The Psychology of Trading | Louis Jackson | Skillshare

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The Psychology of Trading

teacher avatar Louis Jackson

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

18 Lessons (1h 2m)
    • 1. Introduction

    • 2. Are You Psychologically Suited for Trading?

    • 3. Paper Trading

    • 4. Setting Goals

    • 5. The Motivation of Traders

    • 6. Disciplined Trading

    • 7. Making Mistakes

    • 8. Overtrading

    • 9. Position Size

    • 10. Establishing Risk Limits

    • 11. Specialization

    • 12. The Hindsight Bias

    • 13. The Sunk Cost Fallacy

    • 14. Confirmation Bias

    • 15. The Bandwagon Effect

    • 16. Analysis Paralysis

    • 17. Avoidance of Reality

    • 18. Attachment to Ideas & Trade Positions

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About This Class


If you have ever wanted to have an edge in trading, one that gives you knowledge, skills, and tools that most others lack, then this book is for you.

Because in order to be successful at trading in the financial markets, you need more than just knowledge of chart reading, technical indicators, and other mechanical aspects of trading.

You need to understand how psychology can make or break you in the world of financial markets. It's not just money being transacted in the markets; it's also your emotions which can be as volatile as the stocks you are trading.

In this course on trading psychology you will learn

  • Learn the importance of controlling your emotions when making trading decision

  • Learn how to master self discipline and stick to a trading plan

  • Learn how to learn from mistakes so you do not repeat them

  • Learn how to refine your skills through simulated paper trading without risking money

  • Learn how to use spreadsheets and journals for tracking trades

  • Learn how to have a confident mindset while maintaining a flexible and open mind when trading

  • Learn how to avoid getting too attached to our ideas (marrying positions)

In addition, this book delves into ideas from the realm of psychology and behavioral economics and demonstrates how they apply to trading :

  • The sunk cost fallacy and how it can keep traders stuck in losing trades

  • The hindsight bias and how it can lead traders to believe "they knew it all along"

  • The confirmation bias and how it causes many traders to seek out only the information that reinforces their own ideas

  • The bandwagon effect and how it can lead traders to embrace a herd mentality that often results in losing trades

  • Analysis paralysis and how traders fall victim to the mistaken idea that more and more analysis leads to better financial outcomes

This and much more is can be found  in The Psychology of Trading....

Meet Your Teacher

Louis Jackson has  worked as a college instructor teaching political science courses. He has a B.A. and M.A. in political science.

He has been creating online courses privately and for colleges and universities since 2010.

See full profile

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1. Introduction: welcome to the psychology of trading. In this course, we will explore a variety of ways you can approach trading in a positive, productive and emotionally sound way, paying careful attention to controlling emotions and mental states. While we will delve into some ideas from the fields of psychology and behavioral economics , we will always approach these concepts in a way that is practical and they can improve your trading. But simply becoming aware of the biopsies that all humans are prone to you will have an edge that most others lack. We will see how the confirmation bias makes traders more prone to becoming Perma bulls are Perma bears and how they get attached to their ideas and get attached to certain stocks or certain market conditions. We will look at the sunk cost fallacy, which can lead traders toe average down on losing trades, taking their losing trades and adding to their position even when there's no rational reason to do so. Remember when some thought it was a good idea to buy Lehman Brothers on the way down just prior to the 2008 financial crisis? We'll also look at the Han side bias and how It gives traders the mistaken idea that they knew how a trade was going to turn out all along, even if they were on the wrong side of that trade and lost money as a result. So we will see how the mere exposure effect can lead traders to make trades for no other reason than the fact that they have grown comfortable with a certain asset are stuck and just simply like it. Here's a hint. You may not want to get your gold coins out and admire them so much. After you learn about this, we will examine the bandwagon effect and how traders take actions based on the fact that everyone else is doing it, and so they believe it to be a good idea. Remember the year 2000 and the dot com bubble? We will examine these ideas and much Maurin Alexis that follow. Please remember, if you ever have any questions at any point throughout this course, always feel free to post them in the Q and A section. Or you can email me directly because I'm always happy to help you get the most from this course way 2. Are You Psychologically Suited for Trading?: one of the first questions you have to ask yourself when you begin to consider trading is this. Are you psychologically suited for trading? Would you be trading with money that you can afford to lose? If the answer is no, then you'll be trading with what is known in gambling as scared money. In our context, scared money is money that you absolutely cannot afford to lose. Money that have lost would have a very adverse effect on your life, both psychologically and materially. If you are trading with money that have lost, might lead to you not being able to pay the rent or your car payment, then you are dealing with in the realm of scared money. The money that you allocate to trading should always be money you can afford to lose, and although you don't want to lose it and hopefully you want, your life can still go on and you can still pay the bills and not be emotionally haunted by . The loss is you do incur the money that you do lose should always be a predetermined, an acceptable amount. You should be able to view these losses as lessons lessons that can be learned from and used to improve your trading in the future. We will delve more later into strategies that could be used to make sure you do not allow yourself to lose more money than a certain amount on any given trade and how you consent. Risk limits that, if strictly followed, greatly contain your losses to levels that you determined prior to entering a trade. If you're borrowing money from the bank to trade, risking money in your savings account for your child's college tuition fund, then alarm bells in your mind should already be going off trading money. You can't afford to lose congee. Absolutely ruinous. This leads to the blow up, a scenario in which you lose more money than you could possibly afford to, as we will see in the lessons ahead. There are ways we can avoid being put into situations where we lose more money than we can handle. But the first step involves rigorous self examination. In order to make sure you have the right mon set for trading, the next lesson will explore trading without risking a single cent. Well, look at paper training and how it gives you a chance to test and refine your skills and see if you are truly psychologically suited for trading 3. Paper Trading: If you are new to trading, it is vital that you start by trading a paper account. A paper trading account is essentially a virtual trading account that allows you to practice without risking real money. It functions just like a real brokerage account only you are simulating the trading experience without the use of real money. Most brokerages have paper trading accounts available in which you can practice before trading with your real account. It's usually required that you open a standard account with at least the minimum amount of money the brokerage requires. For example, if they require a minimum of $5000 to open an account, then you may have to transfer that amount from your bank accounts of them before you can paper trade with their platform. Although there are some free websites for paper trading, Ah, highly recommend using the platform that your preferred brokerage uses. It is important to not only get a feel for trading the markets, but also specifically get a feel for how the platform you want to use works. You often have to prepare for contingencies related to the brokerage platform you use that you can't duplicate with a free paper trading website. For example, what do you do when there is a server related issue on your brokers? End and you cannot execute trades or at all in the bin of a server going down actually learned this lesson the hard way Once, when much rating platform stopped responding right in the middle of a critical Fed announcement. It's what do you do when these unforeseen events occur? For starters, you should always plan for the worst case scenarios, even the ones that you don't think you're very likely to happen. For example, your Internet connection can go down at any time you're brokerages. Internet connection can also go down at any time. A thunderstorm can knock out the power, and that would include your Internet connection. And aliens get obey the Earth at any time. All right, so maybe the last one. It's not too realistic, but you get the point. You always have to plan for these worst case scenarios we could go on and own. But it's important to realize that if it can happen, there's probably a reasonable chance that it will happen when you cannot trade. As usual, you need a plan for being able to carry on without panic. If you have a data plan on your smartphone and or your tablet device, make sure you have the app if it's available for your brokered service and you haven't ready to G O. That way, if your Internet connection goes out, you can immediately switch to your phone or your tablet and log into your account. If circumstances make it so that you cannot access your account from your computer or your mobile device, such as when the brokerages servers air down, make sure you have their phone contact information readily available. I have a sticky note above my trading desk. It has not only the phone number of my brokerage, but it also has to specific sequence of numbers that allow me to talk to a human being in the shortest amount of time possible. So by knowing these numbers, I don't have to listen to those automated menus the ones that tell me to press number one for this department. Then press number three for this, then press number one again to speak for to a customer service representative and so on its own. I could just hit those numbers quickly and get to a human being faster. As a result, you should use the time you spent paper trading to learn as much from Umer stakes as possible, many great traders and said that you should be as bad a trader as you're ever going to be when you first start trading. What they mean is that you should be learning from the trades that don't go your way, the ones where you make mistakes. You should be analyzing these trades to see what went wrong and what could be done in the future. To ensure that this mistake isn't repeated, the more lessons you can learn for free the paper trading account the better way . 4. Setting Goals: setting goals is a crucial part of achieving what you want out of life. In order to be successful, a trading, you have to set goals that are very, very precise. It's not enough to just set a goal of being a good trader or making lots of money or having enough money for retirement. These types of goals are all too vague to be beneficial in propelling us Fordice traders. We need to follow a goal setting system, one that forces us to figure out exactly what we want and exactly how we're going to get it . Using the smart system is one such way that we can do this. Smart is an acronym for a specific, measurable, attainable, realistic and Tom Lee. Let's take a look at each of these components individually. A specific goal is one that is unambiguous and in the case of training involves a specific dollar figure or percentage gain. For example, a specific goal would be to earn $1000 per month from training over the next year. Dolls and trading are inherently measurable, since we're dealing with gains and losses in quantitative terms. If your goal is to make $1000 per month from trading then you now have two of the five criteria met. $1000 per month is both specific and measurable. If your goal is one that is within reach, it is attainable. Sometimes we might start out with lofty goals, but then realize we don't have enough money in our accounts to reasonably produce the kind of gains that would allow us to reach that goal. Or reaching our goal might requires to take excessive risks, like using lots of leverage, something that should be avoided in the early stages of trading. You always want to make sure that your goal is attainable. This brings us to the next element of gold setting, setting realistic goals realistic. It's related to our previous discussion of attain ability. A gold is attainable must also be realistic. We don't want to set goals that defy the laws of nature or fly in the face of probability. If we're going to set a goal of making $1000 per month, we need to make sure we have enough capital to trade with and be able to calculate how we can use that capital to generate that return of 1000 per month. So if you start out with a $1000 account, then it's not realistic to think that you could use that to make $1 million in a year. It is possible, but just not realistic unless one has a steady stream of good luck and very few setbacks. Not setting these smart goals would be, like Trend, a pitch of baseball without knowing where the catcher's mitt Waas you wouldn't get in your car and just start dropping without knowing the destination. But when beginning traders set out to enter the financial markets, they often have no real goals except to become a traitor. But that's like saying my goal is to go play video games simply because I'm a video gamer. No goal to win the game or lose the game, but just to play the game. That might be fun for amore leisurely activity like playing video games. But the market is certainly not a game, and just showing up to trade and be a trader is a recipe for financial disaster. Without a clear goal, you will just be playing a game in this case, a game that can be extraordinarily costly if you're not prepared and driven to succeed, once you have detailed your goals using the smart system, you need to stay focused on them each and every day. One of the best things you can do is to write down your goals and then read them each day. When you focus on your goals, especially those goals that you have written down, it sends a powerful message to your mind that this is important. This gets your mind, but the conscious and unconscious aspects to begin working for you. Your goals can also be subdivided according to Tom Frames, depending on your time frame for trading on whether you're a day trader, a swing trader, a position trader or some combination of all of those, you can set up your goals on a daily, weekly, monthly or a multiyear period of time. Keep these goals in a journal and put them on sticky notes and place them where you see them on a regular basis. The more you can stay focused on these goals, the more likely you are to take the steps necessary to achieve them. 5. The Motivation of Traders: - At this point, we want to take a look at some of the factors that motivate traders to set the goals they do. What motivates them to want to participate in the markets and exactly what they hope to achieve from being involved in trading just as important as it is to set goals for what you want to accomplish is a trader. It's also important to uncover what drives you to want to be a trainer in the first place. Many traders are out to get rich, plain and simple. Debut trading is one of the best ways to make a lot of money in the shortest amount of time possible. They may aspire to be like some of the most well known traders who have become millionaires and even billionaires from trading people like Polito Jones, George Soros, Stanley Druckenmiller and many others. Others want to acquire wealth, but maybe in a more modest way, such a setting for five or six figure goals If you trade on your own outside of working for a very large financial institution or operating your own hedge fund than the goals of the billionaire traders may not be very realistic. Some others are motivated to trade out of a desire to work for themselves and avoid having to work for someone else for a salary or an hourly wage. The freedom of being able to work from home and not depend on someone else for their financial needs becomes a powerful incentive for them to learn to trade successfully. It could be very helpful to lay out the emotional reasons for why you want to trade and why it's so important to you. This could help you stay on track and had fuel to the fire of motivation that keeps you going. Maybe it's a desire to live a life of luxury. Maybe it's a bizarre to have money to help others, whatever your reason, maybe make sure you know why you want to trade and have reasonable expectations in terms of how you get there. 6. Disciplined Trading: self discipline. It is the key component to being a successful trader. Considering how many rules have to be followed in terms of making the appropriate entries and exits and managing money and risk, it is essential that you have the ability to be very disciplined. Sometimes when you hit the buy button on an equity that you're extremely bullish on, there will be times when that equity immediately begins to move against you. When it reaches your predetermined stop loss, there may be a great temptation toe lower that stop in hopes that just any minute now it will turn around and start going back up in your favor. But hoping is not a strategy and failing to honor a logical and predetermined stop loss, just turn straight ing into the equivalent of pressing buttons on a slot machine in a casino. Although there may be times when it is appropriate to lower a stop loss because of changing circumstances such as when a stock pulls back to a well established level of support, you should generally and especially in the early stages of trading, have predetermined stop set. For this reason, it is generally good to go ahead and set up your stop loss as soon as you enter a trade. If you buy a stock for $25 and determine that your stop loss should be set at 24 50 go ahead and immediately put in the stop loss order so that it automatically triggers at just the right time. This way, you can walk away from the trade. If it's a winner, you can let it run if it's a loser than the stuff loss will take you out of the trade is planned. For this reason, it is generally good to go ahead and set up your stop loss as soon as you enter a trade. If you buy a stock for $25 and determine that your stop loss should be set at 24 50 go ahead and immediately put in the stop loss order so that it automatically triggers at just the right time. This way, you can walk away from the trade. If it's a winner, you can let it run if it's a loser than the stuff lost will take you out of the trade is planned. If you trade long enough, you will find that there will be numerous times when I stop losses triggered just before the market recovers, reverses course and starts going in favor of the position you just stopped out of. It seems like a cruel trick. It first. It seems like the universe is conspiring against you. May even seem like you just have bad luck. It's hard to watch because you will find yourself thinking, Wow, if only I had sent my stop just a few cents lower, I would still be in that trade, and I would be making a profit Right now. These types of losses, which comes as a result of strict risk management or a normal and healthy part of discipline trading, it happens to the world's best traders on a routine basis. You have to accept what seems like. Fate's cruel hand is just a part of the randomness involved in the markets. Whenever these frustrating losses occur, it is usually best to just simply walk away from the trade. Don't let your emotions control your decision making and lead you to take bigger risks. Don't try to jump back in the trade again and then hope it goes in your favor this time unless they're actually very compelling, fundamental and or technical reasons for doing so. But usually the best course of action is just to take the loss. Recognize that it was essentially a good loss, as it came from proper risk management and then move on to other opportunities. Although a good loss seems like an oxymoron, you have to view it from the dual benefits it offers Number one. It demonstrates that you are following your risk management strategy and number two. It usually offers a lesson that you can learn from for future reference self discipline. It's not just about being able to cut losses quickly, but it's also about being able to avoid chasing trades or trading merely for the sake of trading. We will discuss the issue of chasing stocks and over trading at greater length later in this course. 7. Making Mistakes: Let's face it, mistakes happen as we address previously. We need to make a many mistakes as possible without having to pay a monetary price. We do this by making mistakes in a paper trading account. However, once we graduate to the world of real trading, we have to face mistakes with a solid plan. We actually learned the most from the mistakes we make in life, not the successes. It is sometimes said. One of the worst things that can happen to you when you begin trading is to have too much beginner's luck, which can lower you into a state of overconfidence, a false sense of possessing an incredible amount of natural talent when in actuality you have been more lucky than many others who are also trading for the first time. This could lead the new trader to assume that they just have a net for trading, leading them to believe that they have proved themselves and that everything will be all uphill from here. Although we can take steps to minimize the number of mistakes we make along the way, we have to first accept that they will happen and resolved to take the necessary steps to confront them and learn from them. When they do show up, we have to set ourselves up from the beginning so that the mistakes we make cannot destroy us. Mistakes are great. Learning tools provided were able to survive them long enough to be able to turn them into learning experiences. In the context of trading, survival means not blowing up our trading accounts to the extent of having no capital for which to trade in the market. Do you remember when you first learned how to ride a bike for some of us? It didn't start out as well as we expected. After careless hours spent on training wheels, we felt sure we would define when we attempted a Rod without assistance. But once we took off riding without the training wheels, we often fell off. But we didn't give up, and we didn't return to a lifetime of riding around the neighborhood on training wheels. No, we figured out what we were doing wrong, and we began the process of troubleshooting. Maybe we weren't pedalling fast enough, or maybe we put too much weight on once out of the bike. Making mistakes and trading is much like making mistakes, learning to ride a bike. We figure out what we did wrong, and we take the steps necessary to correct our actions. 8. Overtrading: in order to survive and thrive as a trader, you have to be more preoccupied with preserving your money than making money. To do otherwise is just gambling. If you play good defense and prevent large drawdowns in your account, no matter what happens, you can always manage to survive to trade another day, even if you're currently not making as much money as you would like to from trading, as you had initially hoped. You have to always remember that by being more defensive and less aggressive, you're keeping yourself in the game and getting one step closer to your goals. This approach is the opposite of what many traders follow. Being too aggressive is one of the most common reasons traders blow up their accounts and end up out of the game of trading forever. Playing a good defense may not be very exciting, but it is key to success. Excessively aggressive trading often shows up in a tendency to over trade and trade, with position sizes that are far too large when we speak of someone who over trades. This usually refers to people who always feel the need to be doing something. I always feel the need to have positions own no matter what, Even if there is nothing apparently worth trading, They always need to search frantically to find something, anything to trade over. Traders should heed the words of the legendary investor Jim Rogers, he said. Do nothing, absolutely nothing until there's something to do. Rogers said that it was important to wait until you found a situation when there was basically money just sitting there in the corner, waiting to be picked up. What this means is refraining from taking a trade just because you want to be active in the market all the time. Instead, wait for those opportunities, those set ups where there is ah ha probability of property while being able to minimize risk. 9. Position Size: Another problem for aggressive traders is positioned size. How much above a certain equity will depend on several factors. The most important being your Tom Horizon and your individual style of trading day. Traders will often bind quantities that are several times larger than that of a swing trader or a position trader. But the day trader almost always sells the entire position by the end of the day, sometimes in the day, trade has gone pretty well. The day trader may sell three force of their position just before the market closes, and then hold the rest overnight in hopes that the stock may keep going up when trading resumes the following day. If a profit was made from that day, trade in the remainder that you swing overnight is essentially free money. If it doesn't keep going up the next day, you can simply get out with a stop loss Swing. Traders and position traders, though, often hold their positions anywhere from a few days to a few weeks to even a few months. They may find themselves holding these trades through long weekends holidays, enduring times at which volatility could explode in a minute's notice, all while the market is closed, regardless of what type of trader you are and how long you intend to hold the position before selling and taking profits. Your position, size and exactly how you build the entirety of that position is extremely important, even a day trader who may end up holding $100,000 worth of stock at one time during a trading day. Well, not by that $100,000 work all at once. Usually they will scale into the position, buying just a small fraction, maybe 1/4 and then add to that position if the price behaves as they expected, and bounces often holds levels of intraday support. Swing in position. Traders should never be holding the same amount as day traders because even a small adverse moving a stock can lead to losses of thousands of dollars in just a short amount of time. And if you hold a large short position in inequity, the losses are theoretically, at least infinite. There are numerous accounts of traders who opened large and risky short positions in which loss is actually exceeded the balance of their account. Not only did they lose everything, but they ended up owing much more money than they started with. It's bad enough to lose all of the money you put in your account. But to lose even more than then takes traders into a world of potentially irreversible damage. In addition to subjecting accounts, a huge monetary losses position, sizes that are too large have an extremely negative effect on the psychology of the trader . Small changes in the price of an equity will lead to fear becoming the dominant dropper of decision making. If you look at your screen and see that a stock you purchase is currently going down and the losses you are experiencing or causing you to feel stress and anxiety in your position , size is far too great. If the stock is going down but still hasn't broken a level of support near when you have placed a logical stop loss, then losses should never be to the extent and magnitude that they give you a sinking feeling in your stomach, recalls beads of sweat to form on your forehead. You can have a declining stock that is still, in essence, doing what it's supposed to do. Perhaps it's holding a support at a trend line or a moving average, and all technical indicators air confirming that there is still a bullish scenario for the trade. But if the losses are unbearably large because the position saws was too great, it can lead a trainer to abandon the trade because that threshold of pain has been reached and or exceeded. A small position that is down $50 yet still above a support level is easier to cope with and that of the same position, although with 10 times as many shares and now causing losses that produced dishes levels of anxiety. But if the losses are unbearably large because the position size was too large, it could lead a trader to abandon the trade because the threshold of pain has now been reached and or exceeded. A small position that is down $50 yet still above a support level is easier to cope with in that same position, with 10 times as many shares and now causing losses that produce vicious levels of anxiety . So you could see that trading with excessive position sizes can lead to emotions overtaking logic. As the main driver of trading decisions, you may panic and stop out of a perfectly good trade because it's causing losses, yet it still has not broken any he level of support. Or you may end up holding onto trades that have already cost you an unacceptably large loss , which may lead to holding and hoping that it will eventually reverse course and start going up again. Always pay attention to your position size, how much you are buying or how much you are shorting truck Cutting your position. Size is down to the point where any losses become manageable and can't lead to a larger than expected drawdown in your account. Trade with position size and allows you to stay emotionally and psychologically composed. One that doesn't lead you to make irrational decisions that are not at harmony with your trading system. A simple test of a reasonable position size is whether or not you can place the trade and then walk away from the computer for an hour without becoming nervous. If you are swinging a trade overnight, then the test becomes whether or not you can get a good night's sleep. Are you waking up at 3 a.m. To check the futures market in order to see how it might impact one of your trades. If so, then your position size. It's far too large. If you go out to lunch with friends for an hour and you have to check what your position is doing on your smartphone's mobile app, then you're probably trading too large. 10. Establishing Risk Limits: you're trading system should also put precise limits on how much you're willing to lose on any given trade. There is no single agreed upon number, but many traders will not risk losing more than 1 to 2% of their entire account on anyone. Trade if you have an account of $10,000 for example, and you've defined your risk limit as 2% portrayed. This means you cannot allow yourself to lose more than $200 on this trade. If you purchase 100 shares of X Y Z stock, for example, you cannot lose more than $2 per share of that stock. If you bought X Y Z stock at $100 per share than your risk management system would dictate that you stop out of the trade drops down to $98. However, you choose to define your risk limits. You should never make any exceptions that involve changing your risk management system midstream. It can be tempting as you see a losing trade, getting closer to your stop loss to give it just a little bit more breathing room by lowering the stop. A few cents down there are virtually no plausible scenarios in which you should violate your own risk management rules and put more capital in harm's way. You should honor your stops and keep your losses contained, even when you are tempted to do otherwise, It's also important that your stop losses have a logical basis and not be based simply on a dollar amount you're willing to lose. Otherwise, you could just go out and buy stock at random and then set a stop that is in line with the 2% risk management strategy. We wouldn't just buy stock at $100 randomly and then go and hope for the best, but be willing to stop out at $98. Logical stop should be set below an important level of support, whether that be a trendline, that its help for some time a key moving average or a Fibonacci retracement level. This means that you have to enter a trade at a price that allows you to place a stop that is unlikely to be triggered unless a major level of support is broken. And if that support level breaks, then you still can't lose more than a predetermined amount on that trade. This makes the stop loss both technically and logically consistent with your risk management plan. 11. Specialization: you don't have to and probably should not be a trader who will trade anything and everything that looks good at the moment, be it due to fundamentals or technicals or some combination of both. There are countless numbers of trading vehicles out there, which tracked almost every sector subsector and asset class one can imagine. It is usually best to pick a sector or asset class in which you will become holly specialized in selecting an area of specialization. It is important to choose something you have a genuine interest in, but with one caveat. You must be able to detach yourself emotionally from any one particular outcome. Bullishness or bearishness. There should be no one side that it's more preferable than the other. It only matters that you can see clearly which direction the trend is going and quickly get on the right side of the trade. You may be drawn to the precious metals, for example, out of a deep interest in gold and silver. However, if you're a gold bug who thinks that gold should be trading at $10,000 per ounce, you may have trouble selling when the price of gold starts to decline. precipitously. On the other hand, if you believe that gold is a barbarous relic and then a bar of gold is no more than a glorified doorstop, you may find it difficult to go long when the precious metal's rally. Once you have chosen an area of interest to specialize in, you should strapped to acquire as much in depth knowledge as possible. If currency trading is what you up to pursue that, immerse herself in it by learning every possible detail every possible tool of the trade. Read every book. You can study the great traders of your specialization and leave no stone unturned in your quest to become an expert in your area of specialization. Apply what you learn to a paper trading account for a few weeks and see what results you get. Specialisation offer psychological benefits and that you were only trading what you know. Well, you're not venturing off into strange and unfamiliar territory. Trading what you know and only what you know can provide you with more confidence than training something you know very little about. Keep a watch list of all the equities within the sector in which you have chosen to specialize track them day in and day out, study the technicals, the fundamentals, the chart patterns, etcetera and note how they behave each day. Over time, you will develop a more intuitive Phil for how these equities react to news, inventory reports, economic announcements and so on. 12. The Hindsight Bias: psychologists and behavioral economists have coined a term called the Han site buys, which is better known to many of us as the Monday morning quarterback or the armchair general. This is basically the idea that we knew something all along, at least after the fact when people gather around the water cooler on Monday morning to talk about a big football game from the previous day. They may make comments like this. I knew it all along. They shouldn't have tried to pass on the fourth and one at the goal line. I knew they were going to lose the game once I saw how bad the defense was playing throughout the first quarter. The only thing worse than the Monday morning quarterback is the armchair general who takes the Hans I'd bus to a more frightening level by making statements similar to the previous hypothetical football quotes but applying them to the realm of foreign policy and military affairs. These are the people who are often news junkies without any military experience, get feel qualified to decide what strategy should have been applied in such matters as war and diplomacy. So what is the hindsight bus have to do with traders when we experience the hindsight, bias and trading, it is usually accompanied by a feeling of regretting that we didn't get into a certain trade, a trade that we just knew in hindsight, of course, would be profitable. For example, after hypothetical x y Z stock rallies after an announcement that Christmas sales were bigger than ever before in the company's history, we convince ourselves that we knew all along that this company would do well and the stock would move higher, even though we didn't own this stock at the time. We may even create a narrative complete with specific causes for that stocks move that help us fool ourselves into believing that we saw this coming all along. But then, if we truly knew it all along, we would have owned a large position in that company shares. And also we would have called the outcome of Sunday's football game with the water cooler on the Friday before not on the Monday after the game was over. Everything make sense in hindsight, 13. The Sunk Cost Fallacy: the sun cost fallacy Upton manifest in the tendency of traders to average down on losing trades. Averaging down is when you add more shares but stuck to an existing position when that stopped. Goes down in price. In the case of longer term investing, there may be times indeed, when you do one about more shares but stock after it drops in price and as long as it's part of a normal and healthy pullback and when the fundamentals air still sound. Warren Buffett has said that he loves it when a stock he owns declines in price because it gives him an opportunity to buy more at a cheaper price that's lowering his overall cost basis. But shorter term training is much different than investing for the long term. And for a trader, averaging down is usually an exercise in futility. When a day trader or a swing trader averages down, it is often a result of the sunk cost fallacy. A trader without the proper risk management strategy will often hold onto a trade beyond a logical stuff level while relying on wishful thinking, hoping that it will turn around and go in their favor at some point. But this is like a gambler who loses money in a slot machine yet continues to put money in hoping that their run of bad luck will surely turn around if they just keep putting money in that machine. When you have a lot of time, money, energy and emotion invested in a trade, you have to always be mindful of the sunk cost fallacy. You devote time and energy to researching an idea. You then commit your capital to that idea, and you now miss the recipe of emotion in with that idea. The sheer amount of emotional and financial capital you have poured into a trade may lead you to villain attachment to it. This is related to the idea of getting attached to your positions or, as they say, marrying your positions. There was a saying that has been popular among Wall Street traders for decades that a bad trader would sooner divorce their spells and get rid of one of their positions. If you like a certain stock is a trade, you have to be able to detach from any particular outcome. You always want to be on the right side of the trade, whether that is bullish or bearish, There shouldn't be anything emotionally satisfying about one side or the other. The only thing that matters is being on the right side. 14. Confirmation Bias: Although there is an artist rating, there's also an element of science. If you remember what you were taught in high school about the scientific method, you will see that much of what you learn to be applied to trading. Legendary trader George Soros had a motto. Invest first investigate. Later, he would see something happening in the market, then immediately take a small test position. From there, he would formulate a hypothesis about what was happening. It would then observe the market carefully, looking not only for reasons he might be right about a trade, but especially for reasons why he might be wrong. This is like hypothesis testing in science, you don't want to get into a trade and then immediately go look for evidence that supports your position. You want to look for reasons why you might be wrong. You want to find evidence that contradicts your position, and if your hypothesis holds up, then you might be onto something. Many traders and investors when they're thinking about buying a certain stock, we'll do a search on the Internet for tough reasons to own X Y Z stop or what X Y Z stock will soar in 2017. But we have to ask ourselves, What are we not you in search for things like what? X. Y Z stock is doomed or top reasons to sell X y Z stock? Justus. We may have a tendency to get attached to our stock positions. We also have a tendency to get attached to our own ideas. We don't want to prove ourselves wrong. Instead, we want to go out and gather data that confirms exactly what we want to believe. This is the wrong approach in science, and it's also the wrong approach in trading, We always want to be aware that we might be wrong, that what we thought might be a great investment or trade idea is no longer a really good idea. It's also possible that we could ultimately be right about a trade but end up getting in at just the wrong time. In some cases, such as trading, volatility, futures or leverage financial instruments that track an index, getting in too soon could be disastrous, even if our hypothesis turned out to be correct. To be a great trader, you have to be a very flexible and open minded when it comes to your trades and your trade ideas. We should always have access to a devil's advocate that is a person or a source of information that contradicts everything. We currently believe about the market or a specific sector of stock. For example, if we think the Bob technology sector is about to explode and move higher in a parabolic rally that we need to hear the voices that argue for biotech entering a bear market and going down or those saying that it will simply trade sideways for some time In the end, we all have to make our own decisions when it comes to entering and exiting trades. This doesn't mean, however, that we should be so convicted in our ideas and opinions that we don't subject them to rigid scrutiny. Just like with the scientific hypothesis, we need to seek this confirmation as opposed to confirmation. In other words, we don't need to seek out reasons why we might be right, but rather reasons why we might be wrong. 15. The Bandwagon Effect: the bandwagon effect occurs when we adopt believes mainly because the majority of other people were exposed to have adopted those beliefs as well. This is why we often hear someone refer to people jumping on the bandwagon in the world of trading, the information we're exposed to be from other traders or from financial publications or financial news channels on TV. How were affected by the bandwagon effect can also be dependent on what it is we want to believe. It's true if we read headlines everywhere proclaiming that Dow 25,000 is just around the corner, we may jump on the bandwagon. Believe it, because so many others do. If we read that gold is heading for new all time highs, we may rush out and back up the truck and buy as much gold as we can. We could see how the bandwagon, if that could be problematic. If we just look back to the 2000 dot com bubble, traders and investors were scared of being left out or left behind. A stocks continued to go up in value. So what did they do? They all piled in and bought stocks and extreme valuations. People experience what it's called irrational exuberance. And they believe what almost everyone was saying at the time that stocks were going to keep going up. Parabolic Lee. So everyone should just buy with both hands. People can jump own the bandwagon all at one time, but they can also jump off the bandwagon all at the same time. 16. Analysis Paralysis: many traders do their work with a financial news running on a big screen television in the background of their workspace. The smart traders, though, have gained the wisdom to know that news should be played, usually with sound muted traders running multiple computer monitors and multiple mobile APS , maybe in a little bit of a disadvantage. In some ways, it seems counterintuitive to suggest that running all these monitors with dozens of indicators being displayed and the financial news play on a TV in the background, could somehow be a negative thing. It just seems reasonable that a trader would want to consume it, analyzed as much information as humanly possible. But there's a point at which we can absolutely overload ourselves with such an abundance of information that our judgement and decision making faculties become completely overwhelmed and confused. And this can affect our ability to stay disciplined and to stay true to our system of trading, which should be much simpler. Think of it this way. Let's say you have decided to buy a new DVD player, but you want to make sure that the device will be a hot quality and will last a long time. you'll probably visit sites like Consumer Reports. You'll probably read through online reviews both the positive and the negative in an extent to see how others have rated this DVD player. But you may be faced with thousands and thousands of reviews, a number which would make reading all of them a gargantuan task. If you were able to read all of those, you would still have to think and deliberate about whether to buy that DVD player, where to look for another brand and model instead. The point here is that you could overwhelm yourself to the point of what's called analysis paralysis, where other you cannot make a decision or worse, your emotions lead to making a bad decision. In the end, most traders who experiment with using very complex trading systems the ones that attend to make use of huge amounts of data will eventually return to more simple methods of trading. Unless you're an algorithmic trader and use computer generated buy and sell signals toe automatically enter and exit trades, then there is really no need to get bogged down and overly complex analysis 17. Avoidance of Reality: Yeah. Let me start this lecture with a personal anecdotal financial experience about 15 years ago accumulated a monstrous amount of credit card dead. I had just graduated from college, and over the course of those four years I had taken care of all of my needs and wants by paying for virtually everything with a credit card. I knew it was amassing more and more debt every day and an almost exponential rate. And the high interest rate was only compound in the amount of money. I know the way I handled that situation at the time was away money. Others do. I completely avoided looking at the important information on my credit card statements, information such as Thea outstanding balance and the amount of interest I now owed. I simply mailed the check in each month for the minimum amount due. Ignorance was bliss as long as I could avert my eyes from reality as long as I possibly could. As long as I can avoid seeing what was happening on that credit card statement eventually, the reality dictated that I take care of this debt and get it paid off, even if it took me several years to do so. People often do a very similar thing with their brokerage accounts. In the course of trading and investing, they may look at once a month or once a year because they don't want to see the losses that might give them reason to feel stressed out. If you're a long term investor, perhaps investing money over the course of many decades, then there could be benefits and not constantly watching and fretting over a diversified portfolio. But if you're a trader looking to profit off market moves on a much shorter time frame, you cannot afford to not monitor your account on a regular basis. Trades are not investments. Day traders hold positions for Tom frames of seconds, minutes and, at most a few hours a day. Trader must be constantly vigilant, especially since the short term positions are usually held in very large quantities, sometimes hundreds, even thousands of shares. At one time, a single trading session may have the potential to virtually wipe out a day. Traders account. These types of traders have to look at the screen almost all day long, so there's no possible way for them to avert their eyes from anything unpleasant happening in their brokerage account. Sweet traders usually hold markedly smaller positions than day traders and for longer periods of town, anywhere from a couple of days to several weeks. A swing trader doesn't have the same need to be parked in front of a computer monitor or multiple monitors observing every single tick of a stock. A swing trader will usually have a water stop loss and will stop out automatically if the stock breaches a predetermined level of support. A position trader is someone who has a time frame of several months to even a few years. Although usually no more than 2 to 3 years. This trader must still realize that despite having a plan to hold trades for a significantly long period of time, they're still not engaged in long term investing and cannot afford to let their trades go unattended. So, like the credit card account, where the student loan account or any other account that might be causing you to lose some money or a Messam debt, closing your eyes and not looking at the reality of the situation is never a good option. In order to avoid losing money, you have to stay on top of your finances, which includes the brokerage account, where you place your trades, you will sometimes hear the term Close your eyes. In the world of trading, just close your eyes and bob. They sometimes say when they believe the odds of something going up or practically a certainty. But there are no real certainties in the world other than death and taxes. So it is best to always be skeptical of any idea that involves blindly going forward without any concern for risk. Always do your own research before entering a trade, and once you have taken a position, don't just close your eyes and then hope for the best. 18. Attachment to Ideas & Trade Positions: Let's expand our discussion of confirmation bias and look at just how this bias can interfere with our trading. The problem of marrying once positions or ideas is well illustrated if we look at the prevalence of cult stocks that have become popular with many, especially the millennial generation, in their choice of devotion to certain brands. For example, a large number of people love anything and everything made by Apple iPhones, ipads, back books and so on. It's one of the world's most loved brands. What happens, though, when you take your love of a brand or company and decide to investor traded in the market? Often we will have a tendency to root for that stock in 11 in the same way that we love the products that the company makes. We love the products in where the services provided by the company so much that we feel like the stock could do no wrong. Even if a company makes great products or provides great services. This doesn't always equate with a heart price and stock our perception of a company concolor how we approach investing or trading in the underlying stock, and it could be confusing when the price of a stock of a company you love fails to live up to your expectations of it. Just take what we saw in 2015 in 2016. What their number of companies that have come to be regarded as being cult stocks. Fitbit, GoPro and Twitter, just to name a few lost a large amount of value in some cases, 50% or more. These stocks construir the emotions if we have a personal connection to the products for the services provided by these companies. If you look at the chart, you could see how much GoPro has fallen since 2015 from a high of over $90 to its current price, which says that just under $10 a rule waterfall price decline many people who love the action cameras put out by go pro and used them personally. I bought the stock at the highs, thinking that the future could be nothing but bright for this company. The same thing goes for Fitbit. People who have used the product to lose weight and improve their fitness and health may absolutely love the product and have a real conviction that fitness tracking devices are the wave of the future, and the Fitbit would be just the company to dominate that space. And if you look at the chart for Twitter, while trading in over $50 per share in 2015 it was thought by many to be an indispensable social media site that millions and millions of people could not live without. And if you look at the chart now, it trades in the 15 to $20 range as of December 2016.