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Trading is like a Grand Prix

D. Murali

FROM a Tokyo coffee shop or a Thai beach, from a German beer hall or a New York office, from "practically anywhere in the world" investors can make and lose money at the click of a button, writes Mark Mobius in his foreword to Brendon C. W. Seeto's The Psychology of Electronic Trading, published by Wiley (www.wiley.com).

"The gargantuan flow of real-time, on-screen market information brings the markets closer, sometimes too close, to the investor. He or she must therefore be able to handle this new environment."

Brendon writes in chapter 1 how one needs not only a mastery of trading strategy but also "a comprehensive understanding of the new technology," because "a mistaken trading error or accident" has been enough to wipe out careers. `Pshychology @ the market' looks like a flawed e-mail id, but that's chapter 2, where the author breaks down `economic psychology' into "the psychology of money; psychology of saving, investing and gambling; and stock exchange psychology."

Trading in the financial markets is like a Grand Prix race and "it begins the moment your opening order hits the market", he explains. "The race is tough, gruelling, and much of the competition is as well prepared, if not better, to achieve the same victory that you seek." Okay, let's say you find yourself enjoying investing, and even getting "addicted to the speed and excitement of the trading game"; do a self-check as suggested in the chapter on `trading mindset' — "whether you have slipped from investing to speculation."

There are different trading styles, such as: scalper who rarely holds positions overnight, fundamental trader known for informed decisions, technical trader looking for signs of convergence or divergence, momentum trader who attacks during high-velocity price changes, and swing trader identifying cycles or swings in prices. Beware of keying errors, warns Brendon. These are often caused by anxiety and panic, he notes. "The distinction between simple nervousness, stress and anxiety, and panic is often difficult to distinguish." Know that panic is "a discrete period of intense fear or discomfort, which develops abruptly and reaches a peak within a short timeframe, generally within minutes."

The book explains many theories and concepts. Prospect theory holds that people are more inclined to gamble with losses than with gains. Disposition effect is about the tendency "to disproportionately hold onto assets declining in value while selling assets that have gained in value." Regret theory that can explain why traders could be reluctant to click the mouse button to exit the trade in a falling market — "perhaps to avoid the action that confirms a mistake has been made". Selective attention that can make a trader "tend to implement strategies to control the environment rather than attempt to gain control by adapting to the changing environment."

Before you step into the market, pay attention to `the starting grid' where the author talks of ergonomics, the stuff you may dismiss too easily, "Oh, I know." But, no: "Keyboards should be kept clear from items that may cause accidental key presses and sticking of keys." Which means, be careful with the newspapers and annual reports on the table, and don't spill sandwich bits; also, you may cut losses by not allowing your secretary to perch on the table.

BookValue@TheHindu.co.in

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