By now, you should know that Psychology plays a vital role in our success or failure as a trader.
But did you also KNOW that OUR inherent Biological makeup can make us susceptible to losing money in the markets.
Yes, that correct….Let me clarify a bit with an example.
Let's me ask you a question….
Given the two choices below, Which of the following would you choose…
Choice 1: If I flip a coin and you guess correctly whether it lands heads or tails, you would get $ 500, but if you guess incorrectly, you would lose $ 250
Choice 2: If I flip a coin and you guess correctly whether it lands heads or tails, you would get $ 250, but if you guess incorrectly, you would lose nothing.
So which Option would you choose.
Well...if you are like most people you would choose Choice 2.
Seems like a Risk-Free Proposition...Right?
Statically speaking both options offer the same payout : $ 125
But why did YOU and the majority of people prefer Choice 2.
Well the reason is this….
People suffer a higher degree of pain from losing money than they feel pleasure from making money.
And this seems to explain why many traders have such a hard time with managing trades properly, letting winning trades run too short, and letting losing trades run too long.
And by the way, I am not just telling you this from my own observation, but there is conclusive scientific evidence pointing to this fact.
...This was the conclusion of a study in neuroeconomics led by two psychologists, Kahneman and Tversky.
So HOW can you use this information to advance your own trading?
Know this….YOU have to train yourself to fight your innate urge and temptation to HOPE a loser will turn into a winner eventually.
I hope this sheds some light and helps YOU gain some clarity...
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