TRADING PSYCHOLOGY
How Time Transforms Your Outlook
How Do You Make A Trading Decision?
by Simon Vine
What goes into making a decision about a trade?
Whenever you make a trading decision, you
base your choices on particular outlooks regarding market developments.
Although a predicted scenario at a specific moment may seem very likely,
events rarely occur in the way or at the time we expect. How does the passage
of time transform your outlook?
TIME FACTOR IN RISK EVALUATION
Suppose you place a straight stick in a pool of water. Once submerged,
the stick appears to be bent. The water acts as a prism through which you
observe the familiar object and by which it is distorted.
In a similar way, time is a prism that alters your outlook. The decision-maker's
perspective of the world is linear, but reality is curvilinear. When making
forecasts, traders assume they can depend on certain market factors to
be stable, or at least predictable. Tested scenarios should account for
the possibility of changes in base assumptions, but deep within, each trader's
assumptions remain fixed. Most processes tend to accelerate, decelerate,
or substantively change at some point; decision-making becomes a discrete
curve, and we cannot predict the point at which an additional decision
may be needed. Ignoring the curvilinear shape of the future can lead to
misrepresentation of current risk.
...Continued in the November 2002 issue of Technical Analysis of
STOCKS & COMMODITIES
Excerpted from an article originally published in the November 2002
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2002, Technical Analysis, Inc.
