How to think like a successful trader

The key is to understand how people think – and to go against the crowd, writes John C Burford

CHICAGO - DECEMBER 31:Traders and clerks in the Eurodollar trading pit at the CME Group's Chicago Board of Trade celebrate as confetti falls signaling the end of the trading year December 31,
(Image credit: 2009 Getty Images)

Traders who make money consistently over the long run are rare. If you want to join their ranks, you need to cultivate a certain mindset. One recent book – not actually about trading – that I’ve found particularly helpful, is Daniel Kahneman’s Thinking, Fast and Slow. Kahneman’s basic thesis is that we have two modes of thinking that can be in conflict: system one is intuitive, knee-jerk and fast; whereas system two is considered, rational and slow.

The key is that we are not always the rational, maximum-gain seeking, loss-avoiding agents that form the foundation of classic economic theory. Far from it – we are often irrational and emotional, with poor choices the result. In a market context, it is these poor choices that produce the extremes of herding (where almost everyone is betting on one outcome) that we invariably find at major tops and bottoms.

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