Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Making Sense of the Stock Market
11/09/2015 6:00 am EST
"Emotions should have no place in your decisions and they absolutely have no place in ours," says Frank Kollar, of Fibtimer.com, who maps out the reasons he thinks unemotional buy and sell decisions—generated by tried and true trend timing strategies—are the certain road to trading profits.
When a person decides to enter the financial markets, he or she brings years of personal experiences with them. Those experiences are usually a detriment to profiting as they are based on one's life experiences. The financial markets, as well as all freely traded markets from stocks to commodities, from currencies to tulips, behave in a much different manner.
Typically, when we first learn how to trade, we study the markets and try to develop our own personal theories about how the markets work. Because we don't actually conduct formal experiments though, we fall prey to psychological biases.
Those same personal experiences, built over a lifetime, which helped us to advance and learn in our world, wind up being the very reason many traders fail to profit.
False Consensus Effect
One of these psychological biases is the false consensus effect...we tend to wrongly think that others believe what we believe and do what we will do, but that's only our perspective and it can mislead us.
Why is it difficult to anticipate what people will do? Part of the problem lies in the fact that we are mere mortals. Humans have a limited capacity for understanding complex information. In some ways, people can process information better than a computer, but in other ways they cannot.
The false consensus effect is one of those rules of thumb that may bias our decisions. No matter what decision you ask people to make, no matter how important the issue, and no matter what choice is made, social psychologists have demonstrated that people overestimate the number of others who agree with them.
There is a natural tendency to believe that our decisions are relatively normal, appropriate, and similar to what our colleagues and peers would do in a similar situation.
We use our decisions as an anchor and evaluate what others would do based on what we would do. Decisions based on our life's experiences. Our biases. Our interpretation of events and their consequences.
This decision-making bias can contribute to feelings of overconfidence. Once we make a decision, we tend to be confident that we are correct and that others will agree with us, but had we seen the situations from their perspective, we may see that they would behave quite differently.
Anticipating What the Masses Will Do
Many market timers try to anticipate what the masses will do. Will they buy or will they sell? The crystal ball method of timing.
But this method has a long history of lost fortunes behind it. In fact, this is the method that gives market timing a bad name. No one knows the future and even though they may make a lucky pick, getting the future right again and again is impossible.
You cannot predict precisely how people will react to world events, economic changes, etc.
But there is a method of timing that has worked for many years and will continue to work.
The Very Best Timing Strategies
The very best market timers follow market trends. They wait until the trend is confirmed and then climb on board, riding it as long as it lasts. If the trend fails—and some always do—they exit quickly and await the next trend.
This follows the old market saying, "cut your losses short and let your winners run." Everyone has heard it but so few are able to adhere to it.
That is why we follow trends here at Fibtimer.com. We do not try to forecast the future like other timers do and usually fail at. We identify trends and take positions accordingly. If the trend fails, we exit quickly. If it continues, we ride it to the end. That could be weeks or even months as profits accumulate.
Following a carefully defined trend following strategy is the only sure way to be certain you will be in the right position, at the right time, when the markets take off in one direction and stay in that direction.
Emotions should have no place in your decisions and they absolutely have no place in ours.
Unemotional buy and sell decisions, generated by tried and true trend timing strategies, are the certain road to profits.
By Frank Kollar, Editor, Fibtimer.com
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