Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Trading Lessons: We Don't Always Revert to the Mean


Even though the markets are rallying, most traders aren't

Editor's Note: Dr. Doug Hirschhorn is among the premier peak performance coaches on Wall Street and holds a PhD in Psychology, with a specialization in Sport Psychology. A regular contributor to CNBC, he currently hosts a weekly video blog for CNBC. Dr. Doug is the author of 8 Ways to Great: Peak Performance On The Job and In Your Life and co-author of The Trading Athlete.

As the markets rally to make higher highs, an irrational human emotion begins to impact risk-taking decisions.

People tend to stick to the idea that "what goes up must come down" (also known as reversion to the mean).

We see this particular irrational behavior in casinos, around the roulette wheel.

Basically, when people see that red or black has come up several times in a row, they think that the other color is "due."

It would be like flipping a coin: If it came up heads 3 or 4 times in a row, (i.e. a "trend"), then a person is more likely to bet on tails on the next flip.

This is completely irrational risk-taking behavior, because the coin doesn't "know" that it's landed on heads 4 times in a row.

In fact, on the fifth flip, there's still a 50-50 chance of coming up either heads or tails.

How does this relate to trading and investment decisions?

In trending markets, traders tend to fight trends, get stubborn, and miss money-making opportunities.

So even though the markets are rallying, most traders aren't -- because of irrational thinking.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos