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  • 8/6/2019 Trading Psychology linkedin group newsletter

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    Trading Psychology: Understanding thepsychological aspects of yourself couldboost your trading.

    In the highly competitiveworld of trading, one needsevery edge possible to be

    successful as a trader.Almost everyone has thesame pool of information (toa degree), access to a pool ofcapital, and a desire tosucceed. Yet only very few

    actually make it to the top. Why is that? Whatmakes them different? What are they doing rightthat everyone else seems to be failing at? What is itthat gives them the edge?

    These are question that has been asked many oftimes over, sometimes out of curiosity, though Ifear more often in frustration or bewilderment. Inanswer to this you will hear a myriad of responses,such as; you need a better system, perhaps aspecial secret indicator, you should learn to controlor eliminate your emotions, listen to the experts,read certain books, perhaps even suggestions oftaking some a magic pill. Truth is that there is noright or wrong answer to this question (well perhapswith the exception of the magic pill that is).

    I think that Jack Schwager sums it up nicely in theNew Market Wizards when he says that Thesecret to success in the market lies not in thediscovery of some incredible indicator or elaborate

    theory; rather it lies within each individual.

    So how do you develop the correct attitude if youdont already possess it? Some useful starting pointswould be:

    Understanding the psychological and emotionalaspects of trading.

    Learning and understanding about yourself andhow your work in relation to the psychologicaland emotional aspects of trading.

    Learning about how others are affected by thepsychological and emotional elements oftrading and how successful traders cope withthese elements.

    Understanding the nature and psychology oftrading performance.

    Some people are dismissive of this aspect of trading,I however believe it is a huge factor differentiatingmany of those who survive, succeed and excel fromthose who fall by the wayside or crash and burn.There will of course always be those that rise to thetop, who seemingly make the whole think lookeffortless, who know just when to go in and stay

    out. (Cont inued on Page 2)TRADER,

    TRADING&

    RISK

    PSY

    CHOLOGY

    Trader, Trading & Risk PsychologyLinkedIn Group Newsletter July 2011

    Dear Group Member

    Welcome to the first newsletter of the LinkedIn group Trader, Trading & Risk Psychology. Thisletter is being sent to all group members to present a round-up of the topics and discussions whichhave been grabbing attention and interest within the group over recent months.

    I am aiming to send out quarterly summary newsletter, following suggestions by a number of groupmembers and interested parties, who are keen to know what topics and subjects are beingdiscussed within the group, but have not had the time to regularly check up on the groupsprogress.

    I would like to thank all those who have made contributions to the group so far. The participationlevels, interest and rapid growth of the group (almost 500 members in just three months) suggeststhat there is a real appetite and demand for learning and understanding more about thepsychological issues and aspects of trading, markets and risk.

    Thank you and warm regards

    Steven Goldstein

    Behavioural Economics: Nudging tosave lives in Mumbai.I am very glad to welcome Biju Dominic as amember of this group.Bijus excellent work hasseen him apply behavioural insights to save lives inMumbai. To find out more about Bijus work on the

    Mumbai rail system please followthis linkto aBoston Globe article. I would also suggestchecking out the website of Bijus Final mile

    consultancyhttp://finalmile.in/

    http://articles.boston.com/2011-05-08/news/29523051_1_mumbai-central-line-experimenthttp://articles.boston.com/2011-05-08/news/29523051_1_mumbai-central-line-experimenthttp://articles.boston.com/2011-05-08/news/29523051_1_mumbai-central-line-experimenthttp://finalmile.in/http://finalmile.in/http://finalmile.in/http://finalmile.in/http://articles.boston.com/2011-05-08/news/29523051_1_mumbai-central-line-experiment
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    (Cont inued f rom f ront page)

    Whilst it is true that there may be one or two thatfit into that category out there, I have not yet metany. A quick read through the stories of successfultraders, in books such as Jack Swaggers MarketWizards, or Alpesh Patels excellent but littleknown Mind of a Trader, and youll realise thatthis is a fallacy. In most cases these successfultraders battled and fought against the sameinternal enemies which all traders face, they hadmany successes but they also had many failuresalong the way. Above all however they had theright psychological attitude, irrespective of theirapproach, or even their background, it was thisthat enabled them to ride the downward phases,and prosper from the upward phases.

    One of, if not the toughest area for most traders, isdealing with emotions. Few jobs and professions

    can put you through the emotional rollercoasterquite like trading. I do not ever think you candefeat your emotions, many have tried and usuallyit has backfired somewhere along the line.Emotions are part of you, as much as your skin,bones and hair (though less so in my case). Helpingto understand your emotions however, could makeyou appreciate them better, peoples emotions andemotional levels are all of course slightly different.However, once you start to understand your ownemotions and impulses you could start to developtrading strategies or practices that account for youremotions. I know from years of experience as atrader that eventually you can even start to useyour emotions in a positive way.

    There are many ways in which learning andunderstanding about trading psychology can helpyou as a trader. If you want to know more there aresome very good books specifically on tradingpsychology including works by Brett Steenbarger,Mark Douglas or Dr Alexander Elder. There are alsoJack Schwagers and Alpesh Patels book, which Imentioned earlier. Other excellent books includeThe Way to Trade by John Piper, Curtis FaithsThe Way of the Turtle, and Tony Plummers

    Forecasting Financial Markets, amongst others.

    Before I finish I would like to use a quote from SunTzus The art of war, which I think emphasises thepoint about the need for learning about tradingpsychology very succinctly:

    It is said t hat i f you know your enemies andknow yourself, you can win a hundred battleswi t hout a single loss.If you only know yourself, but not your opponent,you may win or may lose.If you know neither yourself nor your enemy, you

    wil l always endanger yourself .

    Behavioural Finance: Applying psychologyto shine a light on ourselves, ourtrading and financial markets.

    Behavioural finance, and its bigger siblingbehavioural economics, looks at social, cognitiveand emotional factors to help explain the economicdecisions that people and institutions make andtheir effects on market price action. BF and BEtypically integrate insights from psychology withneo-classical economic theory.

    One of the central tenets of Behavioural Finance isthat people have limits to their rationality orbounded rationality. This is the idea that indecision making, rationality of individuals is limited

    by the information they have, the cognitivelimitations of their minds, and the finite amount oftime they have to make decisions. This is inopposition to the traditional financial theoriesbased of long-held conventional thought that theworld is made up of rational human beings alllooking to maximise their utility and wealth.

    (Cont inued on Page 3)

    TRADER,

    TRADING&R

    ISKPSYCHOLOGY

    TT&RP Promotions section.

    Group members are encouraged toadvertise, promote or market theirbusinesses or business ideas in the

    promotions field.Members can also check out the manyexcellent products, services, educationalarticles, investing ideas, and courseofferings of other group members withinthe Promotions section.

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    (Cont inued f rom page 2: Behaviour al Finance:Apply ing psychology t o shine a li ght onunderst anding how ourselves and markets.)

    In Behavioural Finance the view is that peoplesdecisions, and therefore markets, are affected bymany factors including emotions, biases, prejudices,urges, different motivations, social pressures,culture and belief systems, all which combine tolead people to make decisions which may seemirrational and against their best interests.

    Whilst the subject of behavioural finance isrelatively new,the concepts behind it are as old as

    the hills. People active in the markets; traders,investors, some analysts (certainly technicalanalysts), sales and marketers; have known foryears that markets are not efficient and that theyare affected by peoples behavioural aspects. Manyof the concepts and theories of traditionaleconomics do just not stand up in the real world.

    Thus whilst certain academics and economictheorists continue espousing the line that it isimpossible to profit from markets in the long-term,those who know this is nonsense just continuemaking money from the markets. And just for the

    record, Adam Smith, the father of the wholemodern economics movement himself, was fullyaware of this; some even say that modernbehavioural finance has its very roots in hisTheTheory of Moral Sentiments.

    So how can understanding behavioural financeimprove your own understanding of the marketsand/or your own trading?

    It creates greater awareness of many of thetheories that underlay behavioural finance; as aresult traders and investment managers shouldbe more capable of recognising aspects of their

    own behaviour which negatively affect andinfluence their trading and investmentperformance.

    Through understanding how people makedecisions and what leads to effective andineffective decision making. As a consequencetraders may be able to alter their ownparticular behaviours or even their tradingstrategy and tactics to implement a more rigidstructure to how they analyse markets andarrive at trading decisions.

    In addition, understanding and appreciatingthese aspects, and the underlying tenets of

    behavioural finance, can help lead to onerationalising why markets often behave as theydo, irrationally. From looking at individualbehaviour and crowd behaviour we can soonstart to explain the herd mentality of markets,bubbles and crashes, spikes in volatility, andthe trending nature of market moves.

    Before I finish this short article, I would like toprovide an example one of the major theoriesunderlying behavioural finance. Prospect theory: isthe idea that people have a tendency tovalue equivalent gains and losses differently, which

    leads people to base decisions on perceived gainsrather than perceived losses. Thus if a person weregiven two equal choices but expressed in terms ofpossible gains as opposed to a possible loss, peoplewould choose the former even though they are thesame thing. I will demonstrate this through use ofan example taken from the Investopediawebsite:Assume an investor was presentedwith the same mutual fund by twodifferent financial advisors. The first advisor tellsthe investor that the mutual fund has had anaverage return of 7% over the past five years. Thesecond advisor tells the investor that the mutual

    fund has seen above-average returns in the past 10years but has been declining in recent years.According to prospect theory, even thoughthat investor was presented with the same mutualfund, he or she is more likely to buy the mutualfund from the first advisor, who expressed the rateof return as an overall 7% gain, rather acombination of both high returns and losses.

    There are many theories within the field ofbehavioural finance, which form the backdrop tounderstanding peoples behaviour and decisionmaking processes, and thus help shed a light on whywe are so prone to making sub-optimal decisions.

    I would encourage anyone who wants to know moreabout the hows and whys of markets and traders,to try and understand more about behaviouralfinance and economics. The range and scope of thesubject is huge, however a couple of easy intros tothe subject would be to look at the Investopediawebsites Behavioural Finance; Background ororder James Montiers excellent Little Book ofBehavioural Investing.

    TRADER,

    TRADING&R

    ISKPSYCHOLOGY

    Join the TT&RP Linked-in group discussions or start your own.Group members are encouraged to participate in the many discussions currently runningwithin the group. Alternatively start your own discussion. Discussion topics enable members tointeract with-each other, share views and opinions, offer alternative perspectives, deepen learning anddiscuss developments around the broad topics of psychological aspects of trading.

    http://www.investopedia.com/terms/p/prospecttheory.asphttp://www.investopedia.com/terms/p/prospecttheory.asphttp://www.investopedia.com/terms/p/prospecttheory.asphttp://www.investopedia.com/university/behavioral_finance/behavioral2.asp#axzz1RtgaTDI6http://www.investopedia.com/university/behavioral_finance/behavioral2.asp#axzz1RtgaTDI6http://www.investopedia.com/university/behavioral_finance/behavioral2.asp#axzz1RtgaTDI6http://www.investopedia.com/university/behavioral_finance/behavioral2.asp#axzz1RtgaTDI6http://www.investopedia.com/terms/p/prospecttheory.asp
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    A look at some of the most popular andinteresting discussions on the TT&RPLinkedIn group site:(Cli ck on discussion t i t le t o go to discussion)

    What is the difference between tradingand gambling?This particular discussion has been the mostcommented on so far, with over 80 comments todate. Some of the answers have been mostilluminating, occasionally getting people fired up,

    and producing some interesting perspectives. It isparticularly worth checking out the comments from,Brian Wideman, a professional poker player whoand Fred Viole who brings a more scientific andstatistical perspective.

    What is more important for success as atrader - A high level of IntellectualIntelligence, or a high level of EmotionalIntelligence?The general feeling from the comments so far isthat whilst both high levels of intelligence at anintellectual and emotional level are crucial, high

    levels of emotional intelligence appear to be morehighly valued than high levels of intellectual

    intelligence when it comes to trading. Of course noteveryone however agreed. This discussion hasproduced some extremely interesting responsesfrom number of esteemed group members.

    Inspirational trading quotes help keepyou grounded and focused: Anyone gotany good ones?This has produced a slew of excellent inspirationalquotes. Inspirational quotes are a great way ofremaining grounded, I always keep my ownfavourites handy for any time I need a little

    inspiration or am feeling frustrated.

    My own particular 3 favourites are:

    Predict ing rain does n't count ; buil ding arksdoes': Warren Buffett.

    'Never let f ear of str iki ng out , get in yourway': Babe Ruth.

    'It s tough t o make predict ions, especial lyabout t he fut ure.'- Lawrence Peter 'Yoggi'Berra.

    TO view a complete list of these quotes by themego to:http://hometraderuk.blogspot.com/2011/07/inspi

    rational-quotes-for-traders.html(Continued next page)

    Why mastering your Psychological and Emotional aspects are crucial in trading.

    Understanding and appreciating the psychological and emotional aspects of trading, is in my opinionprobably the most important part of trading, if one is to truly be successful over the long term. Atrader could possess the best trading system/method, the optimum risk and money management

    techniques, and a deep knowledge of markets, however if this is not underscored by the correctmental attitude it could all count for nothing.

    Plenty has been written on this subject over many decades, yet achieving and mastering thepsychological aspects of trading is something that still eludes the majority of traders. In One-WayPockets, a book written in 1917 by Don Guron, which looked into the activities of the most activetraders at a brokerage firm, Guron wrote The fact that impressed me most forcibly was the tradingmethods ..may be classed with a number of psychological phenomena that cause the greatmajority of speculators to do the opposite of what they ought to do. Later in the book Guyon says,The man who applies this or that method successfully must be able to exercise patience and self-control to withstand all forms of mental temptation, to ignore the dictates of fear and greed. JesseL.Livermore touches on it too in Reminiscences of a Stock Operator published in 1923. The game ofspeculation is the most uniformly fascinating game in the world. But it is not a game for the stupid,

    the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. Theywill die poor.

    In the acclaimed classic trading book Market Wizards published in 1989, Jack D.Schwager conducted aseries of interview with successful traders. Schwager asks What sets these traders apart? He answersthis by saying that Most people think that winning in the markets has something to do with findingthe secret formula. The truth is that any common denominator among the traders I interviewed hadmore to do with attitude than approach.

    The factors I mentioned earlier; trading system/method, money/risk management, and knowledge ofmarkets, are the essential pillars of a successful trading approach. Yet there is nothing is more crucialthan to understand oneself and the psychological aspects of trading if one is to overcome the manyself-induced obstacles that contribute to trader underperformance.

    TRADER,

    TRADING&R

    ISKPSYCHOLOGY

    http://www.linkedin.com/groups/What-is-difference-between-trading-3863963.S.56137670?qid=027bc669-7511-4a4e-9d95-ea078fa93731&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-difference-between-trading-3863963.S.56137670?qid=027bc669-7511-4a4e-9d95-ea078fa93731&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/Inspirational-trading-quotes-help-keep-3863963.S.50177235?qid=649b28a2-d46e-42a5-b9d9-d8c69b49c669&trk=group_most_popular-0-b-ttl&goback=%2Egmp_3863963http://www.linkedin.com/groups/Inspirational-trading-quotes-help-keep-3863963.S.50177235?qid=649b28a2-d46e-42a5-b9d9-d8c69b49c669&trk=group_most_popular-0-b-ttl&goback=%2Egmp_3863963http://www.linkedin.com/groups/Inspirational-trading-quotes-help-keep-3863963.S.50177235?qid=649b28a2-d46e-42a5-b9d9-d8c69b49c669&trk=group_most_popular-0-b-ttl&goback=%2Egmp_3863963http://hometraderuk.blogspot.com/2011/07/inspirational-quotes-for-traders.htmlhttp://hometraderuk.blogspot.com/2011/07/inspirational-quotes-for-traders.htmlhttp://hometraderuk.blogspot.com/2011/07/inspirational-quotes-for-traders.htmlhttp://hometraderuk.blogspot.com/2011/07/inspirational-quotes-for-traders.htmlhttp://hometraderuk.blogspot.com/2011/07/inspirational-quotes-for-traders.htmlhttp://www.linkedin.com/groups/Inspirational-trading-quotes-help-keep-3863963.S.50177235?qid=649b28a2-d46e-42a5-b9d9-d8c69b49c669&trk=group_most_popular-0-b-ttl&goback=%2Egmp_3863963http://www.linkedin.com/groups/Inspirational-trading-quotes-help-keep-3863963.S.50177235?qid=649b28a2-d46e-42a5-b9d9-d8c69b49c669&trk=group_most_popular-0-b-ttl&goback=%2Egmp_3863963http://www.linkedin.com/groups/Inspirational-trading-quotes-help-keep-3863963.S.50177235?qid=649b28a2-d46e-42a5-b9d9-d8c69b49c669&trk=group_most_popular-0-b-ttl&goback=%2Egmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-more-important-success-3863963.S.54379108?qid=7f3506ac-5f4d-4b51-ba4b-4dfd22fbe5b7&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-difference-between-trading-3863963.S.56137670?qid=027bc669-7511-4a4e-9d95-ea078fa93731&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963http://www.linkedin.com/groups/What-is-difference-between-trading-3863963.S.56137670?qid=027bc669-7511-4a4e-9d95-ea078fa93731&trk=group_most_popular-0-b-ttl&goback=.gmp_3863963
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    (Continued - A look at some of the most popularand interesting discussions.)

    Is it time to talk about the efficientmarket hypothesis in the same way wetalk about a flat earth? This discussion was recently started an invited someinteresting comments. I think there is a lot ofmileage yet in this particular discussion.

    Best books on tradingThanks to Amir Patel for starting this discussion.Amir asked for people to name their top tradingbooks. Amir suggested the following three:

    'Market s Wizar ds (and The New MarketWizards)'Jack Schwager: Brilliant books and agreat read for all traders.

    'T he Way t o Trade'John Piper. Not as wellknown as some books, but this is a brilliant,concise book clearly written by someone whoknows his stuff.

    'Way of t he Turt le', Curtis Faith, anothersuperb book on trading with some great insights.

    Is Technical Analysis a waste of time?This question was in response to an article I postedwhich argued that research had found no convincingcase for technical analysis. The question wasmeant to create debate. Som e excellent responsesto this debate, and I would like to see more

    opinions on this.

    Are great traders born or made?This discussion has gone quiet of late. I would loveto see this re-ignited. Essentially it is the nature vnurture debate applied to trading. We had some

    excellent responses to this question. I think there isfurther mileage to go on this.

    What tools do you use to aid yourinvestment decision making process?Mohammad Yassen asked traders to share theirinsights in to what tools they use in their trading.

    Some more of the many otherdiscussions on the group: In a trading/investment/ risk context; what

    exactly is Emotional Intelligence? And how

    can you increase and improve it? Testosterone and high finance do not mix:

    so bring on the women. What are the traits of successful traits and

    can they be modelled? The Benefits of a Financial Nudge -

    Behavioural Finance Can someone tell who has had experience

    of simulation accounts, do they work inanyway to prepare you for trading.

    Should this trader quit?

    TRADER,

    TRADING&R

    ISKPSYCHOLOGY

    Some useful internet resources for Trader, Trading & Risk Psychology members.

    Mindset of a trader: My own personal blog, a mixture of thoughts on trader psychology and somemarket analysis mixed in.http://hometraderuk.blogspot.com/

    Market Psych: Applying Behavioural Finance.http://blog.marketpsych.com/

    Share Market Research: The website of Daniel Richards Daniel a professional researcher in personalfinance who is completing a PhD with the Open University.http://www.open.ac.uk/oubs/sharemarketresearch/

    Simolean Sense: A blog which curates the web for the best articles on behavioural economics, complexsystems, decision making, psychology, value investing, and science.http://www.simoleonsense.com/The Psy-Fi Blog: A Sideways Look at Psychology and Finance.http://www.psyfitec.com/

    The Rethink Group & Trader Psyches: Adapting findings from the neurosciences of the unconscious,emotion and perception, we teach you to see all of your options, make the best predictions andwithstand the pressure of performing under pressure.http://therethinkgroup.net/http://traderpsyches.com/

    Trader Feed: Though no longer updated, this is an excellent resource.http://www.traderfeed.blogspot.com/

    Xdelia: An on-going project in excellence in Decision-making through Enhanced Learning in Immersive

    Applications.http://www.xdelia.org/

    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