The topic I'm going to write on is about "Prospect Theory". It's a theory that won novel prize in 2002, explaining how people act in uncertain situations and evaluate gain and loss.
The graph below shows that the degree of emotion you will feel when you lose some amount of your money will be doubled, compared to the degree of emotion you will get when you gain exactly the same amount of money.
This implies that you can hardly wait until the price hits the goal that you have decided on before the entry and you give little thought to "Lost Cut" until the price gets close to the point on which you think you'll have to exit from the trade.
So you will always end up with "SMALL PROFIT & BIG LOSS"
This is probably the biggest reason why you lose your money in stock, forex, future, and other markets. And I think this can also apply to many other forms of investment.
To prove it's a possible theory, I did a simulation with PC program which is based on these;
1 Confirm a surge in a market.
(People fear that they might miss a great chance, so they will jump on it.)
2 A strong counter movement against the surge must follow.
(As "Prospect Theory" shows, they will wait longer when they are losing their money because exiting from trades means admitting that they have lost and they don't want that.)
3 So with programming and a little math, I made a strategy tester working on the spread sheet to see whether selling when the market indicates 1 & 2 is profitable.
the chart below is the result.
This is probably the biggest reason why you lose your money in stock, forex, future, and other markets. And I think this can also apply to many other forms of investment.
To prove it's a possible theory, I did a simulation with PC program which is based on these;
1 Confirm a surge in a market.
(People fear that they might miss a great chance, so they will jump on it.)
2 A strong counter movement against the surge must follow.
(As "Prospect Theory" shows, they will wait longer when they are losing their money because exiting from trades means admitting that they have lost and they don't want that.)
3 So with programming and a little math, I made a strategy tester working on the spread sheet to see whether selling when the market indicates 1 & 2 is profitable.
the chart below is the result.
The data I used for the test is Nikkei 225 future (1990-2018)
This strategy works very well. It has been making profit from 1990 up to now.
This is the all for the article this time. I'm planning to show the details about how spread sheet calculates the strategy and the exact entry timing in the next article and if I should get more viewers from the US, I will write that in English too. So please share this with your friends
I hope you guys enjoy this article and have a good day :)
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