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Cognitive Biases That Affect Traders

  
  Education
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cognitive_psychology_irrational
Humans have weaknesses that hamper their trading capabilities. Many were developed in ancient times and were important for survival. I will enumerate the most important:
1) Loss Aversion: the strong tendency for people to prefer avoiding losses over acquiring gains

2) Sunk Cost 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

3) Disposition Effect: the tendency for people to lock in gains and ride losses

4) Outcome Bias: The tendency to judge a decision by its outcome rather then by the quality of the decision at the time it was made

5) Recency Bias: the tendency to weigh recent data or experience more than earlier data or experience

6) Anchoring: the tendency to rely too heavily, or anchor, on readily available information (more…)

Simple Formula For Performance.

  
  Education
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Potential is what everyone has inside them, it is the education, learning, development, support and time put in that enables one to continually develop their capabilities. This can increase, at least until either physical or mental limitations constrain further growth. 
Interference is what detracts from potential to reduce performance. This can be down to any number of reasons, perhaps environmental or external factors, physical or mental hurdles or limitations, poor execution of process, inadequate self-management. Many of these can be deatlt with in some way; however, the greatest threat in most cases is from attitude and mindset. Perhaps it could be something as simple as seeing yourself failing and recalling the look of an angry parent, a doubting physical education teacher or a school bully from your younger years who always told you that you did not have what it takes. – This creates that painful memory which instils that moment of hesitation or self-doubt just when you least need it. – Who hasn’t at some time during their trading had that pang of self-doubt, or lacked the self-belief or confidence just at a crucial moment, and then looked back with regret and heartache, in some cases leading to a whole cycle of self-doubt and poor decisions, execution and position sizing.

4 Types of Traders

  
  Education
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The first type of profitable discretionary trader is the one who has a natural feel for the market.  When you talk to one of these traders and ask them about their trading at some point you’ll hear them say something about ‘feeling the market was this way or that….’. These are traders who over the years have acquired a lot of implicit knowledge of the market and its participants. They understand what moves markets and they also have the required self-trust to act on their ideas and to protect themselves when they are wrong.  Their personalities allow them to have the self-trust to know their limits and believe in their capabilities. We could call them a ‘natural born trader’; and there are very few of them. Although Jesse Livermore eventually blew-out, he’s an example of this rare type of natural trader.

 The second type of profitable trader – or more accurately temporarily profitable – is the lucky trader; the trader who’s P&L is currently in an up swing but they’ll soon be negative. Often these traders either got lucky with a number of trades and can not replicate it, or they learned the habit of holding onto losing trades and they got lucky when those positions came back. This accounts for the largest number of “profitable traders” – but for these traders the money often leaves faster than it arrived. (more…)

How can you enhance perceived self efficacy

  
  Education
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Self efficacy is built through four processes:
Mastery experience
Role modelling
verbal persuasion
psychological cues.
These four are in order of importance. Most critical way to build self efficacy is through a mastery experience.

Mastery experience is basically a successful experience of mastering a task. Mastery experiences happen when the learner has reached the point where they understand the content knowledge enough to perform a task on their own or masters the task. It happens if the learner goes in to sufficient depth on material he trying to learn. It happens as a result of immersion in a particular field or task. It happens with plenty of prior exposure to the content.

At some stage the learners are able to interpret the results of their actions and use those results to develop their own capability to engage in future actions or tasks. Then the learner become auto learners. They are able to participate in tasks on a first hand basis with little or no assistance from outside influences. When you experience a intense mastery experience you get a feedback on your own capabilities. Long and sustained efforts are required for mastery experience.  (more…)

Active learning is the key

  
  Education
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Research shows that you can learn more in few days than you can learn in a year. A focused approach to solving a problem where you put lot of efforts in short period of time leads to expansion of you ability to process and analyse information. That is survival mechanism.  
This is the principle used by armies to train people. Intense burst of 4-5 days of learnings lead to more learning than a long  drawn out plan. Once you get in to learning zone, you would learn more quickly. The more load you add to a learner more efficient he becomes in processing the information.
The most effective learning state is where you are loaded with more work than you can handle and you are continuously challenged. If you go back and look at your own intense learning phases you would see this. Goal of learning skills and procedural stuff is not knowledge acquisition but to change your perceived self efficacy belief.
Learning is complete when your self efficacy beliefs change. Self efficacy beliefs change if you experience mastery experience. When do you experience mastery experience ? When you stretch yourself.
The other pre requisite to experiencing a mastery experience is you have to be actively doing a task. That is why passive video based methods and trading guides and self paced programs, though popular do not work as well as bootcamp kind stretch sessions. Bootcamp style learning methods involve active participation and active learning style.
If you really want to improve your trading results you should look seriously at learning models and select a method which will enhance your skills faster. In a bootcamp kind of environment, you just have to focus like crazy  for  3-5 and try and keep up with the intense pace of learning. The grater demand put on learning capabilities in such methods results in enhancing your own efforts. As a result of that  you will find your abilities will improve dramatically in just days. 
There is abundance of information in public domain to learn trading in the form of books, curses, ebooks, videos, and so on. But most of it puts a trainee in passive learning mode.There is no active effort the trainee has to make . So it becomes like watching porn, it does not improve your actual sex life. 
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