Behavioral Finance Theory and Crowd Psychology - Psychology and Money Management | futures io social day trading
futures io futures trading


Behavioral Finance Theory and Crowd Psychology
Updated: Views / Replies:4,949 / 35
Created: by Big Mike Attachments:1

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors – all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you don’t need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 1  
 
Thread Tools Search this Thread
 

Behavioral Finance Theory and Crowd Psychology

  #11 (permalink)
Membership Revoked
Oslo, Norway
 
Futures Experience: Advanced
Platform: CQG, Excel
Favorite Futures: CL
 
Lornz's Avatar
 
Posts: 1,198 since Apr 2010
Thanks: 500 given, 1,235 received


Rad4633 View Post
You caught my attention, what size fat tails do you like since German isnt one of them

What is this? 20 questions?

The fatter, the better. @Fat Tails does not sound nearly corpulent enough.... However, his picture in the Big Trader thread might suggest that I am wrong....

Reply With Quote
 
  #12 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,653 since Mar 2010
Thanks: 4,226 given, 25,602 received
Forum Reputation: Legendary


Big Mike View Post
If any of you smart guys on the forum have any recommended books or courses on Behavioral Economics and Crowd Psychology, I want to hear from you.

I'd love a discussion on this topic!

How many of you believe that crowd psychology plays a major role in the markets?

Mike


Some books from my personal library in alphabetical order. I am only adding a short comment to each book.


George A. Akerlof and Robert J.Shiller: Animal Spirits (*)

Book explaining how human psychology drives the economy. Recommended.

Philip Ball: Critical Mass (*)

This book explains the mechanisms that drive crowds. It is more on complexity than psychology, but an easy an interesting read.

Terry Burnham: Mean Markets and Lizzard Brains

Have not yet read the book.

John Cassidy: How Markets Fail (*)

Enjoyable read. Does not only focus on behavioural economics.

Justin Fox: The Myth of the Rational Market

Overview over the history of the efficient market hypothesis and its failure.

John Kenneth Galbraith: A Short History of Financial Euphoria

Classic.

Daniel Kahneman and Amos Tversky: Choices, Values and Frames

Collection of essays edited by the authors. Difficult read. Background knowledge.

Daniel Kahnemann: Thinking, Fast and Slow

The last book that I have bought. Not yet read.

Charles Mackay: Extraordinary Popular Delusions (*)

Excellent Classic.

Paul Ormerod: Why Most Things Fail (*)

Another book on the mechanisms that drive crowds.

Martin J. Pring: Investment Psychology Explained

Not a book on crowd behaviour or behavioural economics, but a book on the psychology of the investor.

Thomas C. Schelling : Micromotives and Macrobehaviour
(*)

Highly recommended.

Hersh Shefrin: Beyond Greed and Fear

Case Studies on Investing and Behavioural Finance.

Robert J.Shiller : Irrational Exuberance (*)

Recommended Read.

Andrei Shleifer: Inefficient Markets, An Introduction to Behavioural Finance


Difficult read, requires knowledge of mathematics, background knowledge.

Thomas Sowell: Economic Facts and Fallacies

Not a book on behavourial economics, but I like to mention it here. Not an easy read.

Richard Thaler: Quasi-Rational Economics


Difficult Read, requires some knowledge of mathematics.

Richard Thaler: The Winner's Curse
(*)

Recommended read. Serious but entertaining.


If you want to start to inform you on the subject, select one of the books that I have marked (*).

Reply With Quote
The following 10 users say Thank You to Fat Tails for this post:
 
  #13 (permalink)
Site Administrator
Manta, Ecuador
 
Futures Experience: Advanced
Platform: My own custom solution
Favorite Futures: E-mini ES S&P 500
 
Big Mike's Avatar
 
Posts: 46,240 since Jun 2009
Thanks: 29,353 given, 83,234 received


Thanks Harry. If you have contact info (email) for any of these authors let me know. I would like to reach out and try and get some webinars scheduled.

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
to support our community, become an Elite Member.

Reply With Quote
 
  #14 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,653 since Mar 2010
Thanks: 4,226 given, 25,602 received
Forum Reputation: Legendary


Big Mike View Post
Thanks Harry. If you have contact info (email) for any of these authors let me know. I would like to reach out and try and get some webinars scheduled.

Mike

I have once tried to contact Charles Mackay, but he did not answer the phone.

Reply With Quote
 
  #15 (permalink)
Site Administrator
Manta, Ecuador
 
Futures Experience: Advanced
Platform: My own custom solution
Favorite Futures: E-mini ES S&P 500
 
Big Mike's Avatar
 
Posts: 46,240 since Jun 2009
Thanks: 29,353 given, 83,234 received


Fat Tails View Post
I have once tried to contact Charles Mackay, but he did not answer the phone.

I will research the authors and try to reach out through websites that they sometimes keep. But I know that sometimes authors list email addresses in books.

Of course, some of these authors might be dead. I do not know how old these books are

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
to support our community, become an Elite Member.

Reply With Quote
 
  #16 (permalink)
Fiddler
Nashville, TN
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: IB
Favorite Futures: NQ ES
 
Posts: 468 since Feb 2011
Thanks: 323 given, 542 received

"Understanding the psychology of the market" means being able to quick adapt to the conditions that increase/deacrease volatility, shift markets from trending to rangebound and back. You don't have to fully understand the what/why...just that your charts or DOM or whatever allows you to know better than the next guy what the likely market condition is...and the sense to stay out of the market if you don't....that last part is where market psychology meets your own psychology.


Big Mike View Post
d) Don't be risk averse. Set a stop far enough away that once the market trades there you admit the trade was wrong, but not so close that if market trades at a nearby level and takes you out, that you don't feel the trade is still valid - yet you are flat.
Mike

I see this as a key point that many people lack an understanding of, and because of that it helps drive some of the psychological aspects. I have probably taken this too far with my swingbot that has no price stops, just time stops, but I am comfortable knowing my risk in the market versus the profit potential that is available. It may be automated, but I still have to stomach the trades. At the same time it forces good risk management, because to be comfortable with a wide-stop / no-stop trade one should be taking on less risk.

Regardless, if you have to put a stop too close then you are not confident in your trade. Also for those that buy into a "trend" without a plan or knowing why they got in, are saving themselves from failure by saying they bought the "trend" which was created by someone else and failed because of others. Somehow it is less their fault.

"THEY" is a powerful psychological word used often in trading, denoting the other guys, the masked men that are mean to you, that you must fight against. I believe that this forces risk taking to "beat the odds". Taking trades against what is apparent, always expecting a breakout/breakdown when a market is rangebound or meandering, or vice versa.

The above end up being the basis of many a bad trade, repeated endless by many and on occasion even by the best.

In the end, the successful prey on the unsuccessful at least in the sum-minus-game of futures trading. One guy trading on the other guys fear and greed, and that other guy driven by those emotions. Still there are no absolutes.

Reply With Quote
The following user says Thank You to Luger for this post:
 
  #17 (permalink)
Elite Member
Greensboro NC
 
Futures Experience: None
Platform: TOS/ NT Dorman
Favorite Futures: ES TF CL
 
Rad4633's Avatar
 
Posts: 1,352 since Sep 2011
Thanks: 2,651 given, 886 received


Lornz View Post
What is this? 20 questions?

The fatter, the better. @Fat Tails does not sound nearly corpulent enough.... However, his picture in the Big Trader thread might suggest that I am wrong....

Actually I figured out my issue in a prior reply to @Big Mike, what I was searching for isnt in my trading but in me. So Now the exorcism begins, You interested in helping (my issue is related to crowd Psychology). Im in the crowd I see the target but the first noise I scatter with the crowd then turn around saying did I really do that...

Reply With Quote
 
  #18 (permalink)
Elite Member
Quebec
 
Futures Experience: Intermediate
Platform: NinjaTrader wt Rancho Dinero's profiling tools
Broker/Data: Stage 5 trading/AMP/CQG
Favorite Futures: ES, NQ, YM
 
trendisyourfriend's Avatar
 
Posts: 3,697 since Oct 2009
Thanks: 3,041 given, 4,497 received


Big Mike View Post
Interesting.

Why is ES different from CL?

Mike

That's an excellent question Mike. I'd be tempted to say there is no difference from a psychological perspective apart from the volatility but the ES gives you a compensation as you can trade larger size. All in all you can probably make as much money on the ES as you can on the CL.

Reply With Quote
 
  #19 (permalink)
Elite Member
Berlin, Europe
 
Futures Experience: Advanced
Platform: NinjaTrader, MultiCharts
Broker/Data: Interactive Brokers
Favorite Futures: Keyboard
 
Fat Tails's Avatar
 
Posts: 9,653 since Mar 2010
Thanks: 4,226 given, 25,602 received
Forum Reputation: Legendary


Big Mike View Post
I will research the authors and try to reach out through websites that they sometimes keep. But I know that sometimes authors list email addresses in books.

Of course, some of these authors might be dead. I do not know how old these books are

Mike

Those books are not hands-on books for the practical trader. They are books on behavioural economics, which studies irrational behaviour as opposed to the efficient market hypothesis or game theory, which is mostly based on the assumption that the behaviour of the market participants is rational. Some of the authors are dead, authors have been awarded prizes for writing science books, and some of them have been awarded Nobel Prizes. Not exactly the crowd you would invite for a webinar @Big Mike's.

As a trader you want to master your own demons and chase the demons of other traders. Trading is about mastering one-self (this subject is better covered by Brett Steenbarger and Mark Douglas) and about exploiting crowd behaviour.

Exploiting crowd behaviour would involve feedback analysis, focus on volume and open interest, for example

- COT reports showing net positions of market participants
- market breadth indicators
- volume and range analysis
- following sentiment indicators showing flight to safety (Vix, ISEE index, stocks versus treasury, USD index)

There are also specific trading setups - all setups that trap traders - which rely on crowd psychology.

Actually I do not think that there is such a thing as crowd psychology. It is all about mechanisms that rule behaviour through feedback loops. The correct image is probaly a bird swarm or a school of fish, and not a collective psychological state of investors that drives markets.

The problem of the trader is to develop tools to detect and describe such mechanisms. At some stage collective behaviour overrides the individual decisions, but the reason is not necessarily fear, it is rather the interrelationships between different agents on the Financial Markets. Lehmann was not dangerous because the bankers had a collective fear attack, but because other banks had lent to them and were also affected. A bird in a middle of a swarm cannot fly where it wants to, but is forced to follow some simple rules to avoid desaster.

That said, irrational behaviour does not need to be irrational in itself, it only looks irrational as judged with hindsight from the perspective of the historian. But even rational decision makers cannot guarantee a rational outcome, as the prisoner's dilemma shows. A Nash equilibrium is not necessarily Pareto optimal.

A thread on "Behavioural Finance Theory and Crowd Psychology" is probably a bit too much for this forum.

Reply With Quote
The following 3 users say Thank You to Fat Tails for this post:
 
  #20 (permalink)
Elite Member
La Jolla, CA
 
Futures Experience: Master
Platform: Sierra Chart, X_Trader Pro, OptionsCity
Broker/Data: Advantage, Trading Technologies, OptionsCity, IQ Feed
Favorite Futures: CL, NG
 
Private Banker's Avatar
 
Posts: 1,040 since Jul 2010
Thanks: 1,713 given, 3,759 received


I believe I've shared this site before but it's a great source for white papers discussing all the in's and out's of behavioral finance:

Behavioural Finance

Of course there's a ton of information out there regarding this topic but my thoughts are to fade the herd as much as possible. Look to create or be a part of a new trend vs. following one. For example, if everyone is buying into a certain market, you should be selling to them as you scale out of your position. When the frenzy stops and they're running for the exits, that's when it's time to start buying again.

But what's interesting about behavioral finance is all the underlying categories in which, we as traders, deal with on a daily basis. To own control of this is key to trading/investing success in my opinion. I've studied great lengths of this topic in the past and it has helped me tremendously in managing money for clients (in the past) and for myself.

Reply With Quote
The following 6 users say Thank You to Private Banker for this post:

Reply



futures io > > > Behavioral Finance Theory and Crowd Psychology

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Jigsaw Trading: TBA

Elite only

FuturesTrader71: TBA

Elite only

NinjaTrader: TBA

Jan 18

RandBots: TBA

Jan 23

GFF Brokers & CME Group: Futures & Bitcoin

Elite only

Adam Grimes: TBA

Elite only

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
Going against the crowd... (interesting video) Lornz Psychology and Money Management 2 August 22nd, 2011 06:41 AM
Market Alert: Investors Crowd Into New ‘Can’t Miss’ Trade Quick Summary News and Current Events 0 June 1st, 2011 07:20 PM
Economic Theory PandaWarrior Off-Topic 10 May 15th, 2011 12:06 PM
As Fed Exits Bonds, Others Likely to Crowd Back In Quick Summary News and Current Events 0 May 5th, 2011 01:40 PM
Thousands Crowd Central London in Budget Protest Quick Summary News and Current Events 0 March 26th, 2011 03:20 PM


All times are GMT -4. The time now is 05:34 AM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-16 in 0.15 seconds with 20 queries on phoenix via your IP 54.160.245.121