Cognitive distortions and impact of psychology on making decisions

Hello,
Here I will publish all my thoughts about influences of psychology on trading.

 

And how does that make you feel?

 

Anchoring Bias is a biggie.

your entry price weighs too heavy on decision making

 

Once, Fred, saw how 3 days before , price quickly fallen down after piercing local high (the effect of “bright” information, and rejection due unrepresented sample). He decided to open short position because expected the same movement (illusion of knowledge). In addition his friend is going to do the same (herd instinct). After price reached the new high it goes on to grow up without rebounds.

Fred decided that price have to return (fighting with market). He canceled Stop-loss order (Loss aversion). ” What are you gonna to do? ” asked friend of Fred. “I’m still short, no problem, I saw such situations thousand times, when price break the top it must return (Excessive optimism, Overconfidence, Lack of education) – say Fred. Read more (http://volumestrading.com/how-to-avoid-mistakes-in-trading/)

 

Please give Fred's friend a name, too. If Fred deserves a name, so does his friend. I was once a 'friend", and it was humiliating to be described as "Joe's friend" and it made me resolve to never settle for, or be a friend again.

I'm still right much of unfriendly. And friendless, too.

 

Do you want to talk about it?

 

Fred's friend is very hidden, he doesn't want to be recognized

 

Is it only a cognitive distortion when you are wrong? What do you call it when you are right?

Sure, you can know your heuristics and biases but where does that leave you? You can never know all the information which means the next moment in the market is still going to be random.

 

Absolutely correct. We can't predict price actions, because it might be random. But knowledge of randomness of price behavior might give you the way to think in probability are, but not in a field "I'm right/I'm wrong". There are no "Wrong" or "Right" in trading. You can be right following your good signals and having statistical advantages and having losses or be wrong trading against your systems and having profit.

If you are able to find out some your typical biases, you can better work with them. And in case of making decision you might think like: I know that I usually hurry with opening position (regretting about missing possibilities), so I will wait for confirmation or I will do it after some time.

 

Any recommended books on Behaviour Finance or Cognitive Decision Making Process ?

wrbtrader