Trading Pal Blog

In this information age where all the facts are available the behaviour of a crowd should be rational. Well, economists deserve the lack of respect they are getting because they fail to grasp that crowds are impulsive. The more a trader trades the higher the danger of being over-confident.

People fall in love with the stocks they are holding. As a result they discount any negative information but seek any confirmation that they have done the right thing.

People buy high and sell low when they should be doing the opposite. Of course people will explain their behaviour by saying that if they bought a somewhat high price there is enough momentum to sell higher. This will work in a bubble situation and reinforce bad habits at the same time. You could call that the greater fool method where as long as you can find someone more crazy than you it will justify your action.

The motivators here of course are greed and fear. Greed of missing out on a good move while you have no idea how close to the top you really are. Fear of a paper loss turning into a debacle while at the same time savvy investors are buying the very stock you are getting rid of in a fire sale. Two years later, not only it regained your entry price but added 50% growth to that.

Applying good statistical concepts to a small sample is another trap. Just like the random flip of a coin will give an equal number of heads and tails, rises and falls in the market seem to follow evenly. But if you rush to apply this to a small timeframe you are being over-confident. There could be 10 heads in a row in a coin flip experiment and over 500 attempts it is irrelevant. Likewise the market has a fractal nature and there are rises and falls within larger rises and falls. Don't think the market will do you a favour by behaving as you want just because you have a vested interest which colours your perception of things.

People develop a pet formula out of random reinforcement. The mind is quick at working out a correlation between random events. If you made a profit out of two companies in Australia you are going to seek other Australian stocks and become an expert in down under issues. Little did you know that the fact your first two Australian wins were a fluke and it went downhill from there. There was no connection there. The company names might have started with letter B or the CEOs might both be over 6 feet in height!

One thing you can do is to compare your performance with an automated trading system and see how you can improve your skills. For such a system check out Trading Pal

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