Psychological Roots of Failure in Trading
I write this article to shine a light on the importance of the learning process and increasing your knowledge in trading.
Unfortunately, many new traders start trading during the bull cycle without knowing the basics of the market, and the result is almost always the same.
They do not know Bullish trends will not last forever, and this coin has another side!
I remember when I published my RIOT analysis on Nov 5th, 2020, the price was 3.81 USD/share and my target was 55 USD/share!
I relieved many comments that is a scam or some others made fun of me!
RIOT skyrocketed to 79.50 and then I published my first short analysis on Feb 18, 2021, this time everyone oppose me that it is a buying opportunity at 62 USD/share!
I experienced the same situation over and over again:
WKHS
TLRY
SPCE
Now for those who like to know the underlying cause of Boom-Bust cycles in the market, I would like to explain more:
Soros’ boom-bust cycle, explains the three phases of price change as:
1- The “far-from-equilibrium” upswing,
2-The phase transition turning point, and
3--The downswing and return to “near-equilibrium” conditions.
I believe we can evaluate the participants psychological condition as well:
Charles Darwin wrote in his book The Descent of Man, "Ignorance more frequently begets confidence than does knowledge."
We can consider darwin's quote the basis for the psychological researches by psychologists David Dunning and Justin Kruger.
The Dunning-Kruger effect
The Dunning-Kruger effect is a type of cognitive bias in which people believe that they are smarter than others and more capable than they are. Essentially, low ability people do not possess the skills needed to recognize their incompetence. The combination of poor self-awareness and low cognitive ability leads them to overestimate their capabilities.
A Little Knowledge Can Lead to Overconfidence
Another contributing factor is that sometimes a tiny bit of knowledge on a subject can lead people to mistakenly believe that they know all there is to know about it. As the old saying goes, a little bit of knowledge can be a dangerous thing. A person might have the slimmest bit of awareness about a subject, yet thanks to the Dunning-Kruger effect, believe that he or she is an expert.
Other factors that can contribute to the effect include our use of analytical or mental shortcuts that allow us to make decisions quickly, and our tendency to seek out patterns even where none exist. Our minds are primed to try to make sense of the disparate array of information we deal with daily. It is perhaps not surprising that we sometimes fail to accurately judge how well we do.
Is There Any Way to Overcome the Dunning-Kruger Effect?
Keep learning and practicing
Instead of assuming you know all, there is to know about a subject, keep digging deeper.
Ask other people how you're doing
Another effective strategy involves asking others for constructive criticism.
Question what you know
Seek out information that challenges your ideas, as you learn more and get feedback, it can be easy to only pay attention to things that confirm what you think you already know. This is an example of another type of psychological bias known as confirmation bias.
Dunning and Kruger suggest that as experience with the subject increases, confidence typically declines to more realistic levels. As people learn more about the topic of interest, they begin to recognize their lack of knowledge and ability. Then as people gain more information and become experts on a topic, their confidence levels begin to improve once again.
Conclusion:
you should keep updating your knowledge about the market and accept that as a never-ending process regardless of your experience.
Best,
Moshkelgosha
Reference Articles:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7176464/
https://psycnet.apa.org/search/display?id=22e111c1-9e14-c395-f0f3-98624ea3ce4c&recordId=1&tab=PA&page=1&display=25&sort=PublicationYearMSSort%20desc,AuthorSort%20asc&sr=1
https://www.britannica.com/science/Dunning-Kruger-effect
https://www.verywellmind.com/an-overview-of-the-dunning-kruger-effect-4160740
https://www.psychologytoday.com/us/basics/dunning-kruger-effect
Unfortunately, many new traders start trading during the bull cycle without knowing the basics of the market, and the result is almost always the same.
They do not know Bullish trends will not last forever, and this coin has another side!
I remember when I published my RIOT analysis on Nov 5th, 2020, the price was 3.81 USD/share and my target was 55 USD/share!
I relieved many comments that is a scam or some others made fun of me!
RIOT skyrocketed to 79.50 and then I published my first short analysis on Feb 18, 2021, this time everyone oppose me that it is a buying opportunity at 62 USD/share!
I experienced the same situation over and over again:
WKHS
TLRY
SPCE
Now for those who like to know the underlying cause of Boom-Bust cycles in the market, I would like to explain more:
Soros’ boom-bust cycle, explains the three phases of price change as:
1- The “far-from-equilibrium” upswing,
2-The phase transition turning point, and
3--The downswing and return to “near-equilibrium” conditions.
I believe we can evaluate the participants psychological condition as well:
Charles Darwin wrote in his book The Descent of Man, "Ignorance more frequently begets confidence than does knowledge."
We can consider darwin's quote the basis for the psychological researches by psychologists David Dunning and Justin Kruger.
The Dunning-Kruger effect
The Dunning-Kruger effect is a type of cognitive bias in which people believe that they are smarter than others and more capable than they are. Essentially, low ability people do not possess the skills needed to recognize their incompetence. The combination of poor self-awareness and low cognitive ability leads them to overestimate their capabilities.
A Little Knowledge Can Lead to Overconfidence
Another contributing factor is that sometimes a tiny bit of knowledge on a subject can lead people to mistakenly believe that they know all there is to know about it. As the old saying goes, a little bit of knowledge can be a dangerous thing. A person might have the slimmest bit of awareness about a subject, yet thanks to the Dunning-Kruger effect, believe that he or she is an expert.
Other factors that can contribute to the effect include our use of analytical or mental shortcuts that allow us to make decisions quickly, and our tendency to seek out patterns even where none exist. Our minds are primed to try to make sense of the disparate array of information we deal with daily. It is perhaps not surprising that we sometimes fail to accurately judge how well we do.
Is There Any Way to Overcome the Dunning-Kruger Effect?
Keep learning and practicing
Instead of assuming you know all, there is to know about a subject, keep digging deeper.
Ask other people how you're doing
Another effective strategy involves asking others for constructive criticism.
Question what you know
Seek out information that challenges your ideas, as you learn more and get feedback, it can be easy to only pay attention to things that confirm what you think you already know. This is an example of another type of psychological bias known as confirmation bias.
Dunning and Kruger suggest that as experience with the subject increases, confidence typically declines to more realistic levels. As people learn more about the topic of interest, they begin to recognize their lack of knowledge and ability. Then as people gain more information and become experts on a topic, their confidence levels begin to improve once again.
Conclusion:
you should keep updating your knowledge about the market and accept that as a never-ending process regardless of your experience.
Best,
Moshkelgosha
Reference Articles:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7176464/
https://psycnet.apa.org/search/display?id=22e111c1-9e14-c395-f0f3-98624ea3ce4c&recordId=1&tab=PA&page=1&display=25&sort=PublicationYearMSSort%20desc,AuthorSort%20asc&sr=1
https://www.britannica.com/science/Dunning-Kruger-effect
https://www.verywellmind.com/an-overview-of-the-dunning-kruger-effect-4160740
https://www.psychologytoday.com/us/basics/dunning-kruger-effect