Super Gann Trader Academy which runs stock market institute in Delhi, offers free trader awareness lessons.
Examples of patterns in life
- Babies love seeking human face patterns. It is good for their survival as they need adult humans to take care of them.
- If a couple of movies based on love story become successful, other producers begin love story projects.
- When we observe that a flight is delayed or hostess has behaved rudely we begin to believe that this must be very common with this airline. We jump to conclusion with little evidence.
- People believe in ‘becoming hot’ while playing basketball, meaning that, if a player has scored in his previous few shots, he has more chance of succeeding in the next attempt. Statistics do not support this belief.
- If a cricket team wins, we immediately find the captain to have leadership qualities, insight and being a strategic thinker. However if the team loses the captain appears to have lost all his abilities.
We over analyze all events and even create stories around these patterns to make them more meaningful to us.
We have a brain that is very good at seeing patterns. By seeing patterns, our brain tries to make sense of information available. Once our brain learns to see a pattern, it is very hard for it to ignore it. We cannot turn off this pattern seeking machine in our head.
Humans found meaningful patterns like animal migration timings, seasons and tides. Our ancestors also learned patterns that warned them of dangerous predators. This helped them survive. That’s why it is part of our genes.
Some of these patterns are useful while others are not. Noticing patterns and learning from them helped us plan better and survive.
However, this pattern seeking phenomenon is so ingrained in our behavior that we have learned to see patterns everywhere, like lucky numbers, the palms of our hands and the clouds and stars in sky.
How can such pattern-seeking behavior harm in the stock market?
Mr. Raj watched the business channel every day. His favorite channel, TV Guru, commented that on the past few occasions, company ABC’s share price went up after a fall of X Rs. So, Mr Raj took note of this pattern and began to buy ABC’s company shares as soon it dropped in price by X Rs. After it turned out to be true for the next two occasions, he began feeling like a genius. When ABC’s share price dropped the next time, he was prepared and invested all his savings. He then started calculating the profits he would make. But this time, ABC’s share price did not recover. So he decided to wait till he gets his money back. As the price dropped further, he bought some more to make the average investment price lower. He had taken money on loan to make this additional investment. However ABC’s share price did not recover and he lost all the money.
Mr. Raj lost money because he made every mistake in the book. He saw a pattern in ABC’s share price and jumped to conclusion with little evidence. He had no stop-loss and money management plan. He did not test TV Guru’s recommendation.
He did not learn the share trading/investment business before entering the market. This cost him a lot.