Trading Psychology

To be successful with any investment strategy, you have to start out with an investment philosophy that is consistent in substance and one that corresponds not only to the markets you  decide to invest in but your to your personal and individual characteristics as well. What is an Investment Philosophy? An investment philosophy is a logical method of thinking about markets, how the stock exchange system works, how and when you should buy or sell and even the types of mistakes that you believe consistently underlie investor behavior. Most investment strategies are fashioned to capitalize on mistakes caused by some or all investors in pricing stocks. Those errors themselves are determined by far more canonical presumptions about human behavior ... [read full story]

It is pretty apparent to most people who observe people act and react that they do a lot of what they do based on moderately primal and/or emotionally motivated impulses. Many experiments have been conducted to check the impact that primal instincts and emotion-based thinking has on investing and stock market psychology. They have generally proposed that when people are presented with ambiguity their emotions can overtake their logical thinking, guiding them to resist speculative propositions. This raises the challenging hypothesis that people who are less fearful than other people may produce more proficient investors. Modern developments in neuroscience have emphasised exactly how biologically grounded our human brains are to require the quick dollar - and to neglect the risk of losing even more. By studying ... [read full story]

What kind of stock trader are you? There are a variety of personalities at work in the market, many of them self destructive. Ideally, you want to have aspects of each as a sort of personality disorder, but most of us are just one or another.   Even Steven After suffering a loss, they are eager to right what has been made wrong. On their next stock trade, they sell the moment their profit exactly offsets the previous loss. Now they are even, and don't have to go through the emotional despair of losing in the market. Unfortunately, that stock they sold to make back the previous loss keeps going higher. Emotion is Even Steven's master, happily riding a fence ... [read full story]

Most investors believe in healthy greed, and it seems like even people who haven’t seen the Oliver Stone movie Wall Street know that Gordon Gecko says that "greed is good." But this old chestnut warns us that we can get too greedy, whether we are long or short on the market. Casinos make money because we tend to believe in things like 'luck' and 'streaks'. But winning five spins of the roulette wheel doesn't change the odds at all for the sixth spin. Our impulse to 'let it ride' when things are going our way is just a method of returning money to the house. Of course, most people enter a casino expecting to lose money. But in the stock market, investors tend to ... [read full story]

There are numerous people who will tell you how to make money in the market. But what you don’t often see, however, are ideas written on how to lose money.   "Cut your losers and let your winners run" is common stock market trading advice, but how do you determine when a position is a loser? Interestingly, most traders don’t formulate an answer to this question when they put on a position. They focus on the entry, but then don’t have a clear sense of exit - especially if that exit is going to put them into the red. One of the real culprits is in the difficulty traders have in separating the reality of a losing trade from the psychological sense ... [read full story]

Short Selling. Is It Unpatriotic? Short selling is the opposite of normal (long) stock positions. If you buy a stock hoping it will go up, you are ‘long’ of the stock. But if you think the stock will go down, you can sell it first, and buy it anytime you please. This ‘short selling’ is a simple borrowing-of-stock process that is handled by your broker with no need for you to understand how. Now, lets clear the air on another common fallacy that some people hold with regard to bears. Some people think that selling short is in some way unpatriotic or negative. They believe that to invest your money in the industry of your country and lose it is more patriotic than ... [read full story]

So you want to become a full time stock trader? This is the dream of many. The problem is that it is very easy to be wiped-out in the learning process. Some lucky people have the skills to make money from the stock market and keep it, knowing very little. This is because they are skilled at money management and taking risks. They know how to handle a risk - bookmakers generally make good traders because they are skilled and practised at risk-taking and know how to handle it. Magic Stock Trading Systems There are no magic systems in the stock market. If there were, every move would be very rapidly discounted. We know this because there are some of the sharpest ... [read full story]

If you havent already, it might help to first read the background on Overconfidence in Trading. Psychologists have found that people become overconfident when they experience early success in a new activity. Also, having more information available and a higher degree of control leads to higher overconfidence. These factors are referred to as the illusion of knowledge and the illusion of control. Illusion of Knowledge People have the tendency to believe that the accuracy of their forecasts increases with more information. This is the illusion of knowledge that more information increases your knowledge about something and improves your decisions. However, this is not always the case - increased levels ... [read full story]

People are overconfident. Psychologists have determinedthat overconfidence causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Does overconfidence occur in investment decision making? Public stock or security selection is a difficult task. It is precisely this type of task at which people exhibit the greatest overconfidence. Are you overconfident? Most people are overconfident about their abilities. Consider the following question: How good a driver are you? Compared to the drivers you encounter on the road, are you above average, average, or below average? How would you answer this question? If overconfidence were not involved, approximately one-third of ... [read full story]