The Behavioural Investor – Daniel Crosby
Market Meditations | April 1, 2021
The best technical and/or fundamental knowledge is nothing without the self understanding to match it. In The Behavioural Investor, Daniel Crosby draws our attention to 4 trading dangers that, if we do not address, will destroy our trading and investing returns ? Let’s take a closer look.
Almost everyone in the world thinks that they are better than average ? Logically speaking, it would be hard to prove that we are all better than average. So it seems some people are not thinking straight. Now whilst there is nothing wrong with self confidence, the issue with overconfidence or ego is that we do not fathom the idea we could be wrong. Instead, we seek out information that strengthens our beliefs and ignore that which challenges them. And in doing so, we are looking for validation rather than the truth. Do you think the market will be looking to soothe your ego? Certainly not. It will more than likely look to exploit it.
It is essential that you come up with reasons why your analysis could be wrong ? Write them down for every trade idea you have. Once you have them written down, look out for them. If you have a hard time fathoming that you could be wrong, try shifting your mentality. Even if you don’t think you are ‘wrong’, you cannot deny or eliminate random events. So you must have a plan for the downside or loss.
Conservatism causes one of the greatest trading mistakes of all: holding on to a losing position. We prefer that which is familiar over that which is profitable. If you find it difficult to abandon assets that you feel comfortable with, try to invert the problem. Don’t ask yourself why you are long an asset you are holding but rather, try to consider why you wouldn’t want to be long the asset. You might realise it’s not such a good idea after all. There is nothing wrong with looking for trading options different to that which you are used to. ⏰ So take ample time to come up with your trading decisions but do not be afraid to rock the boat. Calculated risks are part of the investing process.
Whilst there is merit in fundamental analysis, there is not merit in getting carried away with stories. We need to also play attention to mathematics and statistics in our trading and investing. For someone with a short attention span, stories stick much more than numbers. Sometimes, crypto influencers raging about coins can seem much louder and more convincing compared to what the charts are saying.
If this sounds like you, it’s essential to stick to a rules based trading system. When you are bombarded with hype, don’t just take it at face value. Assess the news against your trading system and see whether and how it can actually impact your position. Importantly, what will the size of the impact be? Sometimes, for a lot of hype, the impact might not even be enough to take you over your stop loss target. Whilst access to the internet and resources is a luxury, it is also pertinent to be able to see the forest for the trees ?
When strong emotions are at play, the set of rules you set for your trading are left at the door. You find yourself completely disregarding the value of that stop loss level you so carefully selected. If your emotions are controlling you, we cannot stress the importance of meditation. Meditation is the practise of recognising your emotions but not letting them influence your current task. Practise just 10 minutes a day and you’ll see serious improvements in no time. At the very least, learn to notice when you are hungry, tired, agitated or upset and don’t make trading decisions in those states ❌ If you don’t trust yourself to make this assessment, you can look to automate your trading with stop-loss orders that will close out your position automatically.