The contrast effect is a cognitive bias where our perception of something is influenced by what came before it. Humans are particularly susceptible to this bias, especially when it comes to how we perceive stock prices and value. You would think a bottle of wine that costs $300 is cheap after looking at a list full of $1000 bottles, right? Now think of how this impacts institutional investors...
The House Money Effect is a psychological bias where people treat money they’ve recently won (or earned easily) as less valuable than their original capital. This leads to riskier decisions like a gambler taking bigger bets after a hot streak. This cognitive bias, borrowed from casino psychology, transforms how traders perceive and handle risk after periods of success—a pattern well recognized...
The Chaikin Money Flow (CMF) is a volume-based trading indicator developed by Marc Chaikin. It measures the volume of money flow into or out of a security over a given trading period, typically 21 trading days. The core principle behind CMF is that when closing prices are near the high on increasing trading volume, it indicates strong accumulation or distribution. Conversely, when closing prices...
The Woodie’s Pivot Points trading indicator is a set of calculated pivot point levels used by traders to identify potential support and resistance areas in the market. These types of pivot points help traders predict possible price reversals and breakouts by establishing key levels based on past price data. Unlike traditional pivot point calculation methods, which distribute weight evenly among...
Hyperbolic discounting is one of the most powerful yet least understood psychological forces in trading. This cognitive bias leads investors to choose smaller, immediate gains over larger future rewards, fundamentally altering how they approach position management and long-term strategy—a classic challenge highlighted in trading psychology. It's a pattern that repeatedly undermines thoughtful...
Have you ever refused to sell a stock at a loss because you “knew” it would recover? Or hesitated to buy because the price seemed too high compared to a past level? That’s anchoring bias, and it’s one of the most dangerous traps in trading. It tricks you into making decisions based on outdated price points rather than real-time market data. The best traders don’t anchor to the past—they adapt to...
The Kelly Strategy, developed by John Kelly at Bell Laboratories, provides an optimal strategy for capital allocation in investment and gambling. It aims to maximize the logarithm of wealth over time, ensuring optimal growth rate while managing downside risk. The Kelly Criterion finds applications in investment management, portfolio optimization methods, and sports betting bankroll...
The Downside Tasuki Gap candlestick pattern is a bearish continuation pattern that suggests an existing bearish trend is likely to persist after a brief pause. Unlike reversal patterns that indicate trend exhaustion, the Downside Tasuki Gap signals that sellers remain in control, even as the price briefly pulls back. This pattern consists of three candlesticks and appears when the second candle...
The Upside Tasuki Gap candlestick pattern is a bullish candlestick continuation pattern that suggests an existing bullish trend is likely to continue after a brief pause. Unlike reversal patterns that indicate trend exhaustion, the Upside Tasuki Gap signals that buyers remain in control, even as the price briefly pulls back. This candlestick formation consists of three candlesticks and appears...
The Mat Hold candlestick pattern is a continuation pattern that signals a brief pause in the trend before the momentum resumes in the same direction. Unlike many candlesticks patterns that indicate potential reversals, the Mat Hold pattern suggests that the dominant trend remains intact despite a temporary pullback. This pattern can appear in both bullish and bearish trends, but traders...
The Upside Gap Two Crows candlestick pattern is a bearish reversal candlestick pattern that forms in an uptrend and signals a potential shift to the downside. It consists of three candlesticks: a strong bullish candle, followed by two smaller bearish candles that gap up but fail to continue the rally. Traders interpret this as a warning that buyers are losing control and sellers are stepping in....
The Three Inside Down candlestick pattern is a bearish candlestick reversal pattern that signals a potential shift from bullish to bearish. Traders watch for this pattern at the top of an uptrend, seeking confirmation that the bulls are losing control and sellers are stepping in. This pattern consists of three candlesticks: a large bullish candlestick, followed by a second candlestick that is...