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Trading Psychology 101 – The Near Missing

Trading Psychology 101Recently I came across a paper of professor R.L. Reid – Department of Psychology, University of Exeter, England – titled “The Psychology of the Near Miss”1)The Psychology of the Near Miss, https://www.stat.berkeley.edu/~aldous/157/Papers/near_miss.pdf. A near miss is defined as the of  kind of failure that come close to being successful. In a game of skills, like chess, a near miss gives feedback to improve the technique and also an indication that success can be around the corner.

In an activity such trading, a winning trade (or a handful of winning trades) can give to the novice speculator the positive feeling to be in front of a near miss and consequently the encouragement to keep trading. After all, success may be within reach!

That’s wrong.

And probably that’s one of the worst misconception an obstacle to overcome for most retail traders that operate without the guidance of a mentor. Just go on Twitter or Stocktwits and look for all those individuals that publicly congratulate themselves for the success of their last trade.There is too much emphasis on the single result.

There is too much emphasis on the single result.

As Reid wrote, “The misconception of randomness of outcome is difficult to grasp and misconceptions are common“. A single losing trade can naively be seen as a near miss, but is actually a random event.

As a random event, the result of a single trade doesn’t provide any useful information on one’s edge on the market. Yet a single trade can be seen as an exercise of execution of one’s trading plan and discipline. But the result offers useless information on one’s skill or future success.

What is is worst for those traders that overlook at single trades is that “failure to reach an anticipated goal produces frustration which acts to strengthen ongoing behaviour2)Amsel, A. (1968). Secondary reinforcement and frustration. Psychological Bulletin, 69, 278. . In other words, the frustration of a near miss doesn’t just create a false expectation, but also reinforce a bad habit.

Ultimately, this misconception can have huge impact on a learning curve and bank account of a new trader.

flickr photo by h.koppdelaney http://flickr.com/photos/h-k-d/3310336516 shared under a Creative Commons (BY-ND) license

References   [ + ]

1. The Psychology of the Near Miss, https://www.stat.berkeley.edu/~aldous/157/Papers/near_miss.pdf
2. Amsel, A. (1968). Secondary reinforcement and frustration. Psychological Bulletin, 69, 278.