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The Animal Spirits of Day Trading

| | Posted in: Animal Spirits

In the March 2005 update of their paper entitled “Fear and Greed in Financial Markets: A Clinical Study of Day-Traders”, Andrew Lo, Dmitry Repin and Brett Steenbarger examine possible links between psychological factors and trading performance in a sample of 80 day-traders recruited from a five-week on-line training program offered by Linda Bradford Raschke. Interaction with study participants occurred via anonymous email and online questionnaires. The authors find that:

  • Extreme emotional reactions to gains and losses, positive or negative, result in significantly worse trading performance.
  • There is no specific “trader personality profile.” Traders are probably not born; they are made through proper instruction and practice.
  • Older traders tend to underperform; those with large accounts tend to outperform [that’s how they got large accounts].

Because of the relatively small sample size and the method of selecting study participants, these results are not conclusive.

In summary, given that trading involves logical reasoning, numerical computation and long-term planning, one component of successful trading may be a reduced level of emotional reactivity.

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