Momentum According to Neuroeconomics

It really doesn't matter if the trend is for the day, week, month or year... the still new science of neuroeconomics (taking pics of our brains making risk/reward decisions) reveals a few useful things to know about how we tend to perceive and judge momentum moves. 

First, the default expectation is "what happened yesterday, will happen tomorrow". The old saying the market has a memory probably stems from this. Behavioral (what we do) and neuroscience (poke, prod and take pics of the brain) experiments have shown over and over that humans in general default to this position.

Traders however are clearly not "humans in general". Most of us are taught to trade the ostensible "fat tails" - to fade the moves - to buy support and sell resistance.

But another neuroeconomic finding sheds light on how that ends up working on a day like yesterday. Dr. Elke Weber of Columbia writes about how regret - or even the potential of regret - is more compelling than reward. In other words, when we see a big move, we natually tend to feel we missed it and the regret imbues our next counter-trend trade because surely "we can't NOT make any money when the market is moving" or "you have to be in the market to make anything". (Not true btw - no position IS a position).

Technically what happens next is the traders who are more subject to #2 short a rocket headed for the moon with a stop generally placed way too close. And who comes sweeping back in a moment later? Of course, the "humans in general" who believe it will keep going - they want to buy - and in fact, the feeling of not missing out is also skewing their assessment of the situation. But to the trader-faders this means STOP LOSS - or built-in buying which only further fuels the rally. 

These two brain-on-risk defaults drive trends and bubbles in all degrees of time (to borrow a phrase from my fave market development guru Tom Alexander). So it really does pay to remember to analyze your own in-the-moment susceptibility to this gray matter op-sys as it does to cogitate over the bars, lines or future cash flow of whatever it is that you trade.