Emotions that affect trading

People have developed certain ways of looking at the world that served them well in more primitive circumstances; however, when it comes to trading, those perceptions get in the way. Scientists call distortions in the way people perceive reality cognitive biases. Here are some of the cognitive biases that affect trading:

• Loss aversion:
The tendency for people to have a strong preference for avoiding losses over acquiring gains.
• Sunk costs effect:
The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future
• Disposition effect:
The tendency for people to lock in gains and ride losses
• Outcome bias:
The tendency to judge a decision by its outcome rather than by the quality of the decision at the time it was made
• Recency bias:
The tendency to weigh recent data or experience more than earlier data or experience
• Anchoring:
The tendency to rely too heavily, or anchor, on readily available information
• Bandwagon effect:
The tendency to believe things because many other people believe them
• Belief in the law of small numbers:
The tendency to draw unjustified conclusions from too little information

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Spanish Debt Issues

There is a lot of talk about Spanish sovereign debts recently. I came across a research paper which I think is very useful for me and wish to share it here. This is taken from www.fundsupermart.com, an online fund broker where you can purchase funds form various fund managers. This portal provides some research and comparisons and it is essentially a self service portal. From the chart provided, we can see that there is a problem for Spain to service their debts for the next 4-5 years if the debts are not re-structured. With this kind of risk, no sane investors would want to risk their money to buy Spanish bonds. They can only turn to European central bank for bail out. The blue arrow is a fictitious line I draw assuming re-structuring is going to happen. Essentially, they have to move the payment of capitals into next 5-20 years to be affordable. In addition to that, they can't make additional loans. This is just taking a very simplistic view of the situation. To have that hap...

How to do technical analysis for stocks?

I started investing in stock market about 20 years ago. Initially subscribing to IPOs. I had not have luck with IPOs. All of them ended with money losing deal, even though I held on to them for a few years. So, I concluded that the IPOs in Singapore market is over priced. Then I started to read analyst reports on stocks and invest in companies (typically blue chips). Not much profit but good dividends during the good years. Then, came the financial crises. I went on to buy blue chip companies during crises and I held them over the years and sold of a about 120% gain over 5 years on average. Due to some distraction, I stayed away from the market during this crisis and missed the opportunity to buy during the lows. Recently (few months ago), I had been doing some stock trading and currency trading using technical analysis method for more than a year. So far, I had tried many different technical analysis using different indicators (Moving averages, MACD, RMO, Fibonacci, Stochastics, RSI e...

Trading systems

Here are some trading systems that can be used for trend following trading: ATR Channel Breakout : A volatility channel system that uses ATR as the volatility measure. Bollinger Breakout : A volatility channel system that uses the standard deviation as the volatility measure. Donchian Trend : A breakout system with a trend filter. Donchian Trend with Time Exit : A breakout system with a trend filter and a time-based exit. Dual Moving Average : A system that buys and sells when a faster moving average crosses over a slower moving average. Unlike the other systems, this system is always in the market, either long or short. Triple Moving Average : A system that buys and sells when a faster moving average crosses over a slower moving average but only in the direction of the major trend defined by a very slow-moving average.

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