The Human Element in Trading

Discussion in 'Psychology' started by 4DTrader, Jul 31, 2008.

  1. More than 20 years ago, I was curious about how human beings behaved, so I often went into the campus library and read everything that looked relevant to human beings. Naturally, I ended up standing in front of the biology and psychology shelves most of the time. After I graduated from that school, I still didn't get it. The hindsight explanation for the failure is that there wasn't anything in the whole library to answer my question.

    10 years ago, I went into another school. This time, I decided to give it another try. This time, I got it. The moment I read the books, I knew I found the answer, not because the books self-claimed so, but because I had accumulated an additional 10 years of life experience to corroborate what the books said.

    Since then, I can explain just about everything around me that is related to human beings or other living organisms.

    So I am going to explain trading.

    Be quiet, traderzones and surdo, don't even think about sabotaging this thread with your stupid cartoons.:mad:

    Let me get to the point quickly. Two things bother traders a lot, they are greed and fear.

    I say: greed and fear do NOT exist, they are merely hypothetical constructs, fabricated by people to represent certain RESPONSES in human beings prior to or during trading. Depending on your levels of responses, they can be cognitive activities in your neural cortex such as dreaming of a mansion on the beach or a Sicilly sports car, or physiological demonstrations of sweating, heaving breathing, faster heart beat, shaking, vomitting, etc., or behavioral demonstrations of smashing your keyboards, punching a hole in the wall, kicking your dog or wife or kid or three at the same time, drinking alcohol or Clorox bleach.

    Anyway, the key concept is RESPONSE.

    A response is something that happens AFTER a stimulus. I am not going into details about the laws of motion in physics: Newton's law of action and reaction in particular. But if you accept this law of motion, you must accept that the so called Greed and Fear are Responses to some kind of Stimulus or Stimuli. In other words, Greed and Fear are NOT causes of trading failures.

    I am going to stop here and let you think about it.

    Again, no stupid cartoons from traderzones and surdo.:D
  2. I assume that we've got rid of the perception that greed and fear are causes of trading failure. But let's keep those cognitive, affective and behavioral responses, those are legitimate, observable and measurable phenomena. We can also use the terms Greed and Fear, but when we use them, we should agree that we treat them as responses, not as stimuli.

    Let's get to the stimuli.

    Market moves, up, down and sideways (Isn't that beautiful, market behaviors never change, market always does the same three things. I don't give a shit about SEC rules, decimal change, naked short-selling, up-tick rule, etc., because market is always the same, no matter what news rules will be used. What I mean to say is that traders don't have to worry about their strategies being outdated or about their adapting to new trading environment). Market moves against us, we lose money; market moves for us, we make money; market moves sideways, we lose money. So we have two situations of losing money vs. one situation of making money. In terms of time, 90% of the situations are money-losing ones. This is only the fixed part. The worse part is that the market is behaving "randomly."

    Let's talk about the fixed part first: Losing money causes fear, making money causes greed. Very simple, you say. Yes, but the concept becomes simple only after I point it out. Due to the fixed part of the market nature, you have a lot of fear as a result of numeous losses. Admit it, you are like a frightened rabbit during each trading day. :D On the other hand, your greed is cultivated as a result of some wins. You dream of quitting your day job and buy a big house on the beach. Keep dreaming, good for your health. After some time of trading, your account decreases and your fear is more than your greed.

    Let's talk about the random part of the market: The market moves against you, you hold the losing position and then miraculously the market comes back and offers you a profit. You take it happily. Next time the market moves against you, what would you? Hold it, you wish the market will come back. Miraculously the market comes back again, and offer your a profit. Oh, boy, there is no worse thing that can happen to you in the market. You are doomed because of the random wins.

    You also experienced losses. Market moves against you, you cut loss. After you take the loss, market moves back to you. How tormented you are! If I didn't exit, I would have a profit. Next time you hold, but the market never comes back, you are in a deep hole, in Cramer's words: House of Painnnnnnnnnnnnnnn.

    Something is wrong with my keyboard. I'll post later.