A Matter Of Perspective
How many Xs do you see? XXXXX There are five, right? Are you sure? Your mind can play tricks on you, especially when you are highly motivated to see something. It may seem like psychobabble, but when you are under stress, you see what you want to see, even if it is not there. You've probably had this happen to you. You look at a chart, and at first glance, you see a pattern that suggests a winning trading setup. If you don't take a second, more careful look, however, you may be fooled into thinking you see an optimal trading setup that just isn't there.
Is it that difficult to read a chart? The price is either $50 or it is not, right? The price either went up $2 or not, right? When looking at the price at any given moment, you will probably actually see a price objectively even while under extreme stress. But trading is an activity where your intuition plays a central role. Where a stock price is right now is less important than what you think the price will be in the future based on an analysis of all the available information you have at your disposal. When trying to bring together a variety of different pieces of information, you must rely on your intuition, and that is where psychological biases can come into play. You may see illusory correlations, for example, believing that two events that have nothing to do with one another are related. Or you may fall prey to overconfidence in that you believe your forecasts of future market trends are more accurate than they really are. Sometimes, you have to make an educated guess based on partial information and that's when you may let your hopes and dreams bias your investment decisions. Just because the human mind is fallible under stress and uncertainty does not mean that you should second-guess your investment decisions. But you do want to be aware of psychological biases and minimize their impact. How do you minimize the impact? First, realize that you are especially prone to psychological biases when under stress. It is useful to minimize stress. Don't risk money you can't afford to lose. When you risk too much money, you will feel it, and it may influence your judgment. Second, accept your fallibility. Realize that there will be times when you will let your psychological needs influence your decisions. You're human. Everyone makes mistakes. The key is not to let your psychological limitations get the better of you. At any given time, you must trust your instincts. They may be wrong, but they must be trusted and you must live with the consequences of fallible decisions. Again, that's why it is important to manage risk. You may make mistakes, but they won't hurt you very much if you limit your risk.
Profitable trading is often a matter of having the proper perspective. Sometimes our intuition is off, and we should be aware of this potential problem. We don't need to be perfect, but we do need to manage risk. Our perspective may be wrong, but if we manage risk, we can survive to trade on a day when are intuitions are right and we enter the zone.
Is it that difficult to read a chart? The price is either $50 or it is not, right? The price either went up $2 or not, right? When looking at the price at any given moment, you will probably actually see a price objectively even while under extreme stress. But trading is an activity where your intuition plays a central role. Where a stock price is right now is less important than what you think the price will be in the future based on an analysis of all the available information you have at your disposal. When trying to bring together a variety of different pieces of information, you must rely on your intuition, and that is where psychological biases can come into play. You may see illusory correlations, for example, believing that two events that have nothing to do with one another are related. Or you may fall prey to overconfidence in that you believe your forecasts of future market trends are more accurate than they really are. Sometimes, you have to make an educated guess based on partial information and that's when you may let your hopes and dreams bias your investment decisions. Just because the human mind is fallible under stress and uncertainty does not mean that you should second-guess your investment decisions. But you do want to be aware of psychological biases and minimize their impact. How do you minimize the impact? First, realize that you are especially prone to psychological biases when under stress. It is useful to minimize stress. Don't risk money you can't afford to lose. When you risk too much money, you will feel it, and it may influence your judgment. Second, accept your fallibility. Realize that there will be times when you will let your psychological needs influence your decisions. You're human. Everyone makes mistakes. The key is not to let your psychological limitations get the better of you. At any given time, you must trust your instincts. They may be wrong, but they must be trusted and you must live with the consequences of fallible decisions. Again, that's why it is important to manage risk. You may make mistakes, but they won't hurt you very much if you limit your risk.
Profitable trading is often a matter of having the proper perspective. Sometimes our intuition is off, and we should be aware of this potential problem. We don't need to be perfect, but we do need to manage risk. Our perspective may be wrong, but if we manage risk, we can survive to trade on a day when are intuitions are right and we enter the zone.
posted by nomadhunter at 6:35 PM
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