Quote:
I am firmly convinced that trading is a psychological and not a financial endevour. Traders focus upon system design for a variety of reasons. The first is that it is easy. All technical analysis software consists of almost nothing but entry signals and these are very easy to manipulate in the search for the ideal indicator. To illustrate how absurd this can be consider Fibonacci numbers, many traders default their indicators to reflect these numbers but in essence how is a 13 day moving average superior to a 14 day or a 12 day moving average. In doing this, traders are obsessed with what they perceive to be the secrets of the market, that somehow they must discover these secrets.
The second reason why traders concentrate upon entry signals I alluded to before, it is the need to be right. In simple terms each of us has an ego, therefore we have an emotional stake in all the decisions we make. It is difficult for us to be faced with a situation where we are wrong just as many times as we are right and this is what happens when we accept that the most common entry signals such as moving averages are right approximately less than 50% of the time. Therefore we attempt to redress this balance by looking for a system that is right all the time. Thus traders attempt to protect the fragility of their ego from the realities of trading.
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This hits the nail on the head. In trading, most of what we are cultured to focus our contentration on is technical or academic. It takes a strong personality to objectively assess the price information the market gives and take the correct action, even if taking that action proves their own bias wrong.
Added 04/08: Original article by Chris Tate with sidebar links to his other papers.:
The Trading Game