Trading is actually an anti-human process. In other words, most of the top traders have mastered various manifestations of human nature in trading.
Knowing how human nature behaves and rebelling against these human natures is the basis for a trader's success in trading. Therefore, good traders actually have no secrets. They just discovered the weakness of human nature in trading and actively reversed them .
In the book Turtle Trading Rules, some cognitive biases that have a significant impact on most people's trading are listed. So how do these cognitive biases affect our trading?
1. Loss aversion
We all abhor uncertainty because uncertainty means confusion, loss of control and risk. People like the security that comes with certainty. This has led to many traders who like to take the initiative to take profits, and like to settle their pockets for peace of mind.
Instead, trading should embrace uncertainty, acknowledging that future risks and unexpected surprises can come at any time. Only in this case, the formed trading concept and the generated trading system are truly born for risk trading.
Unwilling to stop loss. I'd rather not make a profit than be stopped out. This is the mental state of many people, and professional traders stop losses directly and decisively, as simple as drinking water and eating.
2. Sunk cost
Because of loss aversion, people's attitude towards "sunk costs" has been derived. Sunk costs refer to costs that have already been incurred and cannot be recovered. Economist Xue Zhaofeng once pointed out: sunk costs are not costs. But most people don't think so, and they have a hard time accepting these facts.
For example, there was an example in the Turtle Trading Rules: A company invested 100 million US dollars to develop a project. As a result, after the project was successfully developed, they discovered a significantly better technology. According to normal rational logic, this company should abandon the previous project and develop this new project instead. It should focus on the future and not care about the cost that has been spent before.
But the shift could make the company feel like its $100 million in costs was wasted. They are likely to stick with the original project...that's bad decision making with sunk costs, influenced by costs that have already been incurred and cannot be recovered.
In trading, this phenomenon can also be seen in the market.
For example, many people often hang on to a stock. In addition to the emotion of aversion to losses, they may also think that if I liquidate this stock, then my previous losses will be wasted. As a result, he clings to trying to get back the cost, and doesn't care about other stocks with better trends. This is the same as the company mentioned above. Because of the previous cost, I gave up other better opportunities.
This behavioral pattern is reinforced as losses mount, because the greater the sunk cost, the harder it is for people to give up. That's why we often hear that someone's stock has been held for decades. The fundamental reason why people can turn off the computer and uninstall the software is: since I have lost so much, if I stop the loss, wouldn't all the money be wasted?
But actually? In fact, how the market goes in the later stage has nothing to do with how much sunk cost he paid.
Therefore, for traders, it is time to stop loss and stop loss, and it is time to take in and out, and not to focus too much on those sunk costs.
3. Aversion to uncertainty
The Turtle Trading Rule refers to people's greater willingness to settle down as a disposition effect. But I think it is caused by loss aversion and uncertainty aversion. When our account has a floating profit, we will face the uncertainty of profit and the possibility of loss of profit at the same time. This makes it unbearable for us to continue to hold positions. We are eager to confirm the profitability. Therefore, once there is a floating profit, especially when the floating profit starts to fluctuate, it is the time when people most want to close their positions.
But in fact, trading needs to embrace uncertainty, and when there is floating profit, try to get the big trend market. Because only in this way can we have the opportunity to increase the profit-loss ratio and realize the positive return expectation of the overall transaction logic. The idea of closing when you see it is good, you can't hold the trending market at all.
4. Result preference
It is that we prefer to believe in the result rather than the process.
Many people only look at whether their transactions are profitable. They think that a profitable transaction is correct, and a losing transaction is wrong. Don't care about the transaction logic behind it at all. In fact, professional traders care more about the trading logic. If the logic is correct, it is right to lose money in a single transaction. The logic is incorrect, and the profitable list is also wrong.
For example, dead carry. Many people really came back after fighting to the death. Under the cognition of result preference, they will think that this is correct, and then one day they will be taken away by a wave of irresistible market conditions. There are also many people who have achieved short-term profits because of luck, but the result is also to strengthen their behavior patterns, which eventually lead to their failure.
People love results, especially in an area of uncertainty like the foreign exchange market. Therefore, in the trading world, there has always been a market for bragging. Because those who make money are powerful, whoever makes money is a master, this is the way most people think. It is better to look at the logic than to look at the result, because in this uncertain and leveraged field, the result is very contingent, and logic has real stability.
5. Recent preferences
More weight is given to recent data or experience.
This is easy to understand. Many people use a certain set of trading methods. As long as they lose money recently, they will immediately say: the market has changed or the method has failed. For example, the turtle trading rules themselves, many people have tried this trading mode, but as long as this method starts to lose money continuously, they will say that too many people know this method, and it has long since failed. But in fact, there are very few people who can really use this method, and very few of them are because they really understand it, while most of them are because they don't understand the trading logic, and they follow their recent preferences.
It starts to change as soon as it loses, and a large part of it is because of people's recent preferences. As everyone knows, no set of trading methods can achieve continuous profitability. Any trading method has its own unfavorable period. Looking at the problem from a long-term perspective, is the right way.
Whoever makes money recently is powerful, and whoever is a master. In the past few years, the income has been stable, and the veteran masters who have lost money recently just can't do it. This is the way of thinking of laymen. Celebrities often exist, but birthday stars rarely exist, but many people don't think so.
6. Trend effect and herd effect
It is relatively simple, that people will follow the trend of believing something because other people believe it. For example, most people believe that the turtle trading rules have long since failed. Why? Because they verified it? No, because everyone says so.
Insight is important in trading because it helps traders avoid both of the above situations.
7. Anchoring effect
A term in psychology that refers to the fact that when people make judgments about someone or something, they are easily dominated by the first impression or first information, which fixes people's thoughts in a certain place like an anchor sunk into the bottom of the sea.
The classic example of this is appearances.
Why are many people indifferent when the trend is falling and the account is losing money, but when the market rebounds to near the cost, people react and run away? In addition to loss aversion, aversion to uncertainty and other factors, another reason is the anchoring effect. For example, I hesitated to release the multi-order rebar at 3000, and now I can’t sell it at 2800, because I didn’t release it at 3000. 3000 This position becomes an anchor point. People always compare the current position to the anchor point. And when the price starts to rebound to this position, it is close to the anchor point, and it is easier for people to get out, because it is close to the anchor point.
We have heard stories about someone in the market who used 50,000 yuan to earn tens of millions and finally returned to 30,000. Why doesn't she settle for safety when she retraces to a certain extent? I believe there are two factors. First: The reason why she can achieve exaggerated returns is that she can resist the retracement. The second point is that during the retracement process, she thought, since I have achieved such a high profit, if I close the position now, wouldn’t I lose my profit in vain? She used her previous high-yielding position as an anchor. The account equity has been falling all the way, being anchored all the way, not reconciled all the way, and in the end, how to go up and come back.
This problem is very common in trading, and the solution is very simple, just set a reasonable exit, endure a certain degree of retracement, and understand that retracement is the inevitable price of trend trading. How to get the correct direction in the trend without taking on the retracement?
The above phenomena are typical manifestations of human nature.
Good traders don't have any magical secrets, they just have insight into these phenomena, reverse them, and do things that most people are unwilling or simply can't do.
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I hope this article can make foreign exchange traders get out of the confusion when they are in confusion. Old rules, if you haven't understood it, please bookmark it first! Welcome to leave a message to communicate with the editor!
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