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Trader's Roundtable
A forum for mechanical system traders.
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Maxwell Cintes
Full Member
Joined: 16 Apr 2003
Posts: 14
Location: Hartford, CT
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 Posted: Wed Apr 16, 2003 8:59 pm Post subject: How does market psychology affect trading? |
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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. |
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Howard Brazzil
Roundtable Fellow
Joined: 16 Apr 2003
Posts: 54
Location: Houston, TX USA
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| Posted: Thu Apr 17, 2003 12:27 am Post subject: re: How does market psychology affect trading? |
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| Quote: | | 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 psychology”), I think you can classify Mr. Eckhardt’s comments as an example of trading psychology. And yes – ideally, the system is supposed to take the psychology part out of it, and it can...as long as you are psychologically able to trade the system.
| Quote: | | I keep hearing about market psychology... |
It’s been said many times that the behavior of markets is the sum of the psychology of its participants. But in turn, the behavior of that which is being observed influences the behavior of the observer. That’s a simplistic explanation of what George Soros refers to as “reflexivity,” and wrote about extensively in his book, The Alchemy of Finance: Reading the Mind of the Market. As I recall, he eventually discounted his efforts at trying to exploit the concept, but it makes for interesting reading.
I suspect that this has only scratched the surface of the answer to your question. Perhaps a more experienced member will expand on this, and help draw a clearer distinction between the two.
_________________
"We do not see things as they are, but as we are." (Samurai Trader's Maxim Number One from Zen in the Markets. - Edward Allen Toppel.) |
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Sir G
Moderator
Joined: 15 Apr 2003
Posts: 243
Location: Salt Lake City, Utah
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| Posted: Thu Apr 17, 2003 10:53 am Post subject: Very Good |
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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
_________________
There is no such thing as bad weather, just a poor choice of clothing. |
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Howard Brazzil
Roundtable Fellow
Joined: 16 Apr 2003
Posts: 54
Location: Houston, TX USA
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| Posted: Thu Apr 17, 2003 12:56 pm Post subject: re: Very Good |
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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
_________________
"We do not see things as they are, but as we are." (Samurai Trader's Maxim Number One from Zen in the Markets. - Edward Allen Toppel.) |
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