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How to Improve Your Trading Habits

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As traders we all have our own ways of doing things. Trading habits that we’ve developed over the years. Some are good and some are not so good. In this post I’d like to talk about how to improve your trading habits, but let me share my parking experience first.

Earlier today I made a mistake which I have repeated no fewer than  four times already this year, not to mention the dozens of times over the years.

I live in Sydney where the cost of parking is ridiculously expensive, an indicative guide of the cost per hour in a metered parking bay is $4/per hour, the beaches price at a hefty $7/per hour. As a self confessed caffeine addict [Hello my name is Michael and I am addicted to coffee] I tend to pop into cafes throughout the day to buy a cuppa.

Taking a chance

So here is my problem and I suspect there are many amongst you who face the same problem. When I drive up to a cafe to buy a coffee I think to myself I am only going to be 15 minutes or so. What are the chances of me getting a fine? So I take a chance and run in without putting money in the meter. Straight away I can feel the extra adrenaline course through my veins as I roll the dice. For the non-locals, beware Australian parking rangers are everywhere.

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Ok so lets take a look at the equation and see whether the approach is reasonable/rational.

Fine = A parking ticket is $106

Cost = $1 for 15 minutes

This means I need to get away with the “gamble” 106 times for it to pay for itself let alone make a profit ?.

Probability of getting a parking fine

I don’t know the exact statistic but I can say quite confidently that the probability of being fined is many times more than 1/106 = 0.9% of the time. So if the expectancy for avoiding putting money in the parking meter is negative why do I do it?

Here are few suggestions:

  • I want to outsmart the city council.
  • I want to outsmart the parking ranger.
  • I want to get something for free.
  • I want a little thrill of excitement.
  • I want to be naughty.
  • I am too lazy to put the money in the meter.
  • I don’t have any coins for the meter but want my coffee.

I think we can all come up with our own list of reasons why we do such financially silly things, the point I am making is that we all know deep down the behaviour is silly and expensive yet we continue to do it over and over again.

The link between your parking behaviour and your trading

The example I have provided above is exactly the practise many traders adopt in their efforts to make a profit. The vast majority of traders are doomed from the outset. Why, because they are taking on way too much risk relative to the size of the profit.

There is a well known behavioural bias called the disposition effect, whereby traders take small profits and accept large losses. This could be financially profitable if the number of losses was small relative to the wins, however in the majority of cases there is negative expectancy, which is a fancy way of saying losses occur more frequently than you think and the probability of your trading is likely to cost you.

So if this behaviour is known to us why do we still do it and how can we avoid doing it in the future. A clue to the solution is to be married to my wife, there is no chance I will make a parking mistake when I go out with Ilana. The reason is she will be barking reminders in my ear from the moment the ignition is turned off.

Allow me to introduce the PsyQuation alert system. This is precisely what the job of PsyQuation’s alert system is to do, it is there to draw to your conscious mind that you are doing financially stupid things. With the flashing notification of an alert delivered to your computer screen, inbox or mobile phone it is our hope that you will be made aware of the behaviour in the moment so that you can address the issue and hopefully avoid paying any unnecessary fines.

 

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