Psychology of Trading

[drrc]

http://business.smh.com.au/business/why-yo...90619-cr5u.html

[Monteverdi]

[drrc]

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]

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]

Pinched this from another forum, but fits perfectly here:

[peter $]

[happy2]

[SixtyTwo]

[happy2]

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.

[happy2]

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)

 UK100.png ( 23.6K ) Number of downloads: 11