Wednesday, June 17, 2009

Cognitive Biases- It's all in your head!

The markets made up of many individuals, each with a tendency to fall into the trap of trading under the haze of these biases. They can appear one at a time or in a bunch, each working in sync with the others to make it even more difficult to see things objectively.

Some of my favourites are:

1) Sunk Cost Effect- Factoring in how much time, money etc you've committed to an idea when deciding whether to exit for a loss (or whether to hold on for larger gains) of course, effort isn't correlated with quality of an idea in the slightest.

2) Framing- Where the same thing is given different treatment dependent on how it's presented.

3) Anchoring- giving excessive weight to an irrelevant, but obvious, piece of information (Entries and Exits spring to mind)

There are many more, all very much linked to our perception of self (ego).

Those that are successful long term recognize these biases within themselves (something I'm very much able to do) AND are disciplined enough to work around them consistently (the part that I'm struggling with)

Tuesday, June 2, 2009

Back From Break.

A break was well overdue. My first self-imposed break from trading in close to 3 YEARS!. I've been on holiday a few times during that period but always had a peak at a chart here and there or was reading a book etc. This time I literally didn't open my platform for a week- no blogs, websites, e-mails or books. Nothing. If I went to a bank to change my dollars into euros, I'd have been as clueless as your average joe as to what the exchange rate was :) Strangely liberating....

Several things became apparent to me while away:

1) There's more to life than trading (even if I love doing it)
2) I trade because I choose to trade, not 'cause I have to- whenever I start feeling the latter, I need to take a break.
3) The only correct way to trade is the way that makes you money, and it has hardly anything to do with patterns, signals etc. No getting attached to one method!
4) There is a good chance that blogging, at least in detail, could be harmful to my trading.

That last one is important. I started blogging with the primary goal of tracking my progress (or lack thereof) by keeping an open diary- essentially talking to myself but with the real possibility of having others follow along too....keeping myself honest in the process.

But things may have changed. I find myself thinking about what others may think about what I'm doing/not doing instead of remaining true to the initial goal- record keeping. The record keeping in itself is questionable as it confines me within the bounds of my own thoughts and beliefs.

So I'm throwing out the rule book and keeping an open mind. The only rule I'm keeping is to have a plan....and TRADE IT!.