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Trading psychology articles
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Trading psychology articles

  #11 (permalink)
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Why the Human Brain Is a Poor Judge of Risk

This article is written by Bruce Schneier, a renowned IT security expert. The subject is how our brain goes about analyzing risk, via two parallel systems. One system, more primitive, residing in the amygdala. The other system, evolved later, residing in the neocortex.

Daniel Kahneman also happens to be mentioned in the article, and parallels are drawn between the two above systems and Kahneman's S1 and S2 systems from his "Thinking Fast and Slow" book.

The reason why I really like this article is, the primal fear usually associated with mortal dangers gets triggered while trading for some people. The two systems get into conflict and so a conversation similar to this ensues in your brain

S2: "This trade is a trade you have seen hundreds of time, therefore it is likely that your target will be reached out before your stop"

S1: "Yes but I entered at a worse price so I am going to move my target closer"

S2: "There's no need to do that. Statistical analysis has demonstrated that your target is going to be hit"

S1 (not really listening to S2): "Price is going back to my entry point, see? I knew it!"

S2: "Yes, that's called market fluctuation. Relax, things are going to be just..." S1: "Price is moving against me! ABORT, ABORT!"


https://www.wired.com/2007/03/security-matters0322/


P.S. Only recently have I realized that this emoji is shutting out outside input and wants only to listen to itself.

In other words, a perfect S1

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You Are Responsible for Improving Your Photography

This article has seemingly nothing to do with trading psychology but, my take is, replace photography with trading and there are many similarities.

First, it all starts with the realization that the answer is not going after vendors, educators or indicators.

Rather, the answer is looking at you in the mirror.

This is a first step and it's the so-called paradigm change, because your psychology needs to believe you are the answer.

The second step is process-based and has been described many times on FIO. Deliberate practice, learning, working on one improvement at a time, refining, etc.

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xplorer View Post
This is a first step and it's the so-called paradigm change, because your psychology needs to believe you are the answer.

I agree with you xplorer.
Im a big fan of the matrix trilogy and it contains a message with a direct parallel to what you are saying.
The Oracle was designed to guide all the necessary players into believing their roles within the Matrix. Neo had to subconsciously accept the Matrix. It had to be his own choice. Morpheus had to believe he would find the One. When Neo himself realises (and accepts) that he is the One, Trinity simultaneously realises that she actually loves him. The kyemaker was created to aid the heroes to believe that they were fighting for something based on a prophecy.

Choice. Only you can decide.

Unfortunately for us as traders, belief is only the first step because to quote the architect who so beautifully describes the emotional factor:

Quoting 
The problem is choice. But we already know what you’re going to do, don’t we? Already I can see the chain reaction, the chemical precursors that signal the onset of emotion, designed specifically to overwhelm logic, and reason. An emotion that is already blinding you from the simple, and obvious truth.

And he goes on to say:

Quoting 
Hope, it is the quintessential human delusion, simultaneously the source of your greatest strength, and your greatest weakness.

So yeah. Belief is crucial but unfortunately as traders we need to work on a host of other things as well.
And when you have learnt to deal with one thing, there will be something else that appears because as you know our minds are not singular but rather a committee of conflicting ideas. Thats hwy it always surprises me when people reduce trading to one condition:
Money management, phsychology, technical ability, screen time...you know? Belief and confidence in yourself is necessary but you have to be chairman of the committee of the mind... you have to be the One.

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Unfortunately for us as traders, belief is only the first step

My point is that I have seen many who don't even consider themselves as the answer - they seek the holy grail elsewhere: a better tool, a better indicator, a better education and so on.

My take is most of the time the basics will suffice. It's how you use those basics that makes the difference.

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Another article which is indirectly related to trading psychology and a great read, especially for those who are considering trading as a career alternative but perhaps have not yet asked themselves what they are willing to give up.




You probably know to ask yourself, “What do I want?” Here’s a way better question

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Glad I stumbled across this thread, looking forward to checking it out. Thanks @xplorer!

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Rrrracer View Post
Glad I stumbled across this thread, looking forward to checking it out. Thanks @xplorer!

Just found this. I agree. Will be following.


xplorer View Post
My point is that I have seen many who don't even consider themselves as the answer - they seek the holy grail elsewhere: a better tool, a better indicator, a better education and so on.

My take is most of the time the basics will suffice. It's how you use those basics that makes the difference.

There are a lot of "basics" -- that is, things that are known to work, due to the fact that others have used them successfully. But almost no one will ever succeed while using whichever of them that he/she tries. Then they (we) go on to another new thing, which usually won't work either.... The one common denominator is, of course, the trader who it trying to use them.

I certainly have seen that in my own trading, so I'm not finding fault, just observing a fact that keeps popping up (damn it )

Good to see this being discussed.

Bob.

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xplorer View Post
Another article which is indirectly related to trading psychology and a great read, especially for those who are considering trading as a career alternative but perhaps have not yet asked themselves what they are willing to give up.




You probably know to ask yourself, “What do I want?” Here’s a way better question

Nice!

Some takeaways:

What is the pain that you want to sustain?

If you find yourself wanting something month after month, year after year, yet nothing happens and you never come any closer to it, then maybe what you actually want is a fantasy, an idealization, an image and a false promise. Maybe what you want isn’t what you want, you just enjoy wanting.

The truth is far less interesting than that: I thought I wanted something, but it turns out I didn’t. End of story.


It could be that:

"I was in love with the result—the image... —but I wasn’t in love with the process. "

Who you are is defined by the values you are willing to struggle for. This is the most simple and basic component of life: our struggles determine our successes. So choose your struggles wisely, my friend.

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Psychology in practice - Emotional management

This video talks about how developing a triggering gesture may help putting oneself into a better emotional state.



Last edited by xplorer; January 5th, 2018 at 04:13 PM. Reason: title add
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Our own blind spots and cognitive biases


I have always been fascinated by human behaviour.

One of the aspects I find most curious is how most people are so entrenched in their own beliefs that they will even go to war for them, no matter how biased they may be.

Biases is one of the central subjects of Thinking Fast and Slow which I mentioned in prior posts of this thread, yet it was surprising when I looked for keywords such as "blind spot" or "cognitive bias" to find a dedicated Wikipedia page about it which lists a whopping 150+ biases, organized by three main categories.

I scanned through the list and I thought I'd provide a selection of those which I think may be applicable to trading.


Note: my own filtering of the list may very well be (and probably is) biased in itself.


Biases
BiasDescription
AnchoringThe tendency to rely too heavily, or "anchor", on one trait or piece of information when making decisions
Bandwagon effectThe tendency to do (or believe) things because many other people do (or believe) the same
Bias blind spotThe tendency to see oneself as less biased than other people, or to be able to identify more cognitive biases in others than in oneself
Choice-supportive biasThe tendency to remember one's choices as better than they actually were
Clustering illusionThe tendency to overestimate the importance of small runs, streaks, or clusters in large samples of random data
Confirmation biasThe tendency to search for, interpret, focus on and remember information in a way that confirms one's preconceptions
Disposition effectThe tendency to sell an asset that has accumulated in value and resist selling an asset that has declined in value
Framing effectDrawing different conclusions from the same information, depending on how that information is presented
Frequency illusionThe illusion in which a word, a name, or other thing that has recently come to one's attention suddenly seems to appear with improbable frequency shortly afterwards
Gambler's fallacyThe tendency to think that future probabilities are altered by past events, when in reality they are unchanged
Hindsight biasSometimes called the "I-knew-it-all-along" effect, the tendency to see past events as being predictable[48] at the time those events happened
Hot-hand fallacyThe fallacious belief that a person who has experienced success with a random event has a greater chance of further success in additional attempts
Illusion of controlThe tendency to overestimate one's degree of influence over other external events
Information biasThe tendency to seek information even when it cannot affect action
Insensitivity to sample sizeThe tendency to under-expect variation in small samples
Irrational escalationThe phenomenon where people justify increased investment in a decision, based on the cumulative prior investment, despite new evidence suggesting that the decision was probably wrong
Neglect of probabilityThe tendency to completely disregard probability when making a decision under uncertainty
Normalcy biasThe refusal to plan for, or react to, a disaster which has never happened before
Observer-expectancy effectWhen a researcher expects a given result and therefore unconsciously manipulates an experiment or misinterprets data in order to find it
Optimism biasThe tendency to be over-optimistic, overestimating favorable and pleasing outcomes
Ostrich effectIgnoring an obvious (negative) situation
Outcome biasThe tendency to judge a decision by its eventual outcome instead of based on the quality of the decision at the time it was made
Post-purchase rationalizationThe tendency to persuade oneself through rational argument that a purchase was good value
Pseudocertainty effectThe tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes
Selective perceptionThe tendency for expectations to affect perception
Subjective validationPerception that something is true if a subject's belief demands it to be true. Also assigns perceived connections between coincidences
Zero-risk biasPreference for reducing a small risk to zero over a greater reduction in a larger risk
Zero-sum biasA bias whereby a situation is incorrectly perceived to be like a zero-sum game
Naïve realismThe belief that we see reality as it really is – objectively and without bias; that the facts are plain for all to see; that rational people will agree with us; and that those who don't are either uninformed, lazy, irrational, or biased
Self-serving biasThe tendency to claim more responsibility for successes than failures

If you are interested in finding out more about any of these biases or indeed all the others, this is the relevant Wikipedia article

https://en.wikipedia.org/wiki/List_of_cognitive_biases


The Cognitive Bias Codex:
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Last edited by xplorer; January 27th, 2018 at 05:29 AM. Reason: added The Cognitive Bias Codex diagram
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