Trading in the market typically offers no shortcuts or easy paths, especially since "trading is against human nature," which will gradually erode your sense of comfort and smooth out your edges as you participate. Those who can adapt to this kind of trial may succeed, while those who cannot will surely fail.
In trading, there are some cognitive biases that affect our judgment of the market and to some extent determine the outcome of the trade. So what are the cognitive obstacles that are difficult to overcome? Let's listen to the experiences shared by fellow traders.
"Apocalypse Da Shuo Brother" shares:
Top traders have mostly mastered the various manifestations of human nature in trading, identified the weaknesses of human nature in trading, and actively gone against them. "The Turtle Trader" lists some cognitive biases that have a significant impact on most traders.
1. Loss Aversion
Preferring not to make a profit rather than cutting losses and exiting is a psychological state for many people. In the end, they all inevitably face the risk of being wiped out. Relatively speaking, professional traders' stop losses are direct and decisive, as simple as drinking water and eating.
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2. Sunk Cost Fallacy
Sunk cost refers to costs that have already occurred and cannot be recovered. Economist Xue Zhaofeng once pointed out: sunk costs are not costs. However, most people desperately try to recover the sunk costs, leading to a series of poor decisions. For traders, when it's time to cut losses, do it; when it's time to give back profits, do it, and don't overly care about those sunk costs.
3. Aversion to UncertaintyThe Turtle Trading Rules refer to the preference for taking profits early as the disposition effect. However, I believe it is caused by aversion to loss and aversion to uncertainty. In fact, trading requires embracing uncertainty and the mindset of taking profits when the opportunity arises, because we fundamentally cannot hold onto trend markets.
4. Outcome Bias
We are more willing to believe in outcomes rather than processes. Many people believe that profitable trades are correct and losing trades are wrong, without paying attention to the trading logic behind them.
On the contrary, professional traders pay more attention to the trading logic. Even if a trade is losing, it is still correct if the logic is right. If the logic is wrong, a profitable trade is also wrong.
5. Recency Bias
People place more emphasis on recent data or experiences in trading. If a trading method results in losses in the short term, they will feel that the method is ineffective and start changing as soon as they experience a loss. However, they do not realize that every trading method has a period of disadvantage and cannot achieve continuous profitability. Looking at the issue from a long-term logical perspective is the correct approach.
6. Bandwagon Effect and Herd Effect
People tend to follow the crowd because others believe in something. For example, most people believe that the Turtle Trading Rules are no longer effective. However, they have not verified this themselves; they just believe it because everyone else says so. In trading, insight is very important, as it can help traders avoid the influence of the bandwagon effect and herd effect.
7. Anchoring Effect
It is a psychological term that refers to the tendency of people to be influenced by first impressions or initial information when making judgments about someone or something, just like an anchor sinking to the bottom of the sea that fixes people's thoughts in a certain place. Why do people who suffer losses remain indifferent when the market falls, but are more likely to exit when the market rebounds? One of the reasons is the anchoring effect.The solution is quite simple: set reasonable exits, tolerate a certain degree of drawdown, and understand that drawdown is an inevitable cost of trend trading.
"He Ziyin" shares:
The "human nature" in trading can be summarized into two aspects—greed and fear. "Against human nature" is against these two. How to overcome them? Only through self-discipline. But the premise is that your strategy must be effective. In fact, during the process of traders growing from novices to veterans, the problems they encounter sometimes appear together.
For example, there are many reasons why a novice trend trader cannot hold onto positions:
First, fear of loss. The stop-loss space is unreasonable, leading to frequent stop-losses, subjective changes in the expected direction of the strategy, and the previous reasonable judgments are all discarded. When the principal is almost lost, it is discovered that the trend has not yet emerged, or the trend has already emerged, but due to too much loss in front, dare not do it.
Second, fear of winning. Finally, an opportunity is seized, and the market quickly starts, and a profit of 50% is made in a few days. Some people are ready to take profits and wait for the drawdown to re-enter. The idea is good, but it does not follow the requirements of the strategy. Later, it is found that the market continues to develop, the longer you wait, the less it comes back, and finally, you can't wait to enter the market, and the result is a drawdown.
This is because the market's operation, rhythm, and context are not clear, and you dare not do it or cannot hold on. At this time, there is no need to talk about any strategy. If you can't see the market clearly, the strategy is no different from flipping a coin.
We cannot avoid subjectivity. Subjectivity, in a sense, is your understanding of the entire market. We need subjectivity so as not to be disturbed by external noise. But subjectivity will bring greed and fear. Only by strictly adhering to trading discipline can you be saved. Understanding the market is a gradual process. With discipline to protect you, you have the opportunity and time to understand the market.
Greed and fear stem from a lack of understanding of the unknown. You need to understand the market, understand the risks, and understand the purpose of trading. If you achieve these, there will be no bad, "against human nature" feelings."Tangtang" Shares
A trading system is not against human nature; it is the adherence to the system that goes against human nature.
There are countless systems that make money, but they all lead to the same end, which is to follow the trend at different levels. Once you have a profitable trading system, you must "go against human nature" and adhere to it.
You start trading according to the system and make money. But if you look closely, the system is at a 10% position, making 10,000, and if I change it to a 50% position, wouldn't I make 50,000? After changing, you go bankrupt.
You start trading according to the system and make money. One day, you find that the system is opening a long position here, isn't this the pressure line? Don't open it. As expected, you lose money. One day, the system reaches the stop loss price, but there is a support point not far below, so you decide not to stop. As expected, you lose money again. You will feel that you are much better than the system, and you might as well operate subjectively.
You start trading according to the system and lose money continuously, feeling confused. One day, the system prompts to open a position, and you think it's not a good point to open, so you decide not to do it to avoid losing more money. As a result, a big market came that day.
You start trading according to the system, made 10% in the first half of the month, and lost 8% in the second half. In the first half of the next month, you made 10% again, and you think it's time to stop. Later, you found out that if you followed the system, you could make 40% for the whole month.
You start trading according to the system and find that some market conditions are not captured by the system, so you start optimizing the system. After over-optimizing, the system fails, and you lose a lot.
I suggest that if you have a profitable trading system, you should adhere to it well, and those who keep discipline live longer. Avoid greed, impatience, fear, and arrogance, maintain a calm mood, and complete each transaction calmly and peacefully.
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