Subscribe Feed (RSS)What follows is a true story. A US University completed an experiment to learn more about the psychology around the subject of success. Subsequent to the initial experiment, similar experiments have been repeated many times at different places and by many different people.
The experiment asked people (experiment subjects) to guess the outcome of tossing a coin and measured how many times they guessed correctly and incorrectly.
Let me ask you a question, if the coin were tossed 500 times how many times would you expect to guess the outcome correctly? That’s right around 250 times or 50% of the time. It doesn’t matter how clever you are or hard you concentrate the outcome is determined by the laws of probability. Just about everyone understands this and knows it.
However, within the 500 tosses you will have a good chance of stringing together a number of tosses in a row that you will guess correctly. This is where the psychology of success comes into effect. The experiment asked it’s subjects how they felt about their performance in tossing the coin and guessing the correct outcome at various times during the experiment.
An interesting outcome observed was that subjects who were having a string of successful guesses (say four or more in a row) believed they were actually responsible for this success. The reasons stated ranged from an improvement in their performance at guessing and tossing the coin, through to a belief that by concentrating harder they improved their performance.
Remember that all these people taking part in the experiment know that the outcome of a guess is based on a 50% probability outcome. Yet these same rational and normal people believe that when they guess a few coin tosses in a row correctly that it is due to their own talent and ability. The psychology of the brain is a scary thing.
The same contradiction happens with traders and investors all the time when trading or investing in the stock market. This is especially observable with new traders and investers. The trader/invester may grow to believe they have “special talents” after a string of winning trades. This may make the trader/invester believe that they are somehow better, or have a special talent for trading, whereby their success has really only been because of probable “chance”.
The way to manage chance success in your trading/investing is to not become over confident and forget your risk management strategies. Enjoy your success but don’t forget the risks. If you do not manage the risk of future trades properly or take on too many trades and over-extend yourself then you may leave yourself volunerable to the Market Slap. The stock market has a habit of slapping down traders who become over confident and take on too much risk with a large loss.
The lesson to be learnt here is that every trade or investment involves risk and that every trader needs to manage the risk in every trade. This means not getting carried away with your successes and protecting your capital every step of the way. Beware the Market Slap!
Looking to find the best share trading course, then visit Just Shares to find the best advice on how to trade shares and share trading education.
Tags: finance, investing, share market, share trading, stock market
