Archives of “critical thinking” tag

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4 Words For Traders :Hear ,Receive ,Believe & Apply

  
  Education
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HEAR

To HEAR you have to listen and listen intentionally. You will not HEAR properly if you are focused on other things. This situation is especially true on a webinar or during the trading day when the markets are open. It is essential to set distractions aside and HEAR what is being stated.

RECEIVE

To RECEIVE something you have to HEAR it and come into agreement with it.  To RECEIVE is to take it unto yourself and personally grab hold of what you have heard and make it your own.

BELIEVE

To be successful you have to believe that what you HEAR and RECEIVE can add value to your current situation. You have to BELIEVE that a specific strategy repeated and correctly  executed, regards of any specific outcome, will provide successful results over time. You will act on what you believe In all areas of life.  Please make sure you really do BELIEVE it and are not allowing any contradictory mindset to compete with your belief because it is possible to hold two opposing beliefs at once. This is being double minded and leads to instability.  Being firm and unswayed in what you BELIEVE can lead to becoming a successful trader. (more…)

Examine Your Beliefs

  
  Education
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There is lot of talk of trading psychology , but what exactly are the 3 or 5 things you can do to improve your psychology.
If you want to increase your muscles you go and lift weight
If you want to improve your stamina, you go and run daily
If you want to reduce weight you eat less and exercise more
What exactly do you need to do to improve your psychology.
First starting point if you want to improve your psychology is by examining your beliefs
You can only trade what you believe in.
Your beliefs drive your behavior. (more…)

RISK in Trading -Anirudh Sethi

  
Analysis, Education
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Image result for risk gifLife is full of risks, and risks are all around you as a trader. In a perfect world there would be no risks and any decision you make will turn out to be the best one. You can hope for win after win, and not even have to worry about the prospect of losing. Yet this is an unrealistic and impossible scenario because as we all know trading is all about risk. However, there is no need to be afraid of risk. We need to accept the fact that it is there, and rather than focusing on fear we need to know how to deal with it and manage it.

This is where risk management comes into play. As a trader you need to be disciplined. You need to know how to understand the way you are thinking. At the end of the day it is all about trading psychology. Trading is not solely about getting an understanding of the market, and the trading skills such as recognizing trading patterns and managing risks. It is also about training yourself to be self-assured without being too risky. It is about being cautious, but not wait too long to take an action. It is about blocking emotions and sentiments which could impair your judgments. The market is constantly changing and you are going to be constantly faced with challenges, and so risk is inevitable. However the risk taht you tae can be calculated.

Thus as a trader you will need to balance out your trading skills with your trading psychology so as to master the mental game of trading. Here are some general rules which can help you in risk management:

  • Emotions have no place in trading. You need to make well planned and well calculated decisions that are not affected by sentiments. Otherwise your decision making process is going to take longer, and in all probability, be skewed.
  • You need to accept that you are not perfect, and so there are going to be times when you succeed, and other times when you fail and lose money. Successes and failures will result in different, and extreme emotions, but these emotions need to be controlled so as to keep thinking straight.
  • In order to minimize risks, many traders are well aware that it is best to opt for diversification. Having an diversified portfolio will help to reduce your risks. Money should be distributed across different kinds of investments so that in case a certain trading decision goes wrong it will be less likely to affect the trader in a dramatic way as one would still have other investments at one’s disposal.
  • Gaining experience is what many traders believe in in order to succeed. Through experience you gain more insight and knowledge, as well as trading skills. However despite their importance, they are not going to be enough to back your progression as a trader. You need to couple this up with clear thinking.
  • You need to have the willingness to take risks. However the risks that you take can be calculated and appropriate. Trading is risky, but in time you will learn how to go about it so as to minimize risks and the results thereafter. For instance, you should only risk money that you can afford to lose. Otherwise, it is best not to trade at all in such cases.

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Should You Trust Your Trading Intuition?

  
Analysis, Education
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I’ve heard from many traders that they often take decisions based on instincts. Actually, all non-quants use intuition in some form or another. If you are not using a program that takes all signals that your system produces, how do you decide between several equally good looking trading setups with similar risk to reward? Do you take them all or do you concentrate on only a few? The odds are that you are doing the latter and your ultimate choice for capital allocation is subconscious.

Even though we are defined by our decisions, we are often completely unaware of what’s happening inside our heads during the decision-making process.
Feelings are often an accurate shortcut, a concise expression of decades’ worth of experience.
The process of thinking requires feeling, for feelings are what let us understand all the information that we can’t directly comprehend. Reason without emotion is impotent.
This is an essential aspect of decision-making. If we can’t incorporate the lessons of the past into our future decisions, then we’re destined to endlessly repeat our mistakes.

Nothing can replace personal experience: (more…)

A Study in the Psychology of Gambling- Written in Year 1873

  
  Education
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In a 1873 letter to The Spectator entitled “A Study in the Psychology of Gambling” Saxon-les-Bains describes his gambling experience in Monte Carlo.

And what was my experience?  This chiefly, that I was distinctly conscious of partially attributing to some defect of stupidity in my own mind, every venture on an issue that proved a failure; that I groped about within me something in me like an anticipation or warning (which of course was not to be found) of what the next event was to be, and generally hit upon some vague impulse in my own mind which determined me: that when I succeeded I raked up my gains, with a half impression that I had been a clever fellow, and had made a judicious stake, just as if I had really moved skillfully as in chess; and that when I failed, I thought to myself, ‘Ah, I knew all the time I was going wrong in selecting that number, and yet I was fool enough to stick to it,’ which was, of course, a pure illusion, for all that I did know the chance was even, or much more than even, against me.  But this illusion followed me throughout.  I had a sense of deserving success when I succeeded, or of having failed through my own willfulness, or wrong-headed caprice, when I failed.  When, as not infrequently happened, I put a coin on the corner between four numbers, receiving eight times my stake, if any of the four numbers turned up, I was conscious of an honest glow of self-applause…

Evidently, in spite of the clearest understanding of the chances of the game, the moral fallacy which attributes luck or ill luck to something of capacity and deficiency in the individual player, must be profoundly ingrained in us.   I am convinced that the shadow of merit and demerit is thrown by the mind over multitudes of actions which have no possibility of wisdom or folly in them, granted, of course, the folly in gambling at all, as in the selection of the particular chance on which you win or lose.  When you win at one time and lose at another, the mind is almost unable to realize that there was no reason accessible to yourself why you won and why you lost.  And so you invent what you know perfectly well to be a fiction, the conception of some sort of inward divining rod which guided you right, when you used it properly, and failed only because you did not attend ‘adequately to its indications.’

(more…)

Mistakes Were Made (But Not By Me)-Book Review

  
  Education
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MISTAKES-WERE MADEOne of the best things I came across this  past week was this terrific review by  Morgan Housel where he shared insights  from the book “Mistakes Were Made (But  Bot By Me)” by Elliot Aronson and Carol  Tavris. Several members have  recommended this book to me so I was  very interested to read his review.
According to Mr. Housel, this are the six  most important things all of us should  learn from this book, many of which are  very important to investors and traders alike:

1. Everyone wants to be right and hates admitting the  possibility of being wrong.As fallible human beings, all of us share the impulse to justify  ourselves and avoid taking responsibility for any actions that turn
out to be harmful, immoral, or stupid. Most of us will never be in a  position to make decisions affecting the lives and deaths of  millions of people, but whether the consequences of our mistakes  are trivial or tragic, on a small scale or a national canvas, most of  us find it difficult, if not impossible, to say, “I was wrong; I made a  terrible mistake.”
The higher the stakes — emotional, financial, moral — the greater the difficulty. It goes further than that: Most people, when directly  confronted by evidence that they are wrong, do not change their  point of view or course of action but justify it even more tenaciously. Even irrefutable evidence is rarely enough to pierce  the mental armor of self-justification.

2. You brain is designed to shut out conflicting information.In a study of people who were being monitored by magnetic  resonance imaging (MRI) while they were trying to process  dissonant or consonant information about George Bush or John Kerry, Drew Westen and his colleagues found that the reasoning  areas of the brain virtually shut down when participants were  confronted with dissonant information, and the emotion circuits of
the brain lit up happily when consonance was restored. These mechanisms provide a neurological basis for the observation that  once our minds are made up, it is hard to change them. (more…)

Understanding Probability

  
  Education
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In his book, The Drunkard’s Walk, Leonard Mlodinow outlines the three key “laws” of probability.

The first law of probability is the most basic of all. But before we get to that, let’s look at this question.

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.
Which is more probable?
Linda is a bank teller.
Linda is a bank teller and is active in the feminist movement.

To Kahneman and Tversky’s surprise, 87 percent of the subjects in the study believed that the probability of Linda being a bank teller and active in the feminist movement was a higher probability than the probability that Linda is a bank teller.

1. The probability that two events will both occur can never be greater than the probability that each will occur individually. (more…)

Objectivity in Trading -Anirudh Sethi

  
Analysis, Education
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Image result for Objectivity in tradingTrading is a very interesting field, and also a highly challenging one. Being faced with changing prices, other traders’ actions, and your expectation and hope of making the right decision, is certainly not an ideal situation to make objective choices. Many a time traders feel the stress and tension of it all to be too heavy on their minds, and as a result, their judgement is clouded. They either act too rashly, or are way too slow and cautious.

So we can all agree that for a trader to be objective is definitely no easy feat. However, an objective mindset is indispensable for a successful trader. The market is going to be offering the trader all kinds of information and data, as well as suggestions and comments being made by fellow traders. A trader needs to learn how to be objective as well as have the flexibility to use that information so as to act upon it objectively. This is however easier said than done.

In reality most traders enter the market with many notions and mindsets, as well as certain biases. The goal is to try to make the best possible trading decision, but due to these aspects it is not always the case. All human beings have an innate tendency of trying to be quite certain about a decision they make, and so they sort of seek confirmation for their actions. However in trading you cannot always be fully certain of your choices, and in the vast majority of the cases you will not be. The best you can do is to acquire information so as to make well informed decisions and as a result minimize risk. Speculating in the financial markets is normal, but no matter how much you try to speculate, you can never be completely certain. (more…)

Mauboussin: Three Steps to Effective Decision Making (Video )

  
Education, Video
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Making an important decision is never easy, but making the right decision is even more challenging. Effective decision-making isn’t just about accumulating information and going with what seems to make the most sense. Sometimes, internal biases can impact the way we seek out and process information, polluting the conclusions we reach in the process. It’s critical to be conscious of those tendencies and to accumulate the sort of fact-based and unbiased inputs that will result in the highest likelihood that a decision actually leads to the desired outcome. In this video, Michael Mauboussin, Credit Suisse’s Head of Financial Strategies, lays out three steps that can help focus a decision-maker’s thinking.

Make the Right Choice: Three Steps to Effective Decision Making 

Timeless Qualities Essential to Speculation

  
  Education
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    1. Self-reliance: A man must think for himself and must follow his own convictions. Self-trust is the foundation of successful effort.
    2. Judgment: That equipoise, that nice adjustment of the faculties of one to the other, which is called good judgment—essential to the speculator.
    3. Courage: That is, confidence to act on the decisions of the mind. In speculation, there is value in the dictum: Be bold, still be bold; always be bold.
    4. Prudence: The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of prudence and courage; prudence in contemplation, courage in execution.
    5. Pliability: The ability to change an opinion, the power of revision. He who observes and observes again is always formidable.
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