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How does market psychology affect trading?

Posted: Wed Apr 16, 2003 10:59 pm
by Maxwell Cintes
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.

re: How does market psychology affect trading?

Posted: Thu Apr 17, 2003 2:27 am
by Howard Brazzil
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€

Very Good

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

re: Very Good

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