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Industry study 20 of 24 · Trading and Options Research Companion

Trading Psychology, Behaviour and Discipline

~6,000 words

The fourth factor of the edge equation, discipline and adaptation, is where good systems most often fail in practice. A rule with a positive expected value after costs earns nothing if the trader stops following it in a drawdown, doubles up after a loss, or sells the winners and keeps the losers. Behavioural finance has measured these habits in brokerage, exchange and tax records for forty years, and the findings are unusually consistent. Some anchors:

What the study covers

  1. 1Overview: discipline is a factor, not a mood
  2. 2Prospect theory and loss aversion
  3. 3The disposition effect
  4. 4Overconfidence and overtrading
  5. 5Lottery preferences, skewness and options
  6. 6Recency, extrapolation and the hot hand
  7. 7Revenge trading, the break-even effect and tilt
  8. 8Attention, gamification and the app
  9. 9Biases by system family
  10. 10What works: rules, journals and checklists
  11. 11How professional firms enforce discipline
  12. 12Living through a system's drawdowns
  13. 13Trading coaches, mindset courses and "trading psychology" products
  14. 14How to read psychology claims
  15. 15Key numbers
  16. 16Landmark firms and cases
  17. 17Pitfalls
  18. 18How an expert thinks about it
  19. 19Glossary

Companies in this study