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Sigmund Freud

Commentary & Analysis

Clinging to beliefs is bad for a trading account





A “belief,” in most cases, is a prerequisite for a trade. No matter what it is we define as our trading edge—fundamental analysis, technical analysis, planetary movement, or back pain— we must have some degree of belief in success, no matter how infinitesimal the probability, or the trigger will never be pulled.

A common trader’s malady which leads to a trigger never pulled is “paralysis of analysis.” This disease flows from the human-like desire to find certainty in a place certainty never exists—the market. If you have traded for a while, I am sure you have been afflicted with the dreaded POA more than once—I have. The remedy for POA is to remember trading is a probability bet; nothing more and nothing less. It sounds so simple, but it is not an easy proposition given the hardwiring of the human mind.

To summarize: Our desire for certainty overlaid with our emotional brain leads to a particular problem for traders—clinging to beliefs.

It’s the too much clinging which leads to the demise of a trading account.

So why do we cling to beliefs?



Popper was fond of David Hume and used his reasoning for much of the basis of his argument about induction, carrying it further. Popper wrote:


Thus Hume’s two problems of induction were:







It is here were we get to the black swan.





Of course everyone knew Triple AAA-rated tranches of securities were safe. Everyone knows municipal bonds will be fine because the default rate has always been low in the past. Everyone knows that gold is the only real money. Everyone knows inflation is a monetary phenomenon. Everyone knows the dollar must go down eventually. Everyone knows that China will rule the world soon….I think you get where I am going here.


Happy New Year.