Archives of “January 22, 2019” day

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Herd Mentality

  
  Education
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“Making money is easy, it is keeping it that is hard.” 

Keeping the profits is what successful trading is all about. It’s not about making money. It is about risk management. Good risk management translates into good profits. Great risk management translates to great profits and a long-term career.

So what about the herd mentality?

You have all heard about it over the years. Psychologists talk about it all the time, but how does it play out in the applied trading world?

The cliché is that following the herd is dangerous – bad for trading and leads to huge losses.

But my perspective is different and one that states that following the herd is  bad only if it was not YOUR game plan. You see, traders don’t mind losing money. That’s right. They don’t. What they mind is losing money doing stupid things. And one of the stupidest things a trader can do is to follow someone else’s game plan instead of their own.

If you are going to lose money (and you are going to about half the time) then you might as well lose it doing the right thing, which is listening to YOUR ideas. Your instincts. Your research and YOUR game plan.

Trading is not complicated. We make it complicated.

Simplify the process. Break your trading down to its basics and follow your plans. And if your plans happen to be in line with the herd, then so be it. And if they don’t, that is fine too. The point is to be consistent in your approach and let the market come to you.

Focused Trading

  
  Education

Many traders seek assistance for the problems they encounter in markets. They are focused on the holes in their trading: the areas where they are failing to achieve their goals. They think about their problems, they set goals to correct their problems, they work on their problems, they discuss their problems. In a nutshell, they become problem focused. The more they focus on their deficits, the more they feel deficient. Ironically, their efforts at self-improvement only serve to reinforce a negative, problem-based view of themselves.
A different approach is what is known as a solution-focused approach to change. Instead of focusing on what is going wrong, you focus on goals: what you want to go right. Once you identify–in concrete, positive terms–what you’d like to be doing differently, then you can focus on occasions in which you are already achieving those goals, even in small measure. Instead of asking a trading guru, for example, where you should place your stops or time your entries, you review your own trading records and identify occasions in which you *did* place your stops or time your entries effectively. This enables you to reflect on these positive instances and develop solution patterns out of the things you’re already doing correctly.

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The psychophysiology of trading

  
  Education
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The paper is old (2002) but still interesting. Andrew W. Lo and Dmitry V. Repin in “The Psychophysiology of Real-Time Financial Risk Processing” report the results of their experiment to measure the emotional responses of ten traders—five highly experienced and five with low to moderate experience. They wired up these traders to plot real-time changes in their skin conductance, blood volume pulse, heart rate, electromyographical signals, respiration, and body temperature.

Although the sample is very small and hence just a first stab, the authors noted some significant differences between the two types of traders. The less experienced traders, for instance, seem to be more sensitive to short-term changes in such market variables as deviations and trend reversals. Both sets of traders, however, saw spikes in their blood volume pulse in the face of volatility events.

Lo and Repin conclude that “emotion is a significant determinant of the evolutionary fitness of financial traders.”

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