Spencer Li

Private Trading Workshop | Guest Speaker at STATS (Singapore Technical Analysts & Traders Society)

Today, we were invited to give an exclusive seminar to the members of STATS (Singapore Technical Analysts & Traders Society), where we shared our prototype of the Trader Blueprint. With a focus on price action and psychology, we shared how to nurture a new trader into a professional via our blueprint for success.

This included 7 important attributes starting with the letter “M”, which are all required to become an excellent trader.

  1. Masterplan
  2. Market
  3. Method
  4. Money
  5. Mindset
  6. Mastery
  7. Mentoring

Guest Speaker at STATS

Many people spend their whole lives searching for the holy grail of trading, but fail to realise that the method is merely one of the 7 M’s. That is why we created an all-rounded program to focus not just on a proven methodology, but also include the other aspects of trading.

Stay tuned for our upcoming seminars!

Sign up for our mailing list to keep updated of the latest workshops and seminars!
For program enquiries, please email info@synapsetrading.com

0 Comments/by
Spencer Li

Confirmation Bias – I See Only What I Want to See!

Confirmation bias refers to a type of selective perception that emphasizes ideas that confirm our beliefs, while devaluing whatever contradicts our beliefs. This can be thought of as a form of selection bias in collecting evidence to support certain chosen beliefs.

For example, you may believe that more red cars drive by your house during the summer than during any other time of the year; however, this belief may be due to confirmation bias, which causes you to simply notice more red cars during summer, while overlooking them during other months. This tendency, over time, unjustifiably strengthens your belief regarding the summertime concentration of red cars.

 

Confirmation Bias

 

To describe this phenomenon another way, we might say that confirmation bias refers to our all-too-natural ability to convince ourselves of whatever it is that we want to believe. We attach undue emphasis to events that corroborate the outcomes we desire and downplay whatever contrary evidence arises.

For traders, this is dangerous because traders who are entrenched in their opinion will only actively seek out information that confirms their opinion, while ignoring those that do not. This is especially true for traders who rely heavily on indicators, since many indicators will give conflicting signals, and it is not hard for a trader to find those indicators which support a chosen viewpoint.

Another hazard comes in the form of marketing gimmicks and market gurus, who like to make a lot of (absurd) forecasts based on their “sure-win” trading method or system. To newbie traders, they may appear to have a very high success rate, mostly because people want to believe the guru, hence they will celebrate his successful predictions while ignoring his less-accurate (or completely off) forecasts.

What is the best solution for this?

Once again, objectivity is necessary to see both sides of the coin, and the best way if you want to test if a method works is to record every signal (whether it is a gain or loss), and not just record those instances where it worked, while ignoring those times when it did not.

“It is the peculiar and perpetual error of the human understanding to be more moved and excited by affirmatives then by negatives.”

– Francis Bacon

 

complete guide to investing and trading psychology cover

If you would like to learn more about trading psychology, also check out: “The Complete Guide to Investing & Trading Psychology”

0 Comments/by
Spencer Li

Endowment Bias – Do You Really “Own” a Trading Position?

People who exhibit endowment bias value an asset more when they own it, as compared to when they don’t. This is inconsistent with standard economic theory, which asserts that a person’s willingness to pay for a good should always equal the person’s willingness to accept disposition of the good.

 

Endowment Bias

 

In essence, this bias is a mental process in which a differential weight is placed on the value of an object. That value depends on whether one possesses the object and is faced with its loss or whether one does not possess the object and has the potential to gain it.

If one loses an object that is part of one’s endowment (ownership), then the magnitude of this loss is perceived to be greater than the magnitude of the corresponding gain if the object is newly added to one’s endowment.

For example, this bias influences traders to hold onto losing positions because they feel that they “own” the position, and are reluctant to close it and enter a better position instead, although the potential gains are higher. This is often the result of decision paralysis, which places an irrational premium on the compensation price demanded in exchange for the disposal of the endowed asset.

What is the best solution for this?

One way to break free from flawed thinking is to ask yourself, “if you did not have any positions at the moment, would you still choose to take the same position which you are currently holding?” If you answered no, then you might want to reflect on why you are still holding onto it.

“A wise man should have money in his head, but not his heart.”

– Jonathan Swift

 

complete guide to investing and trading psychology cover

If you would like to learn more about trading psychology, also check out: “The Complete Guide to Investing & Trading Psychology”

0 Comments/by
Spencer Li

Long-term refinancing operations (LTROs) – Long-term time bombs?

Long-term refinancing operations (LTROs) involve the central bank lending money at a very low interest rates to eurozone banks, which has led to the term “free money.”

The injection of this cheap money means that banks can use it to buy higher-yielding assets and make profits, or to lend more money to businesses and consumers – which could help the real economy return to growth as well as potentially yielding returns.

Banks can use assets such as sovereign bonds as collateral for the loans – although they can no longer use Greece’s bonds as collateral after the country was downgraded to a default rating by Standard & Poor’s. This has helped to boost some of the more troubled sovereign bonds, in peripheral countries such as Spain and Italy, as their yields have fallen because they are being used as collateral for the operations.

This can help out the entire country. Spanish and Italian banks, the biggest buyers in the last operation, used their holdings of their own sovereign bonds as collateral for the LTROs. This helped reduce sovereign bond yields, which were threatening to stay at unsustainable levels that would make debt repayments impossible.

In previous auctions, the money usually had to be paid back within three months, six months or 1 year. The ECB’s launch of three-year LTROs in December meant that this time scale was extended, which helped cause a much greater takeup than usual.

– references: CNBC


The question is, what happens after 3 years?

Unless the Euro zone countries can miraculously turn their economies around in 3 years, the problem has just been delayed by 3 years. If the banks choose not to loan out the cash, they can simply use the money to increase their returns via investments, which does not benefit the economy at all. Also, where does the ECB get this cash from? It will need to pay back the cash one day, or risk the devaluation of the Euro, similar to what the US is facing now. The collateral used are the sovereign bonds (which no one wants to buy in the first place), and should the countries decide to default, the ECB will be left with a lot of useless junk on their hands.

0 Comments/by
Spencer Li

Optimism Bias – Why Most People Think They Can Beat the Market

Most people have heard of “rose-tinted glasses” and know that those who wear them tend to view the world with undue optimism. Studies have shown that with respect to most positive traits, for example driving ability, good looks, sense of humour, physique, etc, most people tend to rate themselves as above average. Logically speaking, this is not possible.

 

Optimism Bias

 

Traders, too, tend to be overly optimistic about the markets, the economy, the economy, and the potential for positive performance of the investments they make. Many overly optimistic traders believe that bad investments will not happen to them – those only afflict “others”. Such oversights can damage portfolios because people fail to mindfully acknowledge the potential for adverse consequences in the investment decisions they make.

Optimism can cause traders to think that they are getting above-market returns, when in fact they need to take into account things like inflation, commissions, and whether they would be better off simply buying an index fund.

Another danger is when traders read too much into rosy forecasts about the economy or a particular earnings forecast, which could cause them to take larger or more risky positions than they should due to “hope”.

What is the biggest danger of this bias?

There is yet another greater danger. Optimism bias can cause traders to think that they are above-average traders, simply because they are optimistic people in general, or to believe that they are above average in other areas of their life, such as driving ability or social skills, which could further lead to overconfidence bias.

“Comedy is acting out optimism.”

– Robin Williams

0 Comments/by