The fourth factor of the edge equation, discipline and adaptation, is where good systems most often fail in practice. A rule with a positive expected value after costs earns nothing if the trader stops following it in a drawdown, doubles up after a loss, or sells the winners and keeps the losers. Behavioural finance has measured these habits in brokerage, exchange and tax records for forty years, and the findings are unusually consistent. Some anchors:
What the study covers
- 1Overview: discipline is a factor, not a mood
- 2Prospect theory and loss aversion
- 3The disposition effect
- 4Overconfidence and overtrading
- 5Lottery preferences, skewness and options
- 6Recency, extrapolation and the hot hand
- 7Revenge trading, the break-even effect and tilt
- 8Attention, gamification and the app
- 9Biases by system family
- 10What works: rules, journals and checklists
- 11How professional firms enforce discipline
- 12Living through a system's drawdowns
- 13Trading coaches, mindset courses and "trading psychology" products
- 14How to read psychology claims
- 15Key numbers
- 16Landmark firms and cases
- 17Pitfalls
- 18How an expert thinks about it
- 19Glossary
Companies in this study
- Jesse Livermore
- Turtle Traders
- Millennium Management
- Citadel LLC
- Tudor Investment Corp
- Duquesne (Stanley Druckenmiller)
- Soros Fund Management
- Bridgewater Associates
- AQR Capital Management
- Winton Capital
- Dunn Capital
- Susquehanna International Group
- Robinhood
- tastytrade
- Zerodha
- Barings (Nick Leeson)
- Mark Minervini
- Larry Williams
- Takashi Kotegawa (BNF)