Trading Lesson of the Week

Check back weekly for another free trading lesson:

The Behavioral Science of Trading

In This Week’s Issue:

  • Upcoming Events – Webinars in the next month
  • New Video – How I Set Up My Trading Computer
  • Stockscores’ Market Minutes Video – Stock Market Corrections – How They Can Be Profitable
  • Stockscores Trader Training – The Behavioral Science of Trading
  • Stock Features of the Week – Abnormal Breaks

 

Upcoming Events – Free webinars this month

Free webinars coming soon, go to the Upcoming Events page on Stockscores to register:

https://www.stockscores.com/trader-training/upcoming-events/

 

New Video – How I Set Up My Trading Computers

Take a tour of my day trading set up as I show what I use for trading computers plus the how and why I have set them up that way.

Click here to watch the video

 

Stockscores Market Minutes – Stock Market Correction - How They Can Be Profitable

This past week had a big correction which left many feeling shell shocked. There are ways to make money from corrections and if you do it right, corrections are much more lucrative than normal markets. This week, I discuss that plus my regular weekly market analysis and the trade of the week on VXX.

Click here to watch the video

 

To get instant updates when I upload a new video, subscribe to the  Stockscores YouTube Channel

 

Stockscores Trader Training – The Behavioral Science of Trading

While we hear about how markets are traded by computers more and more, I believe that it is still people that move markets. The computers take little bit of profit along the way and may affect the short-term liquidity for stocks, but trends and substantial price moves are driven by human judgment.

This makes it important to understand how humans make those judgments. Traditional stock analysis assumes that we make rational decisions based on the information we have about the company. However, what one person considers to be a rational decision might be considered completely foolish by another. Many investors will make moves that are predictably irrational.

Behavioral economics and finance are fields which have still not hit the mainstream, but many of the theories of these disciplines are part of my approach to the market. Here are some areas of research by behavioral theorists that I find are applicable to what we do as trader and how they relate to some of my trading concepts:

Up trends start slowly, there are often pull backs early in the trend.

"A conservatism bias means that investors are too slow (too conservative) in updating their beliefs in response to recent evidence. This means that they might initially underreact to news about a firm, so that prices will fully reflect new information only gradually. Such a bias would give rise to momentum in stock market returns." Bodie, Kane and Marcus (2005)

People tend to make judgements by what has happened recently rather than what happens most of the time.

"Gambler's fallacy stems from two sorts of confusion. First, people have very poor intuition about the behavior of random events. With gambler's fallacy, they expect reversals to occur more frequently than actually happens. The second source of confusion stems from the reliance on representativeness." Shefrin (2000)

For most people, profits in the stock market are short term loans.

"People are overconfident. Psychologists have determined that overconfidence causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Does overconfidence occur in investment decision making? Security selection is a difficult task. It is precisely this type of task at which people exhibit the greatest overconfidence."

Nofsinger (2001)

How we judge information is largely dependent on our mood.

"The discovery that the weather in New York City has a long history of significant correlation with major stock indexes supports the view that investor psychology influences asset prices."

Saunders (1993)

People often wait to buy a stock until it has been going up for a while, in the end, paying too much.

"People prefer the familiar to the unfamiliar"

You are not smarter than the stock market.

"The illusion of control is the tendency for human beings to believe they can control or at least influence outcomes which they clearly cannot."

For every trade, there is a buyer and a seller. The buyer thinks the stock is going up, the seller thinks the stock is going down. One of them is wrong.

"Psychologists Hillel Einhorn and Robin Hogarth (1978) have studied the general issue of why people persist in beliefs that are invalid, that is, why they succumb to the illusion of validity. Einhorn and Hogarth suggest that people do so because they are prone to search for confirming evidence, not disconfirming evidence."

Get the weekly email from Stockscores founder Tyler Bollhorn

Get our weekly trading lesson and stock trading ideas direct to your email in box with the Stockscores Foundation newsletter.

Learn how to be a better investor and trader plus see how to best utilize the tools of Stockscores.com.

This is a free service from Stockscores with no spam (we hate spam!). Enter your email address below to register for future email editions and see the archive of past newsletters.

Past Trading Lessons

October 14, 2018The Behavioral Science of TradingFLKS | GLBS
October 7, 2018Market Scanning for Hot StocksPEIX | BDSI
September 30, 2018Overcoming EmotionsAKER | ETP
September 24, 2018How to Be a Good TraderGLBS | BAS
September 17, 2018Trading Small Cap StocksRNN | AVP | SMSI
September 9, 2018Big Data, Big ProfitV.EMC | FRED
September 4, 2018Profits from WithinAVID | RARX
August 26, 2018Take Your Eyes Off the PrizeCRBP | GS
August 20, 2018Emotion is the EnemyTOL
August 13, 2018TradenomicsT.EFX | T.SW | T.CPX
August 5, 20185 Ways to Overcome EmotionBLNK | MRAM
July 22, 2018The Information TrapT.HCG | XRAY
July 16, 2018Fear or Fact?TLGT | GOL
July 8, 2018What the Ocean Teaches Us About InvestingMCF | DEPO
June 24, 2018Learn from My Trading MistakesAKTX | ZFGN
June 18, 2018Effective Strategy TestingT.NEPT | BLPH | CLSN
June 18, 2018Effective Strategy TestingT.NEPT | BLPH | CLSN
June 10, 2018Trade With Fact or Fear?APRI | BLCM
June 3, 20187 Important Trading TechniquesSTNG | GIGM
May 28, 2018The Expected Value of the TradeSVRA
May 20, 20188 Mistakes of the HeartASNA | CTIC
May 13, 2018Stop Fear in Your Trade Decision MakingT.AUP | T.WEED | TYME
May 6, 2018Trading Should Not Be GamblingCRNT | BPY
April 29, 201815 Core Trading Principles
April 22, 2018How to Measure Your Trading Performance
April 15, 2018Do You Gamble or Trade?T.MOGO | ZIXI
April 9, 201810 Ways to be a Better InvestorHAL | XOM
April 2, 2018Be the Fussy TraderT.HXD | VXX | SDS
March 25, 2018How to Be a Better TraderV.GENE | V.HEMP
March 18, 2018Trade Stocks for a Living - What You NeedNFEC | RKDA | AMTX
March 11, 2018Don't Be a Reckless TraderVVUS | YRD
March 4, 2018Seven Ways to Take Emotion Out of TradingV.PQE | ARLZ | UPLD
February 25, 2018Trading Success with StatisticsACHN | T.THO
February 18, 201810 Ways to be a Better InvestorSTKS | CTG
February 12, 2018Never Fall In Love, Is the Stock Market Crash Over?AQMS | UAA
February 4, 2018Here are 7 Reasons to Say No to the TradeVXX
January 28, 2018Does Size Matter?VXX
January 21, 20183 Ways to Improve Your Trading ProfitsLTRX | NVCN
January 7, 2018Trade Less, Make MoreHEB | NIHD | V.SLL
December 23, 20178 Trading Resolutions for 2018
December 10, 2017Trading a CorrectionBUR | BCRX
December 3, 2017Strength Brings WeaknessROX | ETSY
November 26, 2017Up 27% in 4 Months, How the Big Wins Pay the ProfitsV.KALY | GLOW
November 19, 2017Overcoming FearSRAX | HIBB
November 12, 2017The Importance of Trading LessAPTO
October 30, 2017When to Say No to the TradeT.PGF | T.CPG
October 22, 2017How to Find Hot Stocks EarlyV.NGC | T.PAY
October 15, 2017How I Have Earned 33% Since AugustPLG | XNET | HRG
October 9, 2017Data Based InvestingT.SIS | BPTH | NTNX
October 1, 2017Emotion is Your EnemyCRMD | OPTT