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Non-Tech : The Critical Investing Workshop
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To: Voltaire who wrote (21828)6/7/2000 10:02:00 PM
From: Jill  Read Replies (2) of 35685
 
Porchies,

I'm in study mode for trading. Here are some nice tidbits about psychology from tonight's reading:

Mass psychology is far more important than economic analysis. The herd will be right for most of the trend. They will be wrong at the turning point. We trade in one direction until the market tells us that the prior trend is no longer in force.

Decision theorists have performed experiments in which people are given various choices between sure things (amounts of money) and simple lotteries in order to see if the subjects' preferences are rationally ordered. They find that people will generally choose a sure gain over a lottery with a higher expected gain but that they will shun a sure loss in favor of an even worse lottery (as long as the lottery gives them a chance of coming out ahead). These evidently instinctive human tendencies spell doom for the trader - take your profits, but play with your losses.

This attitude is also culturally reinforced, as exemplified by the advice: Seize opportunities, but hold your ground in adversity. Better advice to the trader would be: Watch idly while profit-taking opportunities arise, but in adversity run like a jackrabbit.

One common adage on this subject that is completely wrongheaded is: You can't go broke taking profits. That's precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits

People want to buy cheap and sell dear; this by itself makes them countertrend. But the notion of cheapness or dearness must be anchored to something. People tend to view the prices they're used to as normal and prices removed from these levels as aberrant. This perspective leads people to trade counter to an emerging trend on the assumptions that prices will eventually return to "normal". Therein lies the path to disaster.

Note: For example, I previously had traded NTAP Sept 100s, having picked them up for 2 and sold them around 8. So it's hard for me to buy Sept 100s for 7 now. To get around that I switched to July 80s. I had to pick a "new" strike on NTAP to overcome my aversion to the changed situation/price.

Jill
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