Continue reading...Psychology is the often overlooked intangible aspect of trading, because it is unquantifiable and generally misunderstood by most traders and investors. Unlike the precise mathematical formulas used in technical analysis, we cannot easily reduce human behavior to a mathematical equation that can be plotted on a graph as a trendline or as a series of variables that we can examine in detail, throughout history.
That said, much of the current research in social sciences is attempting to bring psychology more in line with mathematics for the precision that it gives to experimental methods. Mathematical methods are applied to behavioral science for the purpose of observing and comparing human behavior, according to a set of strict numerical criteria, the only stable benchmarks that allow comparison of behavior from person to person and from time to time.
In relation to trading and investing, we can consider two very different approaches to psychology in the markets: individual...
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