MindTraps-Great Book

I read a great book on trading psychology, called MindTraps by Roland Barach. MindTraps focuses on how the average person tends to think, compared to how we need to think to make money over time in the markets.

 Here’s a summary of points that can benefit you as a trader:

  1. 1.Before entering any trade, you should consider the other side of the trade and state the reasons you’d take the other side of the trade.  This helps you objectively enter a trade with a full understanding of the major risks that involved.
  2. Analyze your behavior from the beginning to the end of the trading process (from idea generation to entry and finally to exit) – what are the areas you can improve to help your trading profitability the most?
  3. Keep a trading journal of your thoughts on open positions and new ideas – writing things down helps you objectively look back and see where you went right and wrong.
  4. Fear blinds us to opportunity; greed blinds us to danger – emotions cause “perceptual distortion” where we only see the part of the picture that our beliefs allow us to see.
  5. We are likely to continue doing things for which we are rewarded -this can cause us to get too bullish after the bulk of the uptrend has occurred, or get too bearish near the lows.
  6. Fear of regret slants stock market behavior toward inaction and conventional thinking –  the person who is afraid of losing is usually defeated by the opponent who concentrates on winning (an analogy for sports fans is the Prevent defense in football – playing “not to lose” only prevents you from winning).
  7. Can’t have a personal agenda to prove your self-worth in the markets –  the focus must be on following your plan to maximize the ability to make money.
  8. Don’t get overly attached to any one view on a stock or market – don’t talk to others about open positions; it just makes it that much harder to exit when your plan says it should.
  9. Our predictions are only as good as the information available to us – objectively look at the indicators and data you use, to get the best quality of information and focus available
  10. People prefer for gains to be taken in several pieces to maximize their feeling good about their ability, while they prefer to take all their losses in one big lump to minimize the pain they feel.
  11. People prefer a sure gain compared to a high probability of a bigger gain, so they can say they made a profit; in contrast, people will speculate on a high probability of a bigger loss over a sure smaller loss, because they don’t want to feel like a loser.  In trading, we must flip around the conventional emotions to allow us to let profits run while cutting losses shorter.
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