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Psychology of Trading
drrc
post Posted: Jun 20 2009, 10:43 PM
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http://business.smh.com.au/business/why-yo...90619-cr5u.html


Said 'Thanks' for this post: Twobees  
 
Monteverdi
post Posted: Apr 15 2008, 08:02 PM
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In reply to: drrc on Tuesday 15/04/08 07:48pm


Trading while drunk is equally effective.

Regards,
Monteverdi.



--------------------
I could be wrong, of course.
 
drrc
post Posted: Apr 15 2008, 07:48 PM
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more like the biology of trading:

Testosterone key for trading success
By Jean-Louis Santini in Washington
April 15, 2008 09:21am
Article from: Agence France-Presse

THE most successful stock traders have higher levels of the male hormone testosterone, providing a dramatic boost to their confidence and drive, a British study says.

Researchers at Cambridge University found that testosterone also appeared to increase traders' appetite for risk-taking, a quality likely to enhance the performance of those who earn a living in the high-stakes world of the stock market.

"Market traders, like some other occupations (such as air traffic controllers), work under extreme pressure and the consequences of the rapid decisions they have to make can have profound consequences for them, and for the market as a whole," said Professor Joe Herbert of the Cambridge Centre for Brain Repair .

The researchers said success fuelled by testosterone fed itself, in part because it led to the production of even more testosterone.

In male athletes, for example, testosterone levels rose before competition and rose further in a winning athlete, but decreased in a losing one.

The phenomenon, called the winner effect, could increase confidence and risk-taking and improve chances of winning yet again, in a positive feedback loop.

"Hormones may also be important for determining how well an individual trader performs in the highly stressful and competitive world of the market. We are now exploring this in much more detail," the researchers wrote.

The study followed 17 male traders in the City of London for eight consecutive business days.

To measure the traders' hormones, they took saliva samples twice a day at 11am and 4pm, times that fell before and after the bulk of the day's trading.

At each sampling time, traders recorded the traders' profits and losses for the day.

They found that daily testosterone levels were significantly higher on days when traders had a higher than usual daily average.

On the down side, however, elevated testosterone might explain why stock traders sometimes made irrational choices that led to bubbles and crashes.

Researchers speculated that if testosterone levels continued to rise or became chronically elevated, it could prompt traders to engage in reckless risk-taking and undermine their profitability.

They said earlier studies had linked administered testosterone to impulsivity, sensation-seeking and harmful risk-taking.

John Coates, lead author of the study said: "If testosterone reaches physiological limits, as it might during a market bubble, it can turn risk-taking into a form of addiction."

Dr Coates, himself a former trader, said: "At times like these, economics has to consider the physiology of investors, not just their rationality."

http://www.news.com.au/business/story/0,23...4-31037,00.html


 
miyagi
post Posted: Mar 22 2007, 02:33 PM
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Excellent reading the threads from H1 & L1 re Trading.

Recently joined Sharescene although have been a FT trader for 3 years now.

Best advice I have taken on board to success is from Christopher Tate's "The Art of Trading". re: Stop Losses....."It doesn't matter how good your trading system is, if you do not employ Stops you will not last very long".


 
Livas1
post Posted: Mar 22 2007, 01:52 PM
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Pinched this from another forum, but fits perfectly here:

QUOTE
From Market Wizards.

Always understand the risk/reward of the trade as it now stands, not as it existed when you put the position on. Some people say, "I was only playing with the market's money." That's the most ridiculous thing I ever heard.
-Bill Lipschutz

You don’t have to get in or out of a position all at once. Avoid the temptation of wanting to be completely right.
-Jack Schwager

I basically learned that you must get out of your losses immediately. It's not merely a matter of how much you can afford to risk on a given trade, but you also have to consider how many potential future winners you might miss because of the effect of the larger loss on your mental attitude and trading size.
-Randy McKay

I take the point of view that missing an important trade is a much more serious error than making a bad trade.
-William Eckhardt

Large profits are even more insidious than large losses in terms of emotional destabilization. I think it's important not to be emotionally attached to large profits. I've certainly made some of my worst investments after long periods of winning.
-William Eckhardt

Investing is a negative game emotionally. If you’re playing for the emotional satisfaction, you're bound to lose, because what feels good is often the wrong thing to do. When all the criteria are in balance, do the thing you least want to do.
-William Eckhardt

You should spend no time at all thinking about those roseate scenarios in which the market goes your way, since in those situations, there's nothing more for you to do. Focus instead on those things you want least to happen and on what your response should be.
-William Eckhardt

It’s important to distinguish between respect for the market and fear of the market. While it's essential to respect the market to assure preservation of capital, you can't win if you're fearful of losing. Fear will keep you from making correct decisions.
-Howard Seidler

Make sure you have an edge. Know what your edge is. And have rigid risk control rules.
-Monroe Trout

I focus my analysis on seeking to identify the factors that are strongly correlated to a stock’s price movement as opposed to looking at all the fundamentals. Frankly, many analysts still don't know what makes their particular stocks go up and down.
-Stanley Druckenmiller

It’s not whether you’re right or wrong that's important, but how much money you make when you’re right and how much money you lose when you’re wrong.
-Stanley Druckenmiller

Soros is the best loss taker I've ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn't work, he's confident enough about his ability to win on other trades. There are a lot of shoes on the shelf; wear only the ones that fit. If you're extremely confident, taking a loss doesn't bother you.
-Stanley Druckenmiller

If there's a large move on significant news, either favorable or unfavorable, the stock will usually continue to move in that direction.
-Richard Driehaus

The critical ingredient is a maverick mind. Focus on trading vehicles, strategies and time horizons that suit your personality. In a nutshell, it all comes down to: Do your own thing (independence); and do the right thing (discipline).
-Gil Blake

The ability to change one's mind is probably a key characteristic of the successful investor. Dogmatic and rigid personalities rarely, if ever, succeed in the markets. The markets are a dynamic process, and sustained investment success requires the ability to modify and even change strategies as markets evolve.
-Jack Schwager

To use a life insurance analogy, most people who become involved in the stock market don't know the difference between a 20 year old and an 80 year old. Investing in the market without knowing what stage it is in is like selling life insurance to 20 year olds and 80 year olds at the same premium.
-Victor Sperandeo

Once a price move exceeds its median historical age, any method you use to analyze the market, whether it be fundamental or technical, is likely to be far more accurate. For example, if a chartist interprets a particular pattern as a top formation, but the market is only up 10% from the last low, the odds are high that the projection will be incorrect. However, if the market is up 25% to 30%, then the same type of formation should be given a great deal more weight.
-Victor Sperandeo

The key to investment success is emotional discipline. Making money has nothing to do with intelligence. To be a successful investor, you have to be able to admit mistakes. I trained a guy to trade who had a 188 IQ. He was on “Jeopardy” once and answered every question correctly. That same person never made a dime in trading during 5 years!
-Victor Sperandeo

Most people lose money because of lack of emotional discipline
-the ability to keep their emotions removed from investment decisions. Dieting provides an apt analogy. Most people have the necessary knowledge to lose weight—that is they know that in order to lose weight you have to exercise and cut your intake of fats. However, despite this widespread knowledge, the vast majority of people who attempt to lose weight are unsuccessful. Why? Because they lack the emotional discipline.
-Victor Sperandeo

In my opinion, the greatest misconception about the market is the idea that if you buy and hold stocks for long periods of time, you'll always make money. Let me give you some specific examples. Anyone who bought the stock market at any time between the 1896 low and the 1932 low would have lost money. In other words, there's a 36 year period in which a buy-and-hold strategy would have lost money. As a more modern example, anyone who bought the market at any time between the 1962 low and the 1974 low would have lost money.
-Victor Sperandeo

Perhaps my number one rule is: Don't try to make a profit on a bad investment, just try to find the best place to get out.
-Linda Bradford Raschke

I believe my most important skill is an ability to perceive patterns in the market. I think this aptitude for pattern recognition is probably related to my heavy involvement with music.
-Linda Bradford Raschke

Only by acting and thinking independently can an investor hope to know when an investment isn't working out. If you ever find yourself tempted to seek out someone else's opinion on an investment, that's usually a sure sign that you should get out of your position.
-Linda Bradford Raschke

You can't listen to the news. You have to go with the facts. You need to use a logical approach and have the discipline to apply it. You must be able to control your emotions.
-Blair Hull

The most surprising thing I have discovered is how ready people are to fool themselves. People's perceptions of reality and true reality are not the same thing.
-Robert Krausz




--------------------
LIVE BIG
Embrace the moment!
Life is a journey not a destination
The only thing that moves markets is surprise...
"The wisest men follow their own direction" - Euripides
People sell stocks for many reasons, but they buy for only one...
 
peter $
post Posted: Mar 7 2007, 06:08 PM
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In reply to: happy2 on Thursday 14/12/06 04:29pm

Hello happy2

I just joined this group hoping to get some basic knowledge about trading.
Bought some anz shares when they crashed because of china, I thought can,t go wrong here, shares allready firmed Iam in it for ther long haul,cause can,t take to many risks due to age.
What is your opinion on bank shares.

 


happy2
post Posted: Dec 14 2006, 04:29 PM
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In reply to: SixtyTwo on Tuesday 12/12/06 09:43am

QUOTE
I've found that trading is really more about psychological things that I first realised. 


That's the funny thing about the financial world. It is not really about the bottom line at all. It is more about personality and psychology.

When I was a teenager, I was told that psychology was wisdom and most people dismiss it, so what does that make them. Naturally, at the time I disagreed. So what did that make me? All I can say is experience has been a great tutor.



--------------------
Have a good one

Happy 2





"Knowledge is a process of piling up facts; wisdom lies in their simplification".

Caveat Emptor: the above comments are merely opinion, not advice.
 
SixtyTwo
post Posted: Dec 12 2006, 08:43 AM
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Posts: 127


QUOTE
You will find that every time you are faced with a similar situation you will react to it with an ingrained aversion


so true happy ! I can think of numerous times when I've looked at trades and thought.. remember what happened last time.... and that has cast doubt about the trade.

Really enjoy reading your posts !! I've found that trading is really more about psychological things that I first realised.

 
happy2
post Posted: Dec 11 2006, 09:16 PM
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One of the keys to understanding market behaviour is understanding when you, yourself, have a memory of being burnt by a trade. You will find that every time you are faced with a similar situation you will react to it with an ingrained aversion.

You may not recall the reason immediately you are disinclined to stay in a trade or to enter a trade at a certain level, but a little reflection and you will probably recall a bad experience.

In effect this is how the sharemarket basically functions. Many people are reacting to previous experiences and as a result support and resistance levels are formed.

I got burnt by not heeding a particular pattern which has a higher probability of success than failure of around 55%-60%. As a consequence of this, I have an aversion to going against this pattern, even when probabilities are in my favour.

When a significant of market participants have the same aversion to a particular pattern forming then we have a resistance or support line.

There are many other reasons why people might or might not like a stock. If a large enough number of participants all share those reasons when the market or stock is at a certain level or price then you can expect a reaction that will cause the a reversal of trend.

When you notice your own emotive responses indicating an aversion to a particular price level or the formation of particular patterns on the charts, then you are able to get a better insight to maket behaviour.



--------------------
Have a good one

Happy 2





"Knowledge is a process of piling up facts; wisdom lies in their simplification".

Caveat Emptor: the above comments are merely opinion, not advice.
 
happy2
post Posted: Dec 7 2006, 10:31 PM
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One of the problems traders face is knowing when to exit a trade and then when having done so remonstrating over the fact they could have made some more profit had they stayed in the trade a little longer.

The chart below shows a trade on the FTSE where I exited slightly before my target. My target was 6107. Anyhow I exited at 6110. This produced gave me 2pts less profit.

When I looked at the chart a little later and saw that had I stayed in the trade longer I would have got my target. When the market does not move down quick enough, I don't like staying in the trade, so I get out and take profit.

It can be argued that it is better to stay in a trade and wait until the target is reached because optimal profit is not achieved and when trading Cfd's, as is the case here, this is an expensive trade. The reason it is expensive is the entry was at 1119 and the exit was at 1110 for only a 7pt profit. In this case, 22.2% of the profit was handed over to the marketmaker. Just to make it easy, say, each point was worth $100, then the marketmaker received $222 for the trade. This seems expensive.

Let us look at this another way. Just suppose this trade was worth $100 for each point. What you would be buying is equivalent to $500,000 worth of stock, leverage on a 1% margin for which you also recieve interest on ($500,000) if you hold this on a daily basis.

If you were to buy $500,000 worth of BHP, you would expect to pay around .1% in brokerage, or maybe less, depending on your broker. At .1% brokerage is $500. This is only on the buy, the sell will require additional brokerage.

When seen in this light Cfds are value trades. Of course the longer the trade is held and the greater the profit the less the brokerage would become.

With the knowledge that staying in the trade and my profits growing, I will be paying less brokerage and making more money, why would I cut my trade?

Well this is where the psychological component comes into play. I have already made a profit. I am aware of my brokerage. Now if the market rebounds, my brokerage will go up and my profit that I will lose in not taking the trade at this point of time can be added to this. The risk/reward component of this trade has to be be taken into account.

I have to ask myself, what am I willing to risk to make 3pts more? Furthermore, am I willing to expend any more anxiousness on this trade? These are questions that have to be asked during every trade.

The chart below tells the story. I sold out cheaply because I paid a higher percentage in brokerage and missed out on an extra 3pts profit.
Attached File(s)
Attached File  UK100.png ( 23.6K ) Number of downloads: 11

 




--------------------
Have a good one

Happy 2





"Knowledge is a process of piling up facts; wisdom lies in their simplification".

Caveat Emptor: the above comments are merely opinion, not advice.
 
 


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