Wednesday, November 3, 2010

"A Bird In The Hand Is ISN'T Worth Two In The Bush"

....that is, if you have a positive trading expectancy.

Way Of The Turtle is a MUST read for anyone who is struggling (who isn't?!) with the emotional/psychological aspects of trading.

Chapter 2, "Taming The Turtle Mind", has been useful to me...particularly this piece, found on page 16:-

"People who are affected by loss aversion have an absolute preference for avoiding losses rather than acquiring gains. For most people, losing $100 is not the same as not winning $100. However, from a rational point of view the two things are the same: They both represent a net negative change of $100. Research has suggested that losses can have as much as twice the psychological power of gains"

So THAT'S were mum got the title's saying from!

We are so tied up in avoiding losses from money we already have that we are prepared to lose (and it is losing!) money that we essentially do have in a future's present if we follow through with our edge-inclusive plan.

Feeling the losses twice as intensely as the gains (or future gains which have been "lost") creates a negative edge- you'll go out of your way twice as much to avoid losing what you've got and, in doing so, avoid future gains by the same factor.

I suppose the above could be viewed as a negative mental edge with a value of -2.

Which would obviously be detrimental for any positive trading edge.

1 comment:

YM-Trader said...

Sometimes (oftentimes a lot) the best parts of some books are the psychology sections. My method is not the turtle method but what that books says about psychology is worth reading alone. I say the same about Alexander Elder. You can't be a good trader until your own head is wired right. The X's and O's? Heck, that's the easy part.