If you’re not familiar with the Forex market, let me simplify it
for you. There are literally trillions in various currencies traded every
single day, all day, all around the world. To help you to be profitable, you need to
know the beauty of using forex trading systems

That market is bigger than commodities, bigger than stocks, bigger
than bonds…it’s MASSIVE. And here’s what really counts for you. The market is growing by leaps and bounds, which means more people are getting involved.
Most of them have no clue about how to make money with Forex.

That’s where I come in. I created Forex Insurrection to help people brand new to Forex trade like pros. We also hope to help people who’ve gotten bashed in the
head by the Forex markets put all of that behind them.

It’s no secret WHY most people who try Forex get their heads handed to them. It boils down to three things:

* The HUGE time commitment required to get educated and actually trade all day

* The emotions of trading, specifically fear and greed

* The judgment you have to exercise when trading…which usually trips people up. So we created Forex Insurrection to punch each and every one of those things in the nose. I’ve been there and done that, as the saying goes, and I know that most people who ever try Forex can spin their wheels in frustration for years. Even worse, they often run out of money before they see any success.

That’s why it is like a breath of fresh air. First, it’s 100% automated. Really. It takes minutes to install, and the trading platform you use it doesn’t cost a penny.

Second, you NEVER have to babysit trades. The software does all the work for you. It enters trades and exits them automatically. You don’t even have to know anything about Forex! So the time commitment to learn and trade disappears entirely.

Third, everything is automatic, so there’s zero emotion and zero judgment required. This is a huge plus. Taking the emotion out of trading is almost like giving people a license to print money.

I worked hard to make Insurrection exactly what I wish I’d had when I started and automated way to trade Forex without profit-killing emotion. This is as close to a “no effort” profits as you can get.

Here is a brief summary of a presentation by Andrew Lo on 'The Psychology of Trading'.


On the one hand the Efficient Markets Hypothesis is at the foundation of Finance (for example all the work by Black-Scholes assumes that the market for options is efficient) on the other hand many people nowadays find it hard to believe that EMH is literally true. This has led to the development of Behavioral Finance, which studies biases that may hinder financial decision making. BF has acceptance problems of its own: it brings up so many possible biases that it is hard to believe (if all these biases are true) that anyone is ever able to make a correct decision. Many economists ask if the behavioral biases even exist.


To try to advance beyond the EMH/BF debate, Andrew Lo has been working on his own framework, which he calls the Adaptive Market Hypothesis, and has been investigating the role of emotion in trading by reading the neuropsycholgy literature and conducting experiments, some of which will be described below.



Do perceptual biases really exist

The first experiment involved the audience. They were invited to watch a video showing college students, some in white T shirts and some in black T-shirts throwing basketballs to each other. Lo told the audience to concentrate on the white T-shirt players and count the number of times they passed the ball to each other. The exercise was made more difficult by the fact that the black-T shirt players intermingle with the white shirt players and that Lo kept talking throughout the video to try to confuse the audience.


After the video was over Lo asked "how many people saw the gorilla?". More than half the people in the audience had not seen any gorilla. [I personally did not see the gorilla, even though I knew that Andy Lo is famous at MIT for showing a video in which a gorilla appears !]. Lo replayed the tape, and sure enough a man dressed as a black gorilla walks through the scene halfway into the tape. Lo explained that people who are concentrating on white figures will often miss black objects; in some sense the human perceptual system is filtering out the black objects.


In conclusion, said Lo, in any debate between economists and psychologists as to whether perceptual biases really exist is going to be won by the psychologists, who have demonstrated these phenomena beyond doubt through careful experiments.



The neuropsychology literature

The book "Descartes Error" by A. Damasio has changed how we view rationality. The classical philosophers believed emotion and rationality were polar opposites. Damasio investigated people who have suffered serious brain injuries and found that people who do not perceive emotions correctly will act irrationally. Emotion is necessary for rational behavior, Damasio says. Emotions allow you to choose quickly and easily among the many choices constantly available to you, saving you time and allowing you to zero in on correct solutions to problems.


The Triune Model of the Brain was proposed by Paul McLean. The human brain is made up of three parts: -the brain stem, which controls basic functions such as breathing and wakefulness is the oldest part of the brain, philogenically speaking. It exists in reptiles as well as in higher life forms. -the midbrain is involved in emotions (such as fear and greed, sexual preference and so on). It exists in mammals. -the neocortex controls higher functions, is the seat of thinking, language, etc. and exists only in hominids. There is a definite order of priority among these three subsystems; a painful stimulus for example will disrupt the processing functions of the neocortex for several hours according to experiments in which blood flow to the brain is measured via MRI scans. When a lower level is activated it disrupts (or takes priority over) the higher level mental functions.


From a financial point of view it is clear that risk-preferences and decisions under risk arise from interactions between the midbrain and the neocortex. Rational decision involves a balance and/or cooperation between the emotional and calculating parts of the brain.



Experiments in neuropsychology and finance

(1) Studying professional traders as they go about their job. Lo attached sensors to traders to measure emotional responses. (2) Lo also interviewed 80 neophyte traders who were learning to trade in a class given by LBR and reviewed their trading



Conclusions

a. emotion is definitely involved in trading decision making, even in the case of experienced decision makers (i.e. it is not solely the beginners who experience these emotions). However, the emotions are somewhat more controlled among the more experienced or more able decision makers. b. traders who experience little emotion during trading have a lower P&L, however traders who experience a great deal of emotion during trading also have a lower P&L. It appears that there is an optimum level of emotion somewhere in the middle. c. people who excessively internalize the outcomes (i.e. attribute everything that happens to their own doing) have a lower P&L, however people who attribute everything to luck also have a lower P&L. Again there appears to be a proper balance, i.e an attitude that events are partly due to ability and partly to luck.



The Adaptive Markets Hypothesis

The AMH takes a biological/evolutionary view of markets, whereas the EMH took a physical/engineering view.


The AMH postulates that financial decision makers:
1. act in their own self-interest
2. make mistakes
3. learn and adapt (through heuristics, not through optimization)
4. competition drives adaptation and innovation
5. natural selection drives the ecology of the markets
6. evolution drives market dynamics


With regard to point 3. Lo has a high regard for Herbert Simon and his idea of "safisficing" (not optimizing), and of making decisions through simplified (and non-optimal) heuristics (since an optimal decision is computationally infeasible). A question that Simon could never answer is "where do heuristics come from", but Lo thinks the answer is that "evolution determines heuristics" (point 5). He did have not elaborate on this. Lo expressed the view that Simon's work is even more important than the Theory of Rational Expectations, even though it has received less attention in economics.


The AMH implies that anomalies can appear, disappear and then reappear again as the market ecology changes. For example the profits to Statarb have waxed and waned over the last 15 years. It is true that the profits have dropped sharply after the Summer of 2002, but this does not mean that hey have been permanently arbitraged away. Statarb profits may not be gone forever, they may come back at some time under different market conditions than what we have now.


So far the AMH is incomplete. Lo is working on extending it and convincing others.



MAIN CONCLUSION

We need emotions to be rational. We need both, it is not either/or. In trading there is a right level of emotion. There is a "right zone". The Zen of Trading.