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The first week of July brought a dramatic shift in market sentiment, driven by easing geopolitical tensions and a highly anticipated jobs report that significantly missed expectations. As the week progressed, investors executed a massive "rotation" out of high-flying technology stocks and poured their capital into traditional, defensive blue-chip companies, pushing the Dow Jones Industrial Average to historic new heights.
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Trading is as much about psychology as it is about market analysis. Two common cognitive biases that can affect decision-making are the availability heuristic and recency bias. Both can lead traders to make choices based on flawed reasoning, which can result in poor outcomes. Understanding these biases can help you make more informed, rational decisions.
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Interactive Brokers(IB) (referral link) is a popular broker, operating in several counties worldwide, usually under local national names. Their trading platform is the same everywhere, it's the Trader Workstation or TWS. For novice users, it may be somewhat intimidating at first glance, but once you get a good understanding, you'll see it has many powerful features to offer.
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In our previous post about gaps, we looked at market behavior around opening gaps and what would generally happen during that same trading session. But nothing spectacular came out, an opening-gap meant nothing for further price action that day. Also, the average size of an opening gap turned out to be a few factors smaller than average daily volatility, so those margins were easily absorbed regardless of whether there was an opening gap or not.
Now suppose the opening-gap does not get closed during the same trading day. How does affect the market in the next couple of days? Does price gravitate back towards such a gap, as if it wants to pull in price or doesn't it have any significant meaning as we saw in the opening-gaps analysis? Let's dive in.
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There's a lot of talk about so-called gaps. General wisdom says they will be closed. But is that true? Is there a statistical edge about gaps that we can use in our trading? Let's find out.
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If you use any search engine and type in the phrase "How to become a successful short-term trader" or anything similar, you will find roughly 70 million(!) websites that will help you in achieving that goal, or so it seems. In reality, there's only one right and honest answer which is more like this: "There is an extremely low probability you will ever be successful in short-term trading, and you will most likely lose all funds in your account".
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The hot hand fallacy in trading is a cognitive bias that occurs when traders believe that a winning streak will continue, even though the probability of success remains unchanged. In other words, traders may think that because they have experienced a series of successful trades, they are more likely to continue to make successful trades in the future.
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After part 3, we move on to part 4 of this series of 'Market gurus and their predictions'. If you're new to this, you may want to start with the first part for some additional explanation.
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The first part of 'Market gurus and their predictions' has really caught some attention. Let's now move on to the next part about this subject.
Again, as mentioned in part 1, these pages are mostly meant as an eye-opener that almost all of the 'mainstream' analysts have no added value in trading or investing. In fact, flipping a coin has a higher probability of making a correct call about the expected market direction than those analysts.
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As a trader or investor, you certainly have noticed the tons of analysts and self-proclaimed gurus out there who all give their opinion about what will likely happen next in the markets. But are they any good?
This is part 1 of a series. Also, make sure to check out part 2 and part 3.
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Now and then, you run into a situation in real life that triggers the trading mind and makes you look at the situation from a trader's viewpoint.
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It has been mentioned in many posts here and elsewhere: to be successful in trading, you need a completely different mindset than the average person.
The Normal Mindset: Expecting Certainty
In our everyday lives and jobs, we usually think in terms of certainty. Our brains like to figure out why a choice we make is the right one, and we generally expect it to work out.
- When things don't work out as planned, we feel like we've failed.
- This failure feels terrible for our ego because we put effort and intelligence into the decision. When that effort only leads to a loss, it's hard to accept.
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"Never complain, never explain" - it's a well-known quote. Famous people have used it, management gurus have used it, and too many to accurately determine who initially came up with it. Let's apply this to trading because trading is probably the ultimate activity where this quote fits extremely well.
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Sometimes, the most simple and basic ideas can lead to better performance in trading. As we know, trading is a lot about having rules and obeying them. Maybe, when those rules are complex or can be bent, it's more likely that they will be broken. A simple rule has, therefore a good chance of being applied in a very rigid and disciplined way. In this article, I will share a very basic and easy rule that I use and have used for quite some time now. I call it the One-Trade-Per-Day rule. As you can guess from the name, that doesn't sound like a very ingenious idea. And it isn't, but it works.