How do you decide what stock to buy? How do you determine the best time to buy? And once we have made the decision to buy when do we sell? These questions, and how we answer them, are a direct result of how we frame the questions, thus directly impacting our trading performance. Framing determines the viewpoint from which we look at an issue, such a stock chart. Framing, in essence, acts as a filter determining what information is important and what is not. For example, some of us trade according to Elliot Wave cycles; others classical patterns; some using point and figure charting; others Japanese candlesticks. Any one of these are neither right or wrong. We simply create the stock chart and trade our creation accordingly. Even the rules for entry and exit, for profit or loss, is framed within a certain set of self-created parameters. If we have not created a frame or if the frame constantly changes to satisfy current emotional imbalances then our performance will suffer accordingly.
The following resource articles can help us better understand framing and its relation to on-going trading success:
Framing and Behavioral Biases: “The field of behavioral finance has provided us with fascinating insights into how our behaviors as human beings impacts investment results. Studies have helped us understand how we hold and trade stocks and mutual funds, and show how behavioral biases such as familiarity, overconfidence, narrow framing, trend chasing, the lottery effect, and home bias lead to poor decision making.” (OUR BEHAVIORAL BIASES PLAY A MAJOR ROLE IN OUR INVESTING SUCCESS).
Framing Effects on Decision Making: “Framing effects show a relevant and related point—how we perceive reference points strongly influences our decisions. Researchers show that when subjects see the same problem framed in alternative ways, they decide differently.” (DECISION-MAKING FOR INVESTORS)
Narrow Versus Broad Framing: “Narrow framing investors who are sensitive to the performance of individual stocks instead of the overall portfolio performance exhibit a greater propensity to sell the winners, relative to the losers, in their portfolios. In contrast, investors who adopt a broader decision frame and evaluate the total performance of their respective portfolios are less likely to exhibit this asymmetry.” (HOW DO DECISION FRAMES INFLUENCE THE STOCK INVESTMENT CHOICES OF INDIVIDUAL INVESTORS?)
Framing and Options Trading: “In a more complex derivatives market, we conjecture that investors are more likely to use selective simplification while trading options.” (NARROW FRAMING: PROFESSIONS, SOPHISTICATION AND EXPERIENCE)
Trading is about understanding self and charts, careful not to put the chart before the self. Proper framing is a good way to start. We discuss charting and how to frame our thinking and trading in CTU, a three month live trading and training environment where education, not indoctrination, is emphasized.
David Blair, The Crosshairs Trader
David Blair
THE CROSSHAIRS TRADER
www.thecrosshairstrader.com
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