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Tag: Mental Model

Simplify Your Trading Using Occam’s Razor

Simplify Your Trading Using Occam’s Razor

Occam’s Razor, also known as the law of parsimony, is a philosophical principle that is attributed to William of Ockham, an English Franciscan friar, philosopher and theologian. The principle states that among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected. Said another way, the simplest solution is always the best. Like all mental models you can apply it across many disciplines but we like to explore how we can use Occam’s Razor to…

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Opportunity Cost

Opportunity Cost

All trading decisions should be viewed through the lens of opportunity cost. You want to maximise the amount of money you make by spending your time in the most useful manner. The concept of opportunity cost comes from the field of microeconomics so some of you may be familiar with it already. Opportunity cost is just a fancy word for trade-off. When we do one thing we won’t be able to do something else. It is the cost of missing…

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Margin of Safety

Margin of Safety

The principle of margin of safety comes from the discipline of engineering but was adopted by those in the finance industry as a way to minimise risk. The concept was made famous by Ben Graham most notably in his book the Intelligent Investor and subsequently by his followers, namely Warren Buffett. It is also mentioned by Jesse Livermore in his book Reminiscences of a Stock Operator. It is a very simple concept that helps you absorb errors and bad luck…

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Circle of Competence: Avoid What You Think You Know

Circle of Competence: Avoid What You Think You Know

The concept of circle of competence has been used by the best professional traders for years as a way to focus on only trading in areas they know best. Most people will be familiar with this concept if they’ve ever read any of the shareholder letters of the famed investor Warren Buffett. But the concept applies just as much to trading as it does investing. As traders we all build up our own unique skill sets in the markets. Through…

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