“Portrait of a green and black machine”
Image extraction: stable diffusion

I asked ChatGPT4 to delve a little deeper into the common sense that "speculation should not trade based on the profit one wants to make, but should trade more mechanically according to market conditions."

Speculation, such as trading stocks or forex, concludes in a few clicks per trade as an actual action. Therefore, it can be said that the success or failure of a trade depends on knowledge and mentality. And there are countless differences in knowledge such as trading strategy, tactics, and method. It’s too vague to ask, and above all, there isn’t much I want to ask a machine.

So I asked about the mentality, and I was surprised again because it was neatly summarized to the point of admiration. That’s why ChatGPT has such an impact that it can be called a global phenomenon, but even so, it’s an amazing technology. Once again.

So, to summarize the answer, it is as follows.

Mental drawbacks of trading based on profit

Confirmation Bias
The first psychological factor that becomes a problem in speculation is ‘confirmation bias’. This refers to the human tendency to seek information that confirms one’s beliefs or hypotheses and ignore information that contradicts them. Traders are constantly exposed to the possibility of seeking information to confirm their predicted market movements and ignoring information that contradicts those predictions.

Gambler’s Fallacy
This refers to the tendency to erroneously believe that past results affect future outcomes in a series of random events (such as coin tosses). For example, it refers to the sentiment of believing that the probability of a tail appearing increases after tossing a coin several times and getting heads continuously. Traders should always be aware that they have a tendency to believe that the market continues to move in a certain direction and to underestimate the possibility of that trend reversing.

Overconfidence Bias
This refers to the tendency to overestimate one’s abilities, knowledge, and judgement. Traders tend to overestimate their ability to predict the market and underestimate the risks. This increases the potential for losses.

Framing Effect
This refers to the phenomenon where the way the same information is presented changes the way it is received. When traders set a profit goal, a ‘frame’ is formed towards achieving that goal, and it influences investment decisions. And they become trapped in goals unrelated to the realities of the market, obstructing rational judgement.

Loss Aversion Bias
This refers to the psychological tendency for humans to desire avoiding losses more than gaining profits. It is a risk taken for the sake of achieving a goal, but when it leads to failure, traders tend to take more risks to recover the loss. This can lead to large losses.

Goal Gradient Effect
This is a phenomenon where the purpose becomes to achieve a goal, and important judgements are neglected in the process. In other words, it refers to the potential of taking actions such as ignoring risk management for the sake of achieving goals, or pursuing short-term profits and lacking a long-term perspective.

The first three are about more general speculative behavior, and the last three justify the hypothesis that speculation should be done more mechanically.

By the way, the following four points are important for mechanical trading:

Important points for mechanical trading

1.
Strict adherence to entry and exit points, risk management parameters, etc., as determined by the trading plan. This is to minimize stress from market fluctuations and emotional decisions.

2.
Regular review and adjustment of the plan. This is to adapt to changes in market conditions.

3.
Statistical analysis of the results of a series of trades. This is to objectively evaluate your trading performance, clarify necessary improvements, and prevent errors due to emotional decisions and subjective evaluations.

4.
A proper mindset and self-discipline are necessary. Understand well the importance of trusting your plan and adhering to it.

Points to note for mechanical trading are as follows:

Cautions for Mechanical Trading

1.
Overconfidence in the trading system. No matter how excellent a system is, it’s not perfect and always needs appropriate adjustments to respond to market changes.

2
Understanding how the system operates and what logic it is based on. This is to understand the weaknesses and limitations of the system and take appropriate actions.

"Mechanical trading, while it may seem simple at first glance, requires a high level of skill and experience to execute and manage. Nonetheless, the rational approach and bias elimination it offers can be powerful tools for success in speculative trading."

This was the conclusion.

I feel like retorting, "Well, of course, but…", and it’s something that would be said if you went to any investment seminar, but it comes back right away just by asking a question in a chat.

I think it’s only natural that the use of AI in education will progress… I don’t know whether or not humans who have such tools at their disposal still have to cram in knowledge in school as they have been doing.

By the way, I also asked ChatGPT4 about the “opportunistic trading” methods it recommends↓
I tried asking the machine ChatGPT4 for recommended mechanical trading methods.