)
6. Moving my profit target (got to let the winners run)
7. Letting a profitable trade turn into a loser (luckily, a rarity)

Continued

Random Reinforcement: Why Most Traders Fail

Posted in education, trader psychology on 2011-01-01 by Strategesis

From Investopedia:

Random Reinforcement: Using arbitrary events to qualify (or disqualify) a hypothesis or idea; attributing skill or lack of skill to an outcome which is unsystematic in nature; finding support for positive or negative behaviors from outcomes which are inconsistent in nature – like the financial markets.

Continued