How does market psychology affect trading?

Discussions about the psychology of the markets and the masses as it relates to trading.
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Maxwell Cintes
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How does market psychology affect trading?

Post by Maxwell Cintes » Wed Apr 16, 2003 10:59 pm

Hi, I keep hearing about market psychology.

What's the difference between trading psychology and market psychology?

Is market psychology important only when you are not trading a mechanical system? Doesn't a system take the psychology part out of it? Isn't it all based on prices not psychology?

Sorry if this seems naive.

Howard Brazzil
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re: How does market psychology affect trading?

Post by Howard Brazzil » Thu Apr 17, 2003 2:27 am

Is market psychology important only when you are not trading a mechanical system? Doesn't a system take the psychology part out of it?
George,

There are a number of psychological factors which shape any investment decision-making process, many of which can exert an influence even in the design and implementation of systematic strategies.

A case in point is the well-known tendency of traders to focus on high-probability entry methods. William Eckhardt touches on this topic in New Market Wizards, and explains: "The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance for a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic, and may even be inversely related to performance."

So in answer to your first question (“What's the difference between trading psychology and market psychologyâ€

Sir G
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Very Good

Post by Sir G » Thu Apr 17, 2003 12:53 pm

Howard-

Very well explained. By the way, I love your signature:
We do not see things as they are, but as we are.

Happy Trading. Sir G

Howard Brazzil
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re: Very Good

Post by Howard Brazzil » Thu Apr 17, 2003 2:56 pm

Thanks, SirG.

That's Samurai Trader's Maxim Number One from Zen in the Markets, by Edward Allen Toppel. I should have attributed it earlier.

Excellent book, by the way. It got bylines by Milton Friedman, Jack Sander, and Leo Melamed.

- Howard

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