Key Economic Facts
Trying to find the key information needed to make money in the markets can be overwhelming, but it doesn't have to be. Knowing every possible fact about financial markets does not in itself make you more profitable. Selecting a few economic reports that fit your trading method will make you the most money.
The key economic facts that affect your financial positions are the following:
Market Direction- Found by looking at the S&P 500 index and the Nasdaq 100 index and observing if price action is trending up or down on a daily or weekly chart depending on your time horizon.
Unemployment Rate - Keep an eye on the unemployment rate and the direction it is going which is more important than the actual number. Unemployment data can be found here.
Interest Rates - FOMC policy is reflected in interest rates. Low interest rates makes money cheaper allowing companies to make more money that turns into higher earnings which lead to higher stock prices. Increasing interest rates can slow the gains of financial instruments, but they may not necessarily go down which is why you must always pay attention to market direction. It doesn't matter what Bernanke says, it matters what Bernanke does to interest rates.
Trader Psychology Type
Trading psychology is the most ignored element of trading. A superior trading method with an inferior psychology will make you a losing trader, but little emphasis is placed on psychology. Trading profits are more than just the balance of your accounts; it's a symbol of everything from self-worth to status. Money has a different meanings for everyone and its imperative to know how this affects your money related (trading) behavior. David Garfield identified 7 Investor Types in his book The Psychology of Smart Investing:
The Conflicted Investor – The conflicted investor is the most common investor type. They go back and forth about trades they have made and are terribly inconsistent. There is often a relieve after a loss because the ordeal has finally concluded. They tend to be competitive hoping to beat the market and yet a successful trade may cause them anxiety.
The Depressed Investor – Happy Investors tend to be successful investors. Depression causes your judgement to be distorted. Perceptions of risks and rewards become unrealistic and your no longer able to deal with the true realities of the market.
The Revenging Investor- This investor is not able to shake the pain of loss. Their need to get even to makes them make decisions not based on set methods, but their emotions.
The Masked Investor – This group alters themselves in the belief that an investing environment needs a new self. A shy person may become an overly aggressive trader or a natural risk taker becomes an overly cautious investor. Masked Investors are confused , their confidence eroding as their disguise breaks down.
The Fussy Investor – This Investor is obsessive, compulsive and orderly. They demand order in the market that doesn't exsist which puts them at odds with the market. This trader doesn't put on many trades because the conditions are rarely right and when they are, they are likely to be losers. They are predominantly losers because too much attention is paid to details that are irrelevant to profitability.
The Paranoid Investor - You don't trust yourself and you don't trust the advice of others. Everything that is heard or read is treated with suspicion. This investor is quick to blame the broker, data feed, etc… for his problems.
The Addicted Investor – Addicted Traders are out of control. This investor is hoping for luck instead of relying on proven methods. They continue to put on trades with the hope that the next trade will be the big winner dwarfing the long string of losses. Addicted Investors feel immediate gratification just being in the market which becomes more important than profit and loss.
Every trader has these components in their personality type to varying degrees. The goal isn't to change yourself to be the perfect trader, but to understand yourself and personalize your method to match your Investor Type. There have been detailed studies on personality profiles by Paul Costa. He created the Neo Personality Inventory, which measures 5 factors of personality, and 6 specific traits within each domain. The 5 factors are and 6 traits follow:
| 5 Factors | 6 Traits in Domain | What It Measures |
| Neuroticism | orry, anger, discouragement, self-consciousness, impulsiveness, vulnerability | threshold of response to stressful stimuli |
| Extraversion | warmth, gregariousness, assertiveness, activity, excitement seeking, positive emotions | preference to engagement with people |
| Openness | fantasy, aesthetics, feelings, actions, ideas, values | degree of curiosity with inner & outer worlds |
| Agreeableness | trust, straightforwardness, altruism, compliance, modesty, tender- mindedness | measure altruism versus egocentrism |
| Conscientiousness | competence, order, dutifulness, achievement striving, distractions, deliberation | measures self-discipline to achieve goals |
The corner stone of Financial Management is psychology. This is in contrast to the plethora of information from gurus, media, and institutions that lead us to believe that a system or market expert is going to make us rich. These pundits not only promise riches, but promise quick and easy financial success. Nothing could be further from the truth. The truth is the exact opposite. You can get rich, but slowly. And its going to be painful at times to the point of wanting to quit. You will have to persevere where 90% of people quit.
Gurus, media, and institutions that have no stake in the outcomes of the investor provide much of what we learn about financial management. Some of the major principals of investing include concepts like "buy and hold”, "dollar averaging" and "buying on dips", and "diversification" to name a few. These principals have some merit but have limited effectiveness because of flawed psychology.
This flawed psychology is primarily related to not accepting risk inherent in trading called "risk aversion". The more one avoids risk, the more risk is actually present. Amos Tverksy, professor of behavior science at Stanford University, examined this paradoxical phenomenon. The phenomena he observed was "cognitive illusion" relating to risk attitudes. Risk attitudes represent a basic assumption of economic theory that asserts that people are risk averse. They prefer a sure investment return rather than one that is uncertain. "Most investors would choose a sure chance of receiving $90,000 versus a 90% chance of receiving $100,000 and a 10% chance of receiving nothing. This is an illustration of risk aversion as both situations have the same expected return. Tversky therefore concluded that people exhibit inconsistent attitudes toward risk. "They exhibit risk averse behavior when gains are involved and demonstrate risk seeking behavior when losses are involved." Tversky also asserted that the first $1000 gained is most attractive, while the first $1000 lost is least attractive. Tversky states that people evaluate events relative to a reference point and are sensitive to changes near that point. This sensitivity usually causes investors to exhibit behavior and take actions to negatively affect their portfolio. Mark Douglass author of Trading in The Zone states that " trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully. Risk aversion is the real impediment to financial success.
Pocket Book Of Economic Indicators
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