Archives of “logic” tag

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21 Ways Rich People Think Differently

  
  Education
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1. Average people think MONEY is the root of all evil. Rich people believe POVERTY is the root of all evil.

2. Average people think selfishness is a vice. Rich people think selfishness is a virtue.

3. Average people have a lottery mentality. Rich people have an action mentality.

4. Average people think the road to riches is paved with formal education. Rich people believe in acquiring specific knowledge.

 5. Average people long for the good old days. Rich people dream of the future.

6. Average people see money through the eyes of emotion. Rich people think about money logically.

7. Average people earn money doing things they don’t love. Rich people follow their passion.

8. Average people set low expectations so they’re never disappointed. Rich people are up for the challenge.

9. Average people believe you have to DO something to get rich. Rich people believe you have to BE something to get rich. (more…)

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.

Think Less & Keep It Simple

  
  Education
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“One of the most difficult things to get investors and traders to understand is that no matter how much they investigate an investment, they will probably do better if they did less. This is certainly counter-intuitive, but the way that our brains function almost guarantees that this will happen. This kind of failure also happens to those investors frequently regarded as the smartest. In essence, the more information that investors have, the more opportunity that they have to choose the misinformation that suits their emotional purposes.

 

Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way. Yet everywhere we turn, we read and hear opinion after opinion and explanation on top of explanation which claim to connect the dots between economic cause and market effect. Most of the marketplace is long on rationale and explanation and short on methods.

A series of experiments to examine the mental processes of doctors who were diagnosing illnesses found little relationship between the thoroughness of data collection and accuracy of the resulting diagnosis. Another study was done with psychologists and patient information and diagnosis. Again, increasing knowledge yielded no better results but did significantly increase confidence, something which the smartest among us are most prone to have in abundance. Unfortunately, in the markets, only the humble survive.

The inference is clear and important. Experienced analysts have an imperfect understanding of what information they actually use in making judgments. They are unaware of the extent to which their judgments are determined by just a few dominant factors, rather than by the systematic integration of all of their available information. Analysts use much less available information than they think they do. (more…)

Ray Dalio Principles

  
  Education
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  • I remained wary about being overconfident, and I figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risks of not knowing.
  • While most others seem to believe that learning what we are taught is the path to success, I believe that figuring out for yourself what you want and how to get it is a better path.
  • How much do you let what you wish to be true stand in the way of seeing what is really true?
  • How much do you worry about looking good relative to actually being good?
  • The most important qualities for successfully diagnosing problems are logic, the ability to see multiple possibilities, and the willingness to touch people’s nerves to overcome the ego barriers that stand in the way of truth.
  • Know what you want and stick to it if you believe it’s right, even if others want to take you in another direction.
  • In a nutshell, this is the whole approach that I believe will work best for you—the best summary of what I want the people who are working with me to do in order to accomplish great things. I want you to work for yourself, to come up with independent opinions, to stress-test them, to be wary about being overconfident, and to reflect on the consequences of your decisions and constantly improve.

What Happens in Your Brain When Your Market View Is Completely Wrong

  
  Education
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Eric Barker has a new article (link here) on how to win every argument. The article had a point which made me think whether the same situation happens in trading.

So it quoted an experiment by psychologist Drew Westen, which showed to supporters, footage of their favorite candidates completely contradicting himself. The experiment found that as soon as the people realized that the information contradicted their world view, the parts of the brain that handle reason and logic went dormant, while the parts of the brain that handle hostile attacks – the fight-or-flight response – lit up. Essentially logic gets thrown out the window, and it just becomes a fight where you do anything to win.

A similar situation occurs in trading, when you have a certain expectation of how the market should behave. E.g. you might for various reasons, think that the market will go up. So when the market does not follow what you expect, you might initially make up excuses for it. However when the market continues to go completely in the opposite direction of what you expect, your logic and reasoning centers would shut down, your fight-or-flight response kicks in, you treat it like a hostile attack on you, and you would do anything to win (or not lose), e.g. keep averaging down. I’m sure this sequence of events led to many traders blowing up their accounts. It is pretty interesting that the experiment showed this as a ‘natural expected’ behavior.

As always, trade what you see, not what you think.

Ten Simple Facts about OIL

  
  Education
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Oil_barrel_standard1) Oil is priced in dollars.
2) Oil trades in Dollars and Euros right now in spite of the pricing unit being dollars. OPEC has recently admitted this fact.
3) Clearly oil does not have to be priced in Euros to trade in Euros, or for that matter priced in Yen to trade in Yen. The same applies to any major currency.
4) Neither Venezuela or Iran hold any dollar reserves. To the extent that either is taking trades in dollars, there is clearly nothing forcing them to hold dollars. By extension there is nothing forcing any OPEC country to hold dollars if it doesn’t want to.
5) It takes less than a second for Forex trades to take place. 24 hours a day, 7 days a week, one can sell any currency they want and buy any other currency.
6) The above logic applies to any currency and any commodity.
7) Nothing is stopping anyone at any time anywhere from selling dollars for whatever currency they want to hold. Nor is anything stopping anyone anywhere at any time from selling any major currency for U.S. Dollars.
8) Because currency conversion is instantaneous no one has to hold U.S. dollars to buy oil, copper, gold, iron, lead, wheat, soybeans, or anything else.
9) Dollars are held (or not held) for reasons totally unrelated to pricing unit. Some of those reasons are political, some are based on sentiment, some on trade patterns and trade relationships, and some to suppress the value of local currencies to improve exports.
10) Currencies float and so do the price of oil and commodities. Pricing oil (or any other commodity) in Euros will not cause a price change in dollars. Look at gold which is simultaneously priced in everything as proof.

Be Unemotional

  
  Education
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UnemotionalIf you have ever played poker, you will know the high of going “all in”. Your heart is racing like there’s no tomorrow, and you are hoping and praying that the cards will go your way. It’s the thrill of knowing you can double your money in a few moments and also knowing it can all disappear if things don’t go your way.

This type of excitement should not exist in any form in your trading. If you are a thrill seeker, go skydiving. If you are a gambler, go to a casino. If you are afraid to lose money, open a savings account.

Successful Day traders do not let their emotions interfere with their trading. Too often, we let fear, greed, or pride get in the way.

Fear

Fear will prevent you from making the right trades and make you lose out on immense opportunities. Fear stems from lack of knowledge and proper education. You are afraid because you can’t see that a trade is the right trade since you don’t know what the right trade looks like. Once you acquire the knowledge and training, you can begin to trust your decisions because they are based on facts and not emotion.

Greed

Greed is another emotion we must overcome to be successful. Many beginners experience “beginners luck”, and come out on top on their first few trades. Then they start believing that they should have traded with more money so their profits will be larger. So on the next trade, they trade with a large sum of money and they lose it all. Logic will dictate that they should trade with a smaller amount the next time around since they have less capital now. Unfortunately, humans are not logical creatures. Our greed takes over, and we start believing that if we put in more money, we will make up for the lost amount, and come out on top. Sadly, this cycle can only continue until you are completely out of money. The worst thing that can happen to a beginner trader is to have a successful first trade. (more…)

Stoploss

  
  Education
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I’m sure everyone has been presented with the following logic: put in a ‘stop-loss’ at some arbitrary amount, say losing 1%. Then, your payoff distribution is tilted towards infinity, as shown above. It’s like the idea of going to Vegas, and saying you will stop when you lose $500, so you think that you still have an equal chance of generating those +$500 and up numbers, and the bad outcomes are just truncated at -$500. Alas, it doesn’t work like the graphs above. Instead, it generates the graph below, with a lot of probability mass at the stop-loss point:

 

What Happens in Your Brain When Your Market View Is Completely Wrong

  
  Education
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Eric Barker has a new article (link here) on how to win every argument. The article had a point which made me think whether the same situation happens in trading.

So it quoted an experiment by psychologist Drew Westen, which showed to supporters, footage of their favorite candidates completely contradicting himself. The experiment found that as soon as the people realized that the information contradicted their world view, the parts of the brain that handle reason and logic went dormant, while the parts of the brain that handle hostile attacks – the fight-or-flight response – lit up. Essentially logic gets thrown out the window, and it just becomes a fight where you do anything to win.

A similar situation occurs in trading, when you have a certain expectation of how the market should behave. E.g. you might for various reasons, think that the market will go up. So when the market does not follow what you expect, you might initially make up excuses for it. However when the market continues to go completely in the opposite direction of what you expect, your logic and reasoning centers would shut down, your fight-or-flight response kicks in, you treat it like a hostile attack on you, and you would do anything to win (or not lose), e.g. keep averaging down. I’m sure this sequence of events led to many traders blowing up their accounts. It is pretty interesting that the experiment showed this as a ‘natural expected’ behavior.

As always, trade what you see, not what you think.

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