Don’t waste your time – keep track of how NFP affects the US dollar!
The ASIC policy prohibits us from providing services to clients in your region. Are you already registered with FBS and want to continue working in your Personal area?Personal area
How many times did you make a decision without even thinking about it? Let’s face it – too many. Among these decisions, there are probably a lot of those you regret. On the other hand, thorough analytical thinking takes more time but helps you to understand complicated tasks. The difference between intuitive and analytical decision-making is the main topic of "Thinking, Fast and Slow", the book written by the famous economist and Noble prize winner Daniel Kahneman. This book describes how people make their decisions and why errors happen during this process. In this article, we will try to apply the main take-aways from the book to trading activity.
According to the book, we have two systems of thinking – System 1 and System 2. The former system is automatic, and you implement it immediately. This is how your brain works: it sees the problem, compares it with the experience in the past, and offers you a solution. In some of the daily life situations, it takes only one blink of an eye to come up with a final decision. For example, how long does it take for you to understand that the smell that you feel comes from your favorite donuts? We guess, just a few seconds. Alternatively, system 2 requires more complex analysis. Here, you need to use your skills, knowledge, and a deeper work of your brain.
Let's look at how these two systems work in trading. For example, what an experienced trader may think of when he reads the news pictured below?
The first thought which springs to the mind of any trader is “It’s time to buy risky assets!” Your mind sorts out every risky asset you know (including stocks, commodity currencies, indices, etc.)
But what should you buy to avoid mistakes? To answer this question, System 2 turns on, and you start to analyze which assets are really worth trading right now. You look for confirmations, such as candlestick patterns, chart patterns, and significant levels. Only after a thorough analysis processed through System 2 you make your decision.
Even though System 1 is generally accurate, there are situations when it lags. In fact, System 1 sometimes seeks an easier answer to questions than it was asked.
For example, after hearing about a bullish rally in the markets, you may jump into a trade without a second thought, followed by emotions and the fear of missing out. But despite your anticipation of success, the market turned in a different direction. That's because you skipped the important signals indicating the change of a trend.
Another interesting aspect which Mr. Kahneman pays attention to is called WYSIATI – “what you see is all there is”. This phrase reflects a phenomenon of making conclusions based on limited information. As a result of WYSIATI, a trader may create false conclusions about the market based on a limited amount of information. Due to the automatism of System 1, our mind identifies seeming connections between the events. After that, the formed judgment or impression is confirmed by System 2.
As a result of WYSIATI, the following errors happen pretty often.
Remember the support or resistance level you considered too strong to break while expecting a rebound? All of sudden, that level got broken, and you lost your trust in statistics. As Kahneman wrote, “many facts of the world are due to chance, including accidents of sampling”. Hence, you should always see the bigger picture and understand what is going on in the market, what events are happening right now, and track the risk sentiment. To read more about it, check the economic calendar.
You open a chart of S&P500, wait for the gap, and…open a sell order. You forget that there are various types of gaps, including continuation and common gaps. The famous fact about filled gaps is related to common gaps, while continuation gaps happen during a strong uptrend/downtrend. As you trade S&P500 which is moving within an uptrend, you faced a continuation one and lost your money. So, we recommend you to get familiar with all the facts possible before entering a trade.
To conclude the article based on Mr. Kahneman’s study, let’s remember five important tips to avoid the mind tricks caused by System 1.
This article describes the strategy known as ‘Method Jarroo’. It is based on the concept of price action but with some unique features. Are you interested? Then, let’s explore this strategy!
What were the best-performing stocks in November 2021? Which stocks to trade in December? Jump in to know!
Every trader knows that economic data have a great impact on the Forex market.
Some traders try to prove technical analysis to be wrong and unprofitable. But we want to show you the Ross Hook, the pattern, that is proven to be profitable for 32 years already.
Do you remember the growth of Tesla stock in 2020? Or how about GameStop soaring 10 times in mere weeks? This is neither an “organic growth” nor a market manipulation. These events are called “Short squeezes” and I will show you how to find one and earn on it!
Apple, your favorite phone maker and one of the biggest tech companies, which capitalization has recently reached $3 trillion, will post its earnings today at 23:30 GMT+2.
For a long time, US Federal Reserve printed trillions of dollars to support the economy. But in the light of the highest inflation in almost 40 years, the stream of stimulus tends to shrink.
What is happening? In December 2021, the main question on global markets was: “When will the FED increase the key rate?” Traders and investors were transferring their capitals into USDs, waiting for the great dump worldwide…