Thursday, September 2, 2010

5 Reasons You Should Create or Follow a Trading Strategy on

Creating a trading strategy on Zignals can help overcome behavioral bias that have been detrimental to traders and investors over the years. I'll discuss a few and talk briefly how using Zignals, you can overcome these.

1. Loss aversion

People typically give more weight to losses than to corresponding gains

For example, consider an investor who needs cash and must sell one of two stocks that he/she owns; one of the stocks has gone up and the other has gone down. Odean [1998a] studied trade records for 10,000 individual investors and shows that investors are much more likely to sell the stock that went up.

Reason- Strategies on Zignals employ a stop loss percentage allowing you to overcome loss aversion and views stocks independently regardless of them being up or down.

2. Endowment effect

People place a higher value on objects they own than objects that they do not. Or the fact that people often demand much more to give up an object than they would be willing to pay to acquire it

Reason - Exits are viewed from a unbiased view and consistent from stock to stock.

3. Over optimism and Overconfidence

People overestimate their ability.

The classic behavioral example is when members of a random group are asked if they are above, below, or average drivers. The results invariably reveal a majority of above-average drivers, a statistical impossibility. Over certain types of questions, answers that people rate as "99% certain" turn out to be wrong 40% of the time.

Reason- You can follow someone with a proven track record to negate over optimism and overconfidence biases.

4. Anchoring

Anchoring occurs when we become stuck to a particular reference point as a basis for making judgments and decisions. Traders commonly anchoring themselves to an entry point after entering a position.

Nobel laureates, Amos Tversky and Daniel Kahneman, using a rigged wheel similar to roulette, but one which always stops at either 10 or 65. Two groups asked the same percentage-based question responded differently depending on which number they saw after spinning the wheel.

Low anchor (10) leads to low estimate (25%)
High anchor (65) leads to high estimate (45%)

Reason – This bias is over come with our Trailing targets and stops, stopping you anchoring your decision to the entry point.

5. Herd instinct

Common tendency to adopt the opinions and follow the behaviors of the majority to feel safer and to avoid conflict.

5.1 Regret theory: The fear of being wrong may outweigh the cost in objective economic terms, and lead individuals or groups to non-optimal conclusions.

Study -

Reason – Your strategy cannot be influenced by other peoples trades or journalism, unless you change it!

These are just some of the reasons you should create/follow a Trading Strategy at

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