Trading Psychology For Dummies

Chapter 10

Using Evolutionary Rules of Thumb

IN THIS CHAPTER

Recognizing mental shortcuts

Dealing with cognitive biases

Humbly following the markets

In this chapter, you’re going to find out what strategies your brain has developed over the course of the evolutionary process that have allowed you to conserve vital energy while leaving you still able to act. The other side of this particular evolutionary coin is that such strategies inevitably lead to cognitive biases, which in turn leads to behavior that isn't particularly useful when dealing with complex financial markets. I'll show you what you need to pay attention to when trading so that you don't fall into an evolutionary trap.

The perception and processing of information doesn’t take place in a rational or objective manner, simply because your brain capacity is very limited. Whether you're filling your brain with objectively relevant or irrelevant financial news is of little importance; as a trader, you have your very own filter for what you perceive and how you process it all. And, despite all your attempts to be objective and rational yourself, your emotional state is what's critical when it comes to how you evaluate this ...