Archives of “bad decisions” tag

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Loss Aversion

  
  Education
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There’s a short Danny Kahneman interview at the Daily Beast here.  He notes why your best friends may not be your best advisors:

 Friends are sometimes a big help when they share your feelings. In the context of decisions, the friends who will serve you best are those who understand your feelings but are not overly impressed by them. 

 That’s the Kahneman I love to read, profound and interesting. But then he follows with this sentence:

For example, one important source of bad decisions is loss aversion, by which we put far more weight on what we may lose than on what we may gain.  (more…)

On Psychology

  
  Education
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  • Stop trying to outsmart the market. NO ONE knows exactly where it will go.
  • With each decision you make comes stress:
    • The more decisions you make, the more likely you are to be wrong.
    • The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
    • No one can be that right.
  • Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
  • Don’t apply logic. Markets move on emotions — period!
  • Plan your trade and trade your plan.
  • Reduce the amount of decisions you make.
  • Make decisions and live with them (also a life lesson!).
    • Good decisions come from experience.
    • Experience comes from bad decisions.

On Psychology

  
  Education
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  • Stop trying to outsmart the market. NO ONE knows exactly where it will go. Psychology
  • With each decision you make comes stress:
    • The more decisions you make, the more likely you are to be wrong.
    • The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
    • No one can be that right.
  • Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
  • Don’t apply logic. Markets move on emotions — period!
  • Plan your trade and trade your plan.
  • Reduce the amount of decisions you make.
  • Make decisions and live with them (also a life lesson!).
    • Good decisions come from experience.
    • Experience comes from bad decisions.

9 Trading Wisdom for Traders

  
  Education
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NEVER THROW MORE MONEY AFTER A LOSING POSITION

Never add to a losing position under any circumstances. Throwing more money at a losing trade will burn your capital faster than you can imagine. This is the main contributor that eliminates losing investors from the trading game. The only thing that happens when you buy more of a losing position is that your net worth declines. You hope that it may turn around eventually and your decision to buy will prove fortuitous. For every example of a fortune from an unexpected turnaround, there are ten examples of bleak outcomes.  

 

ALWAYS INVEST ON THE WINNING SIDE

Do not worry about trading on the bullish or bearish side, but always trade on the winning side. This is a brilliant piece of wisdom. Learn to master the art and science of investing on the winning side. You should be willing to change sides immediately when one side has gained the upper hand. You cannot stay rigid in your positions because the market is dynamic. Keep a close eye to see if the facts have changed regarding the company. If the facts have changed, you must change.

 

DO NOT HANG ONTO A LOSING POSITION

Failure to admit you were wrong and holding onto losing positions will cost you money. Watching your capital deplete in front of your eyes is de-motivating and mentally exhausting. However, your mind will be even more exhausted if you hold onto a losing trade. You will get more and more fearful with each passing minute, day and week.

In the meantime, you are missing out on a treasure chest of potentially profitable stocks that are waiting to make you money. Bad decisions are valuable sources of learning to master your trading technique. Cut your losses, adapt your trading strategy to include your new knowledge, and search for stocks that will make you money. In the stock market, time is money; there is no time to watch your stock fall all the way to the bottom. (more…)

Calmness

  
  Education
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How do you handle adversity? What do you do when the markets go against you? Do you get angry and defensive or do you stay calm and play offensive?

 When the markets go against you, do you overtrade? Do you try to make all of your losses in one deal? Or do you stay calm, take a breather and reevaluate the market? 

When our emotions go up, our intelligence comes down. We make bad decisions. We take it personally. Then we start doubting ourselves and we start losing confidence. Then we start losing more and more…

When we stay calm, we can evaluate the market from an objective place. We can see the market for what it is and not what we want it to be. Then we can take a calculated risk. 

Indian retail investors tend to lose in stock markets: ISB

  
Analysis, Education
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Retail equity investors in India systematically lose out to other categories of players because they sell the winning stocks too quickly and hold on to the losing stocks too long, says a study.

It found that individual retail investors in India, numbering 2.02 million – largest in the world – consistently chase a zero rate of return on their stock investments when they make decisions themselves.

The study attributed the recurring losses to these type of investors to the ‘disposition effect’ (selling the winning stocks too quickly and holding on to the losing stocks too long) and ‘overconfidence’ (taking credit for good decisions and attributing bad decisions to luck) for three categories of investors separately. (more…)

Trading psychology

  
  Education
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  • Trading psychologyStop trying to outsmart the market. NO ONE knows exactly where it will go.
  • With each decision you make comes stress:
    • The more decisions you make, the more likely you are to be wrong.
    • The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
    • No one can be that right.
  • Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
  • Don’t apply logic. Markets move on emotions — period!
  • Plan your trade and trade your plan.
  • Reduce the amount of decisions you make.
  • Make decisions and live with them (also a life lesson!).
    • Good decisions come from experience.
    • Experience comes from bad decisions.

    • You are not your Trade

      
      Education
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    Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. -Ed Seykota

    Traders can make psychological mistakes when trading that can end a trading career very fast. Here are a few examples:

    • They take on more risk than they can deal with, stress takes over and they start making bad decisions.
    • They become married to a trade, they become stubborn and ignore their stop losses, wanting to be “right” they wait while losses mount.
    • Their egos take over their trading. They are more concerned about proving how smart or clever they are than making money. They begin to be more concerned with bragging about their winners than managing their losing trades. It becomes an ego trip that will not end well.
    • Their system does not match them, someone who likes fast paced action should not be a long term growth investor and someone who loves investing in growth stocks they believe in should not day trade.
    • A trader loses many times in a row so they change systems right before the big pay off. If you have a proven system trade it for the long term benefits.

    Here are some solutions: (more…)

    Good Points on Trading psychology

      
      Education
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    • Stop trying to outsmart the market. NO ONE knows exactly where it will go.
    • With each decision you make comes stress:Forget about the “whys’ of the market. After all is said and done, the reasons will be known.FORU
      • The more decisions you make, the more likely you are to be wrong.
      • The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
      • No one can be that right.
    • Don’t apply logic. Markets move on emotions — period!
    • Plan your trade and trade your plan.
    • Reduce the amount of decisions you make.
    • Make decisions and live with them (also a life lesson!).
      • Good decisions come from experience.
      • Experience comes from bad decisions.

    Trading Thought

      
      Education
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    Know what your tolerance for risk is.Traders who are able to make smart decisions can beat the market. However, the greatest hurdle to doing so is overcoming the emotional traps that cause traders to make bad decisions.The reason we succumb to our emotions is because we are afraid of losing. It is the risk we take that creates emotion; take too much risk and you are likely to make bad decisions.Therefore, you need to know what your limits are. What dollar amount of risk causes you anxiety? If you can not make a trade with out fear then you are taking too much risk. For some, that means never trading since they simply can not handle the risk of financial loss. However, over time and with success you will begin to build up your tolerance for risk, just take it one step at a time.
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