I like Daniel Kahneman: ("Thinking Fast and Slow"), Dan Ariely (Predicatbly Irrational), you can read also works of Skinner, Rischard Thaler, Leon Festinger. There are a lot of good scientist in this area.
Psychology: Cognitive biases, heuristics, mental distortions, however you want to brand it, can simply be defined as discretion. Knowing your discretionary biases does not mean you have any control over them. Knowing and doing are two very different things. Example: You have a very clear plan at the start of the day. You look back at the end of the day and wonder why in the hell you did not follow the plan. Ever done that? Of course you have, everyone does. Probabilities: There is no predictive power in statistics. You are completely deluded to think that you have an edge with statistics unless of course, you can model an equation that encapsulates every last piece of information. Which of course is impossible. So then you must ask yourself, if my probabilities are based on statistics that only take into account a percentage of the known information...what good is it? If you don't have all the information yet base decisions on the result of these formulas, arent you simply flipping a coin? The very thought is anathema to a trader. Your comfort derives from the belief that you have control. We like to believe that there is an edge in the psychology of self, combined with a statistical snapshot of historical data but in all reality, they are rabbit holes.
Not aLways. If you know about your weakness, you can use them as advantages. For example: knowing the fact that I became more aggressive when I lose, helps me don’t make any decisions whiting some periods. And it helps to avoid future mistakes which I might do. If the alcoholic accept alcoholism as own weakness he makes 1 step toward to delete this addiction. But if he will think, that he is able to control himself it just illusion of control. People not only often make decisions irrationally when don't know about it, but when know about it. Example: gluttony. Sure that everyone has such experience and not only in trading. But how you can use such information. Plan it's just a plan. Good time managing says that we should fill in only 1/2 or 2/3 of hour dayly routin because ALWAYS will be unpredicatable situations which you can predict. The same situation in trading, if you put very strict plan it will not be done. But if you put some range in your plan or create a few scenarios, (if...then), and will use only scenario which is the closest to the current situation it might be more suitable. If you know that working with plan is much better, but your plan doesn't work, problem not in having any plan but in skills how to create suitable plan. If you suggest that not necessary to have a plan there are a lot of researches which approve that having plan helps better to achieve aims. Vice versa, understanding probability suppose that everything might happen. Using probability I understand that my good scenario might be realized only in case 20-35%, and I don't angry or try do something else when I haven't reached my goals today. I know my statistics and my probability. About statistics, this is just an approach, which we can use. But the question how? Knowing statistic of losses of intraday traders, you can use bigger time frame for tarding. Knowing statistical noise price withing accumulation will help you to put correct stop-loss. There are a lot of examples how it works. The whole business directions (like casinos, insurances ) based on statistic. But I guess you mean incorrect using statistic as combinations of indicators (without knowledge what are the basis) or something like this. There are a lot of statistical advantages which you can use in making decisions on markets: COT reports, seasons, levels of accumulations est. Just advantages of such approaches not so significant. You can have 52-56% (+ dispersion) as advantages but on the short way it's nothing and usually we try to optimised our approach sometimes losing the basis. The problem that sometimes conditions is changing, and results might be different. But we shuld be ready for it. Nobody says that it's easy way. But much better to stretch ourself instead of being in the dark.
I’ll just pipe in and share my experience. The cognitive distortion is very real for traders. I work with alot of traders who experience this. I worked with one who had been trading for several years and was amazing when he was trading in the simulator, but it all fell apart when he went live. In fact, sometimes he would get so stressed his brain would get foggy and he would freeze and could not get out of the trade. It would go further and further against him and he was powerless. I coached him overall for a couple of years, but for months we worked on layer after layer of clearing traumas that he experienced as a child that were impeding his ability to follow his plan. Each layer we cleared, removed some of the fogginess and gave him more of his control back. By the end, the layers were much smaller and less impactful. It was actually an amazing process and really surprised him because he didn’t realize he even had trauma from childhood. I’ve worked with many traders and lots of them have some version of past history and traumas that get in the way of their trading. For some - the "layers" are fear; for others, anger or doubt. This stuff needs to get cleared so it doesn't control us as we trade. If this resonates with you and you’re stuck, call me and we can see if coaching might help you.
I am fascinated by the phenomena of sitting on a trade that's going deeper and deeper in the hole. 13 years ago, I did more or less the same thing, bolstered by the fact that, until that day, I'd always been able to add to my position and trade in and out, still holding the original trade, until I finally was green on the entire series, considering it to be one trade. Of course, fact is, it would have been easier to have taken a manageable loss on the original trade and, if I felt a need to "get even" make other trades later on, or even another day. I could see my problem as I was making it, and I repeated the very next day. It's some sort of feeling like nothing else, losing a shitload of money while knowing better, like the ultimate rush of misery adrenaline. Super not good, and definitely something you wouldn't want to repeat. So, why would someone want to do it over and over? That's the sort of screwup a person should only have to make once in a lifetime, but I see people making exactly the same move over and over. I really want to understand what people are thinking when they do that. Most of the people I've asked about it clam up when I want to know exactly what's going through their mind. One person was honest with me(up to a point) The cessation of communication came when I asked "So, when you, after hours, days, weeks, and months of calm, logical thought came up with the figure of X as being the perfect stop.....decided in the heat of a trade that your most logical move was to cancel that stop and take a chance on a turn on tick past your stop, or an epic beating.. what were you thinking? All I could get was "I wasn't" Possibly he actually stopped thinking, but seems like if he did, he'd been unable to click to cancel his stop. More likely, he didn't want to tell me. In my own case, I was right, I knew I was right, and dammit, I was gonna get my money back!! But, of course, it doesn't actually matter if you're right. You're always right, the market will go up, it will go down...just maybe not right now. In my thinking, right or wrong doesn't matter. It offends me to be making long trades with the current state of world affairs, but that's the way the market is going, and I'm in it for a few bucks here and there, not to make a statement. So, if anybody who has had experience, or knows anyone else who has in this particular field...sitting on a trade while it takes a huge pounding and not getting out...please post what you were thinking. What was the logic?
My experience was Nortel. A Canadian tech darling in the early 2000's. I held at the beginning because I didn't want a capital gain for tax reasons. I kept holding because the pundits and talking heads on TV kept telling me that it would come back. I kept holding because I knew the whole market was waiting for me to sell then the stock would shoot back up. (I knew I had this power because it had happened so many times before) I kept holding and hoping because I didn't know what else to do. I was afraid to sell because it might go up. I had anchored the price to the high or near the high and didn't want to take a loss. I'll get out when it gets back to XXX. I had originally bought the stock for 10 bucks. It went to over 100. I rode it all the way down to 11 then pulled the trigger. It eventually went bankrupt. On the positive side that experience cured me of Buy&Hold. Once the stock was sold I couldn't for the life of me come up with a good reason to have held it all the way down. There were lots of opportunities to get out that I rationalized away because I was holding that particular stock. Almost like I took it personally, me against the market and I hated to give up. My self-esteem was at risk. I'll write it off to trading tuition, an expensive lesson but in the long run i hope it was worth it.
I remember when RMBS was trading at over 400(pre-split) and one of the guys in my trading mIRC room was talking about he'd like to take his 1 month quadruple, but he'd have to pay taxes on the gain. so, he rode it back down the following month and complained the whole time, and when it started back up, he was like "Yeah, when it gets back to $400, I'm selling" and when it did, he was saying.../"but i'll have to pay taxes...anyway, a year later, he didn't have to worry about taxes, and best of my recollection sold at either a loss or breakeven. and I thought that was a pretty big malfunction, but another guy had taken an entry at 400, and took more or less the same ride. In some sense, the guy who didn't want to pay cap gains tax had, at least, some rationalization, but the guy who entered at 400 and rode it down to 150 or so didn't even make sense.
I guess there is some border after in losing money after which people lose their rational mind. LIke "tilt" in poker, like knockdown in boxing, after people can't make rational decision. Losing to much or to quickly might launch in your head some mechanisms when we can control ourself. There is why coach throw white towel while boxer want to continue the fight. In casinos people increase bets by maximum and don't care what might happend. They don't realize what happens. And they can't contol theirself. In this case the best point to close position and make a break, even you are right, even price move in your direction est. If they lose their brain the best point is stop it. Reasons which launch such mechanisms might be different. But I guess we should have some triggers which signal us that something wrong. Moving stop losses, increasing position (if it is not part of strategy), ALL IN or something like this should give us signals that something wrong with ourself. And it this state there is no good decissions because we are managed by older part of brain, which responsible for hit and run. And there are no rational solutions in this state.
Thanks for writing this. This is so great and common and hard to talk about!! I have been there, done that too!