Everyone knows the trading axiom: ‘cut your losses and let your profitable trades run’. Yet so many traders have a hard time sticking with it.
In fact, this issue has its own name: the disposition effect. Several studies have found that investors have the tendency to hold onto losing positions longer than winning ones. Their loss aversion leads them to take risk-seeking actions.
Many profitable approaches to trading (including the Duomo Method — the one I use) take advantage of asymmetric opportunities. …
In most situations in life, there are things we can control and things we can’t. This is especially true in situations that involve other people; we can account for our actions but not theirs.
For example, an Olympic athlete might want a gold medal, but whether they get one or not isn’t actually within their control. They could train as hard as possible and hire the best coaches in the world, but if someone else is better than them at competition time, they aren’t going to win.
This is also what we experience in the markets. We can perform fantastic…
When I was at university, I had a friend who was really into horse racing.
Some days when I was procrastinating from my uni work, I’d join him and go down to the bookies. He’d stand there watching the TVs and bet on the various horse races.
Most of the time he was betting on an outside bet and only occasionally on the favourite, and it was never just based on the funniest sounding name like my bets were!
So I asked him what his process was. …
In 1997, a study was conducted on taxi drivers in New York and it uncovered some very irrational behaviour.
On rainy days, the demand for taxis was much higher than usual, as you’d expect. Yet, the supply of taxis was much lower than on a typical day.
On the other hand, when the weather was good, demand for taxis was lower as people were happier to take a walk. But during these times, the supply of taxis was much higher than usual.
This strange situation raised some questions. Why were there fewer taxis on the road when they were in…
Have you ever said to yourself, “it’s only a small trade, it doesn’t matter”?
If you answered yes, give yourself a slap on the wrist because this statement is wrong!
Every trade you make matters.
When you risk a smaller amount than you usually do, it feels like you can justify it not having to fit your trading system. If it loses you don’t really care.
This relates to a cognitive bias that we all have, the contrast effect. But as traders, we need to battle against cognitive biases as much as possible.
The truth is, the most important trade…
The work by Dr. Carol Dweck has found that there are two types of mindset, the fixed mindset and the growth mindset.
In a fixed mindset, people believe their basic qualities, like their intelligence or talent, are fixed traits. They spend their time documenting their intelligence or talents instead of developing them. As a result of this, failures become a personal reflection of their level of talent, rather than an area of potential development.
With a growth mindset, people believe that their abilities can be developed through dedication and hard work. This leads to enjoyment in learning and a resilience…
Most traders and people learning to trade have trading goals. That’s a good thing because goals are very important.
However, the problem in most cases is that these goals have no practical purpose other than sounding fairly motivational.
The issue comes down to how we set our goals in the first place. A lot of the time, our goals just become one big wish list. After all, if you’re going to choose something that you want to achieve in your life, you might as well go big or go home!
Unfortunately, these goals often just become a source of guilt…
When you first start trading, it’s always exciting to get involved in the live markets. You want to see what’s happening in real-time and react to the twists and turns of the price movements at the same time as countless other traders around the world.
However, while you’re in your development phase, live trading is often not the best thing to be focusing on. Instead, we can achieve many of our goals much more effectively and efficiently by using historical data.
Of course, the live markets can’t be entirely replaced in your development. You will need them for experiencing the…
Benjamin Graham, the father of value investing, is said to have stated that in the short run the market is a voting machine, but in the long run, it is a weighing machine.
It means, in the short term the price of a company may be dictated by its popularity in the market but over the long term the price will be more in line with the actual value of the company.
The difference between the voting machine and the weighing machine also dictates how investors should be planning their own investing strategy. …