Reblog: Why you shouldn’t try to trade like George Soros


George Soros, founder of Soros Fund Management LLC

 

Traders tend to be overconfident and discount what they don’t know about the market and individual securities. They see patterns instead of random noise. And they have a hard time admitting their losses and focus too much on gains.

In summarizing the science of behavioral finance, Statman says we’re pretty much hard-wired to consistently make these mistakes — and lose money. Since we tend to think of ourselves as better than average on most everything from driving to investing, it clouds our rational judgment. A body of research has found this to be particularly true when it comes to amateur stock traders.

Statman said that average returns of frequent traders “lag those of infrequent traders and the average returns of infrequent traders lag average returns of investors who abstain from trading.”

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Reblog: Do NOT Look For a Trading Strategy That Suits Your Personality


What Feels Comfortable and Natural Usually Doesn’t Work

Why do almost all speculator lose money? They lose because successful speculation requires that we consistently do that which is psychologically uncomfortable and unnatural” – Richard Weissman

There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win, you have to act like the minority. If you bring normal habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose” – William Eckhardt

Most of what we naturally do and think do not work in trading. Here are a couple of examples:

  • We are naturally inclined to cut our winners short and let our winners run

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Reblog: How to Cut Losses and Let Winners Run


Loss Aversion – Cut Losses Short & Let Winners Run

If you’ve been trading for a while, you’ve probably heard the following ubiquitous mantra of trading: “Cut Your Losses Short & Let Your Winners Run”.

Why Should You?

Stocks can literally go to zero. It happened many times before and will happen in the future, regardless of how big the company is.

MANY oil and coal companies recently filed for chapter 11 bankruptcy and their stocks got delisted. You may also remember Lehman Brother and General Motors. What happens when your stock falls off a cliff and gets delisted? You simply lose all the money you invested in that stock.

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