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1. Behavioural Psychology And
Your Trading
Simon Coulter
Head of Development and Risk Management
MahiFX

2. About MahiFX
MahiFX is an online retail trading platform offering clients
exceptionally competitive spreads and great customisable
charting functionality.
Simon Coulter, is the Head of Development and Risk
Management at MahiFX and will be discussing the key
areas of human behaviour which can have major
implications on your trading decisions. In the webinar, he
will discuss some practical examples of how to recognise
and address these issues.

3. Key Discussion Areas Of The
Webinar
• What is Behavioural Finance and why is it important to
my trading/investing?
• Discussion on the Efficient Market
Hypothesis/Behavioural Finance relationship
• Key areas of Behavioural Finance
• Examining how knowledge of these (above) can
increase our awareness of why the markets behave how
they do, and help us adapt our trading/investing

4. What Is Behavioural Finance?
Behavioural Finance is the study of the effects that social,
cognitive and emotional factors have on economic
decisions and consequences those decisions may have on
market pricing, returns and resource allocation
Behavioural Finance and Market Efficiency
Does Behavioural Finance research cast doubt over prior
assumptions on market efficiency?

5. Key Behavioural Heuristics And Biases
Anchoring
Cognitive bias which sees people rely too heavily on initial
pieces of information when making decisions causing
subsequent judgements to be anchored to the information
Examples include:
1. Current prices used as anchor in determining current
fair values
2. Investment bank analysts and economist forecasts are
often anchored around previous numbers and around
other analyst consensus forecasts
3. Starting points of negotiations influence the negotiated
outcome
4. Support and resistance levels can be traced to
anchoring

6. How Does Anchoring Effect Our
Trading Decisions?
Anchoring can have a severe impact on our ability to give
an objective probability on the likely outcome of a trade or
investment leading to poor decisions about the risk inherent
in trades/investments
Conservativeness
The tendency for people to cling to a view, closely linked to
anchoring, it can be caused by overconfidence. Main result
of this is the under-reaction to new information

7. Some Key Concepts
Confirmation bias
Tendency to seek information, which conforms to our view,
ignoring contradictory information
Illusion of validity
Tendency for people to think their views are more valid than
they actually are
Cognitive dissonance
Mental conflict caused when faced with contradictory
evidence, tends to see us seek conforming evidence
Alternative histories
Observed outcome was just one of a number of possible
outcomes given the complex participant decision making
process at play

8. Conservativeness And Points To
Consider With Our Trading
1. Be especially mindful of confirmation bias when back
testing trading rules, address the problems that curve
fitting presents
2. Seek out alternative viewpoints and information that run
counter to yours
3. Avoid scanning the world of technical indicators to find
ones that back up your view, sticking to a smaller
sphere may be helpful in this regard
4. Try to increase your understanding of markets and the
context within which events are developing
5. Seek out the opinion of the majority it likely provides
valuable information on what not to do, and how not to
be positioned

9. Representativeness
Bias which causes us to estimate the likelihood of
something happening being based on how closely it
resembles something else. It causes people to place too
much weight on recent data. The heuristic helps us see
patterns in data and saves on computation
Illusory Correlation
Term that refers to our propensity to see patterns and
correlation in random/uncorrelated events

10. Representativeness And Our
Trading
1. Relying too heavily on recent data can cause us to
extrapolate recent movements
2. Will assume future patterns will resemble past ones
without having sufficient regard to context
3. Can cause traders/investors to over-react to repeated
bouts of similar news, when combined with
conservatism (which often causes under-reaction) we
can see large moves in pricing as people extrapolate
the new results and attach them to their new model

11. Price Bubbles/Busts And Positive
Feedback Trading
Extreme cases where prices continue to climb then fall as
noise traders chase the trend. Noise traders will react to
past price changes rather than any particular news per se.
Encourages extreme cases of positive feedback trading
where buying/selling encourages further reactionary
buying/selling
Trend chasing and price movements from stop loss orders
are good examples
Reflexivity
Prices influence fundamentals, new fundamentals change
expectations, further influencing prices creating a self-
reinforcing feedback loop

12. Representativeness/Feedback
Loops And Our Trading
1. Prices do not rise forever, expect mean reversion
2. Incorporate the effects of positive feedback and noise
trading into your decision process when positioning and
considering trade levels
3. Be wary of price manipulation that attempts to create
short-term feedback loops
4. Be extremely wary of crowd behaviour during price
bubbles, recognise that stringent discipline is especially
critical during these periods

13. Over-Optimism
Illusion of control
Where people feel in control of a situation far more often
than they actually are. People often fail to distinguish
between chance events and those that require skill
Self-attribution bias
The tendency for people to attribute positive outcomes to
their own skill and whilst attributing negative outcomes to
bad luck
Random reinforcement
The tendency for people to attribute random outcomes to
skill

14. Over-Optimism And Our Trading
1. Don’t trade before you have the skill and necessary
understanding to trade
2. Develop a trading plan, critically evaluate performance
against the plan, have another trader review the plan
3. Don’t confuse randomness with positive expectancy
4. Keep a detailed record of trades and evaluate that
performance against your plan. This will help address
our tendency to have a selective memory for winning
trades and reduce random reinforcement

15. Overconfidence
Closely related to over optimism. Refers to propensity for
people to believe they will be right in their forecasts far
more often then they actually are
Hindsight bias
The tendency for people after the fact to believe they had
predicted the outcome beforehand
Survivorship Bias
The tendency for failed entities (companies) to be excluded
from performance studies because they no longer are in
existence. Causes results to be skewed higher in studies,
as only those which are successful enough to survive are
included in the study

16. Overconfidence: Points To
Consider In Our Trading
1. Seek disconfirming evidence
2. Never be 100% sure about anything
3. Events in the market follow an improbable script
4. Markets normally always go against the majority to the
benefit of the minority
5. Be aware of testimonials from marketers of trade
package solutions, which prey on this bias
6. Keep a record of trades and analyse them carefully

17. Equity Curve Analysis
Tracks the performance of the system by analysing the
equity curve to ascertain periods when our system is in and
out of sync with the market
• Allows us to track multiple systems with varying degrees
of correlation allowing us to increase/decrease capital
commitment to them as they move in and out of sync
with the market
• Enables traders to have more simplistic systems that are
more flexible, less likely to be the result of having curve
fitted while testing historical expectancy and will have a
wider definition of favourable market conditions
Nonstationarity
Knowledge derived from previous statistics is less reliable
due to changing participants

18. Availability Bias, Framing And
Prospect Theory
Availability Bias
People assess the frequency or probability of an event by the
ease with which they can think of examples
Framing
Peoples behavioural outcomes and attitudes are influenced by
how given piece(s) of information are framed
Prospect Theory
People are far less willing to gamble with profits than losses

19. Availability Bias, Framing And
Prospect Theory (cont.)
Loss Aversion
People gamble with losses because we cannot bear to cope
with losses so we will do anything to avoid them
Disposition effect
People are predisposed to holding losers and selling winners
Status quo bias
Strong psychological benefits brought about by taking no
action and avoiding loss realization

20. Points To Think About With Our
Trading
1. When entering a position ALWAYS put your stop loss in the
system
2. Think about your Risk/Reward ratio, don’t be too aggressive
with your ratio, have adequate stop loss buffers
3. Be clinical with loss realization, recognise its part of being in
this business and not a failure per se. Confront any negative
emotional responses to losses and develop positive
behavioural strategies
4. It is far better to gamble with profits than losses, letting your
profits run allows your returns to increase exponentially,
pulling stops to break even when in a profitable position
(where it makes sense technically), and partial profit
realization are effective ways to do this

21. Summary
The field of behavioural finance whilst still subject to
considerable debate offers valuable insight into the flaws in
our decision making process and our desire for shortcuts.
At the very least, knowledge of the ideas discussed today
will help us as traders increase our awareness of these
biases thereby introducing a more objective framework
within which we trade.

22. Questions?
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