In the last few years I've seen a lot of discussion centered around the psychology of trading. A quick perspective. 1. The discussion of the psychological aspect to trading is rarely written by someone with any experience in that medical field. They have all kinds of opinions on how this or that makes you feel but no clinical research (basis). 2. Most of the research I've read on Behavioral Finance tends to address the different biases we inherently have and how they affect our decision making, research, testing, etc.. I almost never see conversations surrounding this. What I mostly see are threads that describe how to keep your emotions in check while trading... 3. If you want to keep your emotions in check while trading, get your risk profile in check. This often means having realistic goals in place. Here's a pretty simple rule of thumb; If you're excited with your returns, you're going to be depressed with your eventual losses Dial the leverage down, reduce your trading frequency and come to terms with the honest potentials of trading and adjust your âhopes and dreamsâ around it in an appropriate way. With the exception of those black-swan events, trading doesn't have to be, and shouldn't be an emotional roller coaster. If it is, it's not likely something you're going to be able to endure for very long, and it's all about the long-term gains.
but in trading there are many behaviors that we do but we don't have any mindfulness in these. as long as this behaviors make our profit greater LOL
Nicely summarized - Question on 1 & 2: Can you post any links to research? (I will google on my own when I have time). Bias? - Does this relate to personality types? Addictive behaviors? 3 is a gem - For me this has been a lesson learned only after repeated roller coaster rides. Emotion clouds perception which restrains action. The challenge of emotion seems to always be framed in terms of ego. I think you point here is that it can be much more than just that. Learning to see trading as a business is a big differentiating factor. Great Post
Hey TradeWrecker, Very nice observations and you're correct. I think the main reason why we tend to see threads about how to keep emotions in check while trading is that most traders try to keep it simple as possible even though such may be counter-productive. In contrast, if they had to sit down and plan realistic trading goals, analyze the impact of their inherent bias...it's not easy for most to sit down to closely examine how they interact with the markets let alone sit down to develop a plan involving how to manage that interaction with the markets. The thing I find amusing or consider to be odd is that there are known folks here at Elitetrader.com or at other forums that have the belief that "psychology of trading" or "behavior finance" is voodoo or mumble jumbo. Yet, if you read their statements elsewhere at the forum...you can easily see the "emotions"and/or "psychological profile" in their own interaction with the markets when they talk about the markets. Simply, some traders want to deal with it while others pretend it's not there or not important. Besides, most forum discussions deals with trade signals or trades as realities instead of having a more well-rounded approach that must include the psychological aspects of trading and the markets. Mark
Some links googled http://en.wikipedia.org/wiki/Behavioral_economics http://www.behaviouralfinance.net/
Pardon me for being blunt, but what you write is total BS. If you first don't control your emotions, they will override any sane realistic goals that you set. Trading is engineered from within, faulty belief system, self-sabatoage will kill all your best laid plans.
(After skimming the links a bit ) Behaviorial Economics / Finance seems more about trying to understand groups. As individuals at points of market decision, generalizations don't help much. Out of control emotions usually have negative consequences. For 20+ years I operated engineering systems in real time under significantly variable conditions (i.e. ships power plants at sea). For many novice engineers the challenge of situational assessment / response is a source of significant stress. I know more than a few who washed out because they couldn't learn to assess or handle the stresses involved. The ability to identify key information across a range of processes to identify the correct response is easy once you understand the environment / systems. Wrong decisions can have significant negative consequences. This is the source of stress. In my view this same skillset (underpressure decision making) is key to survival and prospering as a market trader. Almost every support out there is based around taking decision away from the individual for a number of reasons. (Many of which make sense). Physical processes don't have emotions. The overlay of participant emotion on market processes makes trading one of the most difficult undertakings out there. I like the OP's points, but in the end I also have to strongly agree with bearmountains comments. Let's see where this thread goes.
hmm, interesting no further bites on this thread. Maybe it was my ignoramus total BS comment. As Ed Seykota says, psychology is the driver and a trading plan (risk profile) is the road map. I believe Behavioral Finance has direct applications in the area of consumer finance, advertising, banking etc but in trading, imo it is fools gold.
Relating behavior to markets is very interesting. Being specific emerges from looking at about 6 things. The bottomline is that any person can use his emotions as "tells" regarding his strengths and/or weaknesses. When a person is less than optimally skilled and knowledgeable to partner with a market, his performance is less than optimal. Personal emotions are very accurate for providing "tells" at just when these failures are ensuing. te best emotional tells are constantly being explained as "problems" in ET. As you read, an irrational process is suggested as the solution. Baron has suggested I use more dignified ways to address some people who are less than proficient. Good idea from him to me. The literature is replete on whther BF is or is not BS. What is penultimate is the bottomlines. If emotions come into the picture for anyone at ant time and the emotions are warning relateed to survival (fear, anxiety and anger) the person is specifically being told at that time that something is amiss. Specifically a person is being told to flee; he is in danger. The solution BF suggests is NOT "controlling emotions". The solution is to "make reasonable changes in technique". Most anomalies can be eliminated in EMH by "making changes in technique". My post is a death nell for a lot of people. Sorry about that. When BF examine overreaction and underreaction, it is determined that they balance out quite well. This is just a statement that the participating community is screwed in two ways and both group are not going to do very well. No one is in both groups, it turns out. The generalization I like best is about the TWO MOST SIGNIFICANT PRINCIPLES I DEAL WITH. Here are twp more failure components where people's emotions are providing "flee" instructions to the individual. 1. pre event continuation of pre event abnormalities, 2. balance with post event reversals. I suppose this is a behavioral measure of the fact that people are lagging traders for the most part; meaning they are doing the wrong thing and doing it at the wrong time as well. reminder, your emotions are signalling to you to "flee" this circumstance. Lastly is the major BF correlation. People above all are irrational in a very consistent and correlated way. On ET this is charcterized often as empathetic posts among those having the same emotional warnings. The good news, BF has determined smart investors take advantage in EMH by exploiting mispricing and irrational investors. So the best contribution that can be made from BF results is that any trader at any skill and knowledge level have an emotional guide. If someone learning wants to take advantage of his spent time, he can keep a journal. The prompt for making an entry is clear from BF. when you get emotional "flee signals", that is the time to log in your journal. Having the logging you know just when and where you are in trouble with your methodology. BF instructs you to do one effort: MAKE REASONABLE CHANGES IN YOUR TECHNIQUE. Thus the above outlines how iterative refinement works in the learning process of learning to trade. As you make methodology improvements, you get graded on these improvements. You figure out something and you apply it. You get an emotional response to this iterative improvement in your trading. Not to be unkind or anything, I notice a person who is contributing to a person who is an ininformed OP somewhere else. This contributor is criticised and his critics are staightened out by historical references. I notice the money maker is also not winning on all trades. I also notice he watches the market all day long and is almost never in the market more than three times and for only a few minutes each time. He trades forabout 45 minutes over 6 1/2 hours. The OP is losing money and telling everyone no one can make money. Both have emotional signals coming to them, neither leeps logs or journals although the successful guy posts in ES P&L daily. Here is the thing,, trading P&L's have to be plotted on semilog graphs. Suing a journal to log emotional signals nd then make reasonable changes in technique is how to shift the P&L curve most frequently going point to point. BF states the errors made by people. BF finance states how to detect where and what methodological mistakes occur. BF states how to itieratively refine a methodology. Personal note: in my trading I use two principles: Continuation and reversals. (see Dodd/Granville). BF confirms thee are cardinal circumstances for when the EMH is underfire by poor traders. BF says these are the places where smart traders exploit irrational traders. An exit is an identity with an entry. In five stages, atrader can examine the end of continuation, the beginning of change, optiimum change, the end of change and the beginning of continuation. This casan keep atrader IN the market ALL the time and ON THE CORRECT SIDE OF THE MARKET ALL THE TIME. Whatare the emotions accociated with this? They are comfort, support and confidence. Thus if I feel even a tinge of the "flee" emotions, look immediately to see which of the five stages I am in regarding a reversal at optimum. There is always a consideration at that time of looking at my smart trader leading indicator, the DOM, my OTR charts (YM and ES) and the T&S with particular interest to BBid, BAsk and block size rate of change. If you pilot on a regular basis, you grab some scot's towels and scotch tape. you cover a lot of the panle indicators. you fly without seeing at them, but you DO check out your supposed dependence upon them whic detracts you form perception of flying conditions. some times an Eagle hangs out around a wingtip. you know sooner or later he is going to come over a bash the canopy and then take fly to circle higher and higher above your climbing the same thermal. He's laughing at you too. Find out why you can't see the thermals on your indicator panel. Find out how to fly with egles. Get BF straight to begin with. Sorry I am being so unpleasant to those who are mistaken.