Book by Brendan Moynihan and Jim Paul
A decision can be good or bad, never be right or wrong, as we cannot know the future, so we should not connect decision making with our Self-Awareness.
Fooled by Psychology
Successive independent events are additive, not multiplicative.
Do not overestimate the frequent occurrence of infrequent events.
Do not confuse the occurrence of "unusual event" with "low probability event."
Do not confuse risk with a probability.
In market events, case probability is not equal to class probability. So it is essential to manage exposure to risk instead of predicting profit.
Money odd vs. Probability odd
Risk Reward ratio has nothing to do with the Probability that the market direction. We cannot know the Probability of price achieving reward.
Profit Motive or Propitiate Motive
We need to distinguish whether we are in the market for money or having recognition by predicting events.
Individuals decide using Reasoning, deliberation, and analysis, whereas the crowd makes decisions based on feeling, emotion, and impulse.
Rules, Tools, and Fools
Uncertainty runs the market. If there was no uncertainty (i.e., socialism system), there's no need to have a stock market.
Steps for decision making
What Kind of Participant are you?
It would be best to find out whether you are an investor, trader, speculator, or gambler.
2. Method of analysis.
First, you need to identify the market type you need to participate i.e., Stock (Cash, Future & Option), Bonds, Commodity, etc.
Learn about the various methods of analysis.
3. Develop Rules
It would be best if you had Entry, exit rules in terms of if-then flow.
4. Establish Control
Here you define exit criteria for profit or loss before Entry. Control should follow the strategy, not otherwise.
5. Formulate Plan
The plan should have Stop, Entry, Price objective. Scenario planning will help in clarifying risk and uncertainty. The plan requires thinking, which a crowd cannot do.
It's not wise to violate rules until you know how to observe it. As Picasso said, "Learn rules like a scientist so you can break them like an artist."
When you are not good at following them, you don't distinguish between the times when its safe to break the rules and when it is not. Further, profit will not be related to specific past behavior.
The threshold of pain and success in the market has inverse relations.
Never personalize losses.
Reason for failure
When losses start, Refusal to acknowledge & accept the reality of losses because doing so will reflect negatively on you.