Eight Cognitive Biases That Affect Trading


  1. Loss Aversion – The tendency for people to have a strong preference for avoiding loses over acquiring gains.
  2. Sunk Costs Effect – The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future. (more…)

John Taylor Of The World's Largest Currency Hedge Fund Sees Euro Dropping To $1.20 By August

John Taylor, chairman and chief executive officer of FX Concepts LLC, the world’s largest currency hedge fund, sees the euro dropping to $1.20 by August, and believes parity is possible. Be very careful, because as of today Goldman is now accumulating euros (as per its just released Sell recommendation). More from Taylor: “It’s going to be quick because things are really falling apart…. Some of these [countries] have to be thrown out [of the EMU]. If you look at a country like Latvia, which has been effectively in the Euro, has been saved by the European Commission and the IMF much like they are suggesting Greece will be, their retail sales were down 30% last year, the GDP was down 18%, it is expected to drop another 8% this year. Latvians are starving, the place is a disaster area: that’s what you have to go through to be a part of the Euro.” On whether his firm has felt any political pressure on putting on bearish euro bets: “None at all. We are SEC regulated and the information is there, but nobody seems to be caring.” Lastly, Taylor ridicules the WSJ story about the restaurant-based collusion: “Yes, they had a meeting and talked about how bad the euro was. But that they in fact had some impact: their assets are 1% of the daily volume. Somebody like us, we have a bigger position against the euro than those people put on.” Taylor says in the next three to six months, the dollar will be strongest against the euro, and Eastern European currencies. In a longer horizon, he says to be long Asia and short the euro. Bottom line: sell Europe, buy everyone else. And join the bandwagon… Just as Bernanke prepares the dollar’s next suicide move with inflation obviously not working.

12 Insightful Thoughts from “The Most Important Thing” by Howard Marks

1. People usually expect the future to be like the past and underestimate the potential for change.

2. When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.

3. In investing, as in life, there are very few sure things. Values can evaporate, estimates can be wrong, circumstances can change and “sure things” can fail. However, there are two concepts we can hold to with confidence: • Rule number one: most things will prove to be cyclical. • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.

4. Very early in my career, a veteran investor told me about the three stages of a bull market. Now I’ll share them with you. • The first, when a few forward-looking people begin to believe things will get better • The second, when most investors realize improvement is actually taking place • The third, when everyone concludes things will get better forever

5. Investors hold to their convictions as long as they can, but when the economic and psychological pressures become irresistible, they surrender and jump on the bandwagon.

6. Even when an excess does develop, it’s important to remember that “overpriced” is incredibly different from “going down tomorrow.” • Markets can be over- or underpriced and stay that way—or become more so—for years.

7. If everyone likes it, it’s probably because it has been doing well. Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out. (more…)

Learn From Paul Tudor Jones: Risk Size Is Key

We’ve all heard the “experts” preach to us that we should only take trades which offer at least a 2:1, or better yet a 3:1 reward to risk ratio and on the surface this seems like sound advice, but is it really?
I used to be one of those educators who would jump on the risk/reward bandwagon until one day when I stepped back and took an objective look at what trading is and how I can best optimize my chances of success. When I did this I realized that not only was the whole risk/reward premise false but that it had the potential to ruin chances for trading success by keeping me out of some of the best trades.
The proponents of risk/reward ratios say that in order to be successful the trade must out produce the amount of money you have at risk by at least double or triple your risk amount but what they fail to take into consideration is that the reward side of any trade is unknown. 
You see the only part of the trading equation that you have any control over is the risk side of the trade. The reward side of any trade is a complete mystery. Oh sure, we all have our best guesses as to where the market might go next, but in the end it’s really just a crap shoot. Sometimes we’re right and sometimes we’re wrong and if we’re honest with ourselves we will admit that we really don’t know where the market is going next.  (more…)

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