List of Cognitive Biases
Decision-making, belief, and behavioral biases.
Many of these biases affect belief formation, business and economic decisions, and human behavior in general and make good sources of alpha for trading strategies…
Anchoring or focalism
The tendency to judge probability of the whole to be less than the probabilities of the parts.
Add biases together to add facets and timeframes.
Scan, Pause, Idea, Scan, Pause, Idea…
Using the process from 101 Trading Ideas: A Magical List for Fast-Paced Alpha Hunting, scan the List of Cognitive Biases, and when you find yourself pausing, when you find yourself thinking, “What if…” that is your idea! Here’s an idea based on Clustering and Crude Oil:
The tendency to overestimate the importance of small runs, streaks, or clusters in large samples of random data (that is, seeing phantom patterns).
close > close 20 days ago, and
close < close 5 days ago, and
number of closes where heating oil was higher than it was 5 days ago over last 40 days > 20
then buy crude oil
Opposite of long rules
After 10 days #one half of 20 day lookback
avg trade: 1.02 pts
profitable 8 of 11 years since 2006
Adds stops, profit targets, and money management
101 Trading Ideas:
This strategy idea was triggered by 101 Trading Ideas, A Magical List for Fast-Paced Alpha Hunting. It turns out that ideas are like the old-fashioned game of telephone – when the List says one thing, you hear a more personal, interesting trading idea. As you scan the List while thinking of the markets, when you pause, when you find yourself thinking “What if…” that is your idea! Try it, test it, find your alpha. It’s as easy as Scan, Pause, Idea, Scan, Pause, Idea. Using the List in 101 Trading Ideas, will help you create trading ideas, too!