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In this article, I would like to discuss the subject of overconfidence. Maybe in some way, overconfidence can be looked at as the exact opposite of perfectionism. Neither emotions serve a trader well as they do not take the market (movement) for what it really is.
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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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As some of the regular visitors probably know, I am a great fan of Dr. Brett N. Steenbarger. I remember reading one of his articles where he discussed the problem of being addicted to trading. To illustrate this, he showed a list of questions that were normally used to determine whether someone was addicted to alcohol.
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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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Before taking a trade, you should have done your analysis. If the analysis shows that the trade has a high probability of being successful, you enter it and see what happens. Now suppose the market moves away and your position is getting worse. No real problem, there is never any guarantee the analysis will work.
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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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Investing in gold has been on every front page in the last two, three years. The financial crisis has scared a lot of investors who lost faith in everything but gold. Many investors buy gold in some form, in paper or physical gold. Investing in gold is not something from the last couple of years, but has been around for many years. It's just that the last couple of years, gold has every characteristic of being a bubble. Gold investors sometimes seem to lose all good sense of judgment and logic. Buying gold has almost become a sort of religion.
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Many traders read all the news, rumors, and gossip they can get their hands on. And there's always more to read. Then they start convincing each other on chat forums that the market has to go in a certain direction based on that news. In the end, they all agree, but we know what happens with crowd consensus.... it's not going to happen.
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We like to think that humans make decisions in a rational and logical way like computers do. Most economists model the consumer as a rational being, a consumer that makes well-informed rational decisions.
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When I think about trading rules, the first thing that comes to mind in less than 0,047 seconds is: always to use a stop loss. Everyone knows this saying 'Cut your losses and let your profits run'. That is, of course, easier said than done and this article is not about that. This article is essentially about accepting a loss.
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.... that you are thinking that he is thinking? This is the funny paradox that is a big factor in the financial markets. In 'A mathematician plays the stock market' by John Allen Paulos, the author analyzes where this is going and what it means.
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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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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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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.