An Introduction
Where to begin... I’ve always loved being "in" the market. Every year I get a little giddy at the prospect of a new YTD P&L—more pumps, more dumps, and more crises. Markets are beautifully dynamic; events span the globe, from container vessels blocking key trade routes to global pandemics that grind economies to a halt, or the sudden proliferation of LLMs. There is always something happening. Of course, to a good investor, this is all just noise—but I can’t help but enjoy the bustle.
Over the years (only about six in reality), I’ve experimented with various styles before honing in on what actually clicks. I started with dividend stocks, tried my hand as a security analyst, and eventually moved into options. I suppose it isn’t a massive list—I’ve stayed away from day trading, scalping, and futures—but the journey was necessary.
"I find the psychology that explains momentum effects to be rather agreeable"
Ultimately, a few specific styles resonated with my personality and led to the creation of this website. I prefer to think in terms of systems, and I find the psychology behind momentum effects to be particularly compelling.
The Psychology of the Trend
So, what exactly is that psychology? You may know it as behavioral finance. I’m no subject matter expert, but here is how I see the "machinery" of the market working.
Herding behavior
This is the classic phenomenon where investors make decisions based on the actions of the crowd. It is incredibly hard to ignore when everyone else is making money, and it takes massive discipline to stick to your guns when your picks are underperforming the broader market.
Fortunately for us, investors are regularly irrational. While herd behavior isn't the only reason a trend starts, it’s the fuel that keeps it moving.
Under reaction to new information
This is a big one, though it’s often dismissed as a crackpot theory. In my opinion, "under-reaction" is just the result of several cognitive biases working in tandem. Remember: price only moves when there is an imbalance between buyers and sellers.
- Overconfidence (aka Self Attribution): Investors often overrate their own knowledge, especially after a win. This bias prevents them from taking profits, which reduces selling pressure and allows an uptrend to continue. To the downside, an investor might be too confident in their ability to pick a cheap stock that has sold off a bit. Investors might view it as cheap and buy more slowing downside pressure temporarily but as more and more news surfaces contradicting the stocks current valuation, the selling will continue.
- Recency Bias: People tend to extrapolate the recent past into the infinite future. This blunts selling pressure on the way up, but on the way down, it causes investors to hold "fallen stars" way longer than they should.
- Endowment effect: We get emotionally attached to our holdings. We don’t want to sell our "winners" because they’ve become part of our identity, which again, slows down the realization of profits and fuels the trend. On the downside, since they are less likely to sell their star performer, they adapt slowly to new information suggesting they should get out.
- Anchoring: Interestingly, this often works against momentum. Investors "anchor" to break-even points or 52-week highs and sell there, thinking the run is over. When the market absorbs that selling and keeps going, it’s a massive signal that the trend is real. On the flip side, they look to recent highs and percent declines and claim a stock is now cheap without really diving into the details. That is a combination of Anchoring and Recency bias.
These biases are what create those periods of consolidation. On an uptrend, weak hands get out while the news suggests they should add. In a downtrend, buy the dip and diamond hands assert themselves before being run over by the reality.
Of course, this is all just my understanding and interpretation.
Stay in the Loop
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Eventually, I might drop some swag here just to help cover the hosting fees lol.