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A PERFECT EXPLANATION FOR THE COLLECTIVE MADNESS OF CROWDS

  
  Education
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All I can say about the following is WOW, talk about THE perfect explanation for the reason behind unreasonable and illogical crowded moves in the stock market…

The most striking peculiarity presented by a psychological crowd is the
following: Whoever be the individuals that compose it, however like or unlike
be their mode of life, their occupations, their character, or their intelligence,
the fact that they have been transformed into a crowd puts them in possession
of a sort of collective mind which makes them feel, think, and act in a manner
quite different from that in which each individual of them would feel, think,
and act were he in a state of isolation. There are certain ideas and feelings
which do not come into being, or do not transform themselves into acts except
in the case of individuals forming a crowd. The psychological crowd is a
provisional being formed of heterogeneous elements, which for a moment are
combined, exactly as the cells which constitute a living body form by their
reunion a new being which displays characteristics very different from those
possessed by each of the cells singly.

…and it was written by a psychologist in 1896!

Anyone care to guess who it is? And it is not Charles Mackay.

THE COLLECTIVE MADNESS OF CROWDS

  
  Education
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All I can say about the following is WOW, talk about THE perfect explanation for the reason behind unreasonable and illogical crowded moves in the stock market…

The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence,the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think,and act were he in a state of isolation. There are certain ideas and feelings
which do not come into being, or do not transform themselves into acts except in the case of individuals forming a crowd. The psychological crowd is a provisional being formed of heterogeneous elements, which for a moment are combined, exactly as the cells which constitute a living body form by their reunion a new being which displays characteristics very different from those possessed by each of the cells singly.

…and it was written by a psychologist in 1896!

10 signs you’re a narcissistic investor

  
  Education
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Some amount of narcissism (a strong belief in yourself) can be helpful in giving you the confidence to apply for a new job or ask for a raise but sometimes these same traits can become too extreme and you can find yourself part of the “narcissism epidemic” that psychologist Jean Twnege and Keith Campbell coined in their book of the same name.

The more you identify with these characteristics, the more likely you are to be a narcissistic investor.

  1. You always know what you’re doing.
    1. “I know I’m good because everybody keeps telling me so.”
  2. Everybody likes to hear your stories and you often boast about your latest or greatest winning trade during conversations.
    1. “Seeking admiration is like a drug for narcissists”, said Mitja Back a psychologist at Johannes Gutenberg University in Mainz Germany. “In the long run it becomes difficult because others won’t applaud them so they always have to search for new acquaintances from whom they get the next fix.”
  3. If an investment loses money it’s because someone else made a mistake, not you.
    1. I almost always hear how my broker sold me this (name a losing investment) vs. I bought this (name a winning investment).
  4. You’re a workaholic.You get upset when people don’t notice how well you’re doing financially. (more…)

The Power of Regret

  
  Education
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Everyone knows that chasing price is usually not beneficial, we either end up catching the move too late, or we get poor trade location, which makes it more difficult to manage the trade.

However, there are other forms of chasing that are just as common, maybe more common, and just as counter-productive.   As a trading psychologist I see these all the time.

Traders who are not profitable are often too quick to chase after new set-ups and indicators, or a different chat room, if that’s your thing.  Obviously, we need to have a trading edge, whether it is from the statistical perspective of a positive expectancy, or simply the confidence in a particular discretionary strategy such as tape reading, following order flow, market profile, etc.

Chasing a trade is the fear of missing out. The fear of missing out is associated with various emotions, including regret. In my work with traders and in my own trading, I’ve seen the incredible power of regret. There’s a lot of talk about fear and greed in trading, but the power of regret is often overlooked. Some of my own worst trades, and those of my clients, often have a ‘regret from missing a prior opportunity’ component. When I finally finish my book on the psychology of financial risk taking, I will include much about this overlooked but very powerful emotion. (more…)

Two Key Questions

  
  Education
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1) Do the problems that affect your trading also impact other areas of your life? – Let’s say that you find yourself overtrading and taking too much risk relative to your planned exposure. You realize that these lapses of discipline are costing you money and creating significant frustration. The key question to ask is whether these lapses also occur in other spheres of life: in managing personal finances, in failing to follow through on personal responsibilities, or in impulsive decision-making regarding career, relationships, and the future. If so, then you know that this is a general problem that is spilling over into trading. Working with a psychologist or other licensed therapist or counselor could be the best way to go, as this is not uniquely a trading problem. Alternatively, if the problem truly is unique to trading, then it is probably triggered by situational factors related to how you are trading. Relying on a trading coach to review your trading practices and address these factors can be promising.
2) Do the problems primarily result from poor trading, or are the problems a primary cause of poor trading? – This can be tricky to sort out, because the direction of causality often goes both ways. Many times, poor trading practices–such as trading excessive risk–lead to emotional fallout, such as frustration, anxiety, or even depression. Working on changing emotions might be helpful, but the root cause–the faulty money management–needs to be addressed. Conversely, there are times when emotional problems, such as performance anxiety, get in the way of trading plans and trading results. It is very helpful to examine trading problems in a step-by-step fashion, to see where emotions are affecting trading and to see where trading is creating emotional pressures.  (more…)

The Power of Regret

  
  Education
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Everyone knows that chasing price is usually not beneficial, we either end up catching the move too late, or we get poor trade location, which makes it more difficult to manage the trade.

However, there are other forms of chasing that are just as common, maybe more common, and just as counter-productive.   As a trading psychologist I see these all the time.

Traders who are not profitable are often too quick to chase after new set-ups and indicators, or a different chat room, if that’s your thing.  Obviously, we need to have a trading edge, whether it is from the statistical perspective of a positive expectancy, or simply the confidence in a particular discretionary strategy such as tape reading, following order flow, market profile, etc.

Chasing a trade is the fear of missing out. The fear of missing out is associated with various emotions, including regret. In my work with traders and in my own trading, I’ve seen the incredible power of regret. There’s a lot of talk about fear and greed in trading, but the power of regret is often overlooked. Some of my own worst trades, and those of my clients, often have a ‘regret from missing a prior opportunity’ component. When I finally finish my book on the psychology of financial risk taking, I will include much about this overlooked but very powerful emotion.

Somewhat related to chasing a trade, is impulse trading.  They both have in common the underlying feeling of the fear of missing out.  It’s tempting for me to talk about impulse trading here, but it really deserves its own piece.

No Risk-No Gain

  
  Education
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Trading is ALL about managing risk and probability.  The risk part is easy, you can quantify your risk by setting a stop on all your trades.  Yes, a stock can gap through your stop overnight, so we can’t know are risk 100% for certain, but setting aside major overnight announcements and earnings, we can get a pretty good idea.  The probability part is a little more difficult.  I don’t have empirical evidence to support the patterns I trade on both the long and shorts side, other’s have done a decent amount of research, and I have read some, but at the end of the day I have always believed that so called voodoo of technical analysis is a different religion for everyone.  Technical analysis, being little more than the study of the psychology of the market, is interpreted by everyone differently, and therefore should not be seen quantitatively to a large extent, but as more of an art.  It’s just like a psychologist, you can go to 4 different guys and get 4 different answer to your issues, they will approach you in different ways, ask you different questions, it’s a feel thing.

Anyway, I want to make the point in this post that you’ve got to understand and accept the risk you are putting on when you make a trade.  I will review a trade of mine where I made a terrible mistake and foresake this principal, and it has cost me quite a good deal of profits over the last few weeks, especially give that my thesis was correct.  It’s not enough to have good ideas, you must execute them properly.

Traders and Drinkers…Are We Different After All?

  
  Education
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If you find this post offensive, relax. This post is not intended to offend, only to discuss more trading psychology. I pass no judgments on this topic because I have lived through this subject in different aspects myself. I came across an article that correlates destructive trading to destructive alcohol consumption. Take a quick look at this questionnaire that professionals use to determine the severity of alcohol abuse…

1) Have you found that your drinking is bringing unwanted, negative consequences?

2) Have you recently felt guilty over the way you have been drinking?

3) Do you find you need to drink more just to get the good feeling?

4) Do you find that your personality changes when you drink excessively?

5) Do you find it difficult to take a break from drinking, even when part of you knows that this would be best for you?

6) Do you find yourself drinking to feel good about yourself?

7) Do you sometimes feel that you cannot control how much you drink?

8) Do you find yourself getting angry when someone close to you questions your drinking?

9) Do you find yourself vowing to limit your drinking, only to slip back into overdrinking?

10) Do you find it difficult to not drink given the opportunity, even when the occasion is not really appropriate?

Like I mentioned, these were questions that are typically asked by a psychologist when confronting someone struggling with alcohol consumption. You can apply this to any substance abuse, addiction, or whatever struggles you cope with. The question is “What about trading?” Take a look at the modified questionnaire…

1) Have you found that your trading is bringing unwanted, negative consequences?

2) Have you recently felt guilty over the way you have been trading?

3) Do you find you need to trade more just to get the good feeling?

4) Do you find that your personality changes when you trade excessively?

5) Do you find it difficult to take a break from trading, even when part of you knows that this would be best for you?

6) Do you find yourself trading to feel good about yourself?

7) Do you sometimes feel that you cannot control how much you trade?

8) Do you find yourself getting angry when someone close to you questions your trading?

9) Do you find yourself vowing to limit your trading, only to slip back into overtrading?

10) Do you find it difficult to not trade given the opportunity, even when the occasion is not really appropriate? (more…)

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