Understanding financial markets requires an understanding ...

Understanding financial markets requires an understanding of the price formation process. It is well established that a major factor in how the price is formed is trader's actions and interactions, by placing various orders at different prices and for different reasons. This leads to the obvious assumption that traders behaviour affects the movement of the price, and hence understanding this behaviour is a key for understanding both price formation and extracting the behavioural qualities that make some traders better than the rest.
Behaviour refers to the conscious or unconscious actions and reactions of an entity in relation to the environment. This definition makes it hard to quantify behaviour, and even harder to express behaviour in a mathematical form due to the difficulty of capturing behaviour in a specific numerical manner. The term behaviour in general is very vague and fuzzy, Hence in order to assess behaviour and most importantly traders behaviour in our case, we have to look at the problem from a new perspective which breaks down the task of assessing behaviour into other areas that are easier to quantify either statistically or computationally. The approach in this chapter is to look at behaviour in a specific frame, i.e. only analyse specific actions from an infinite number of actions "metrics" and then provide a mathematical mean to explain the outcome of a specific behaviour using natural human reasoning.
In This project we use various Traders Psychometrics to express various action outcomes of what the trader has been doing, and then assess these psychometrics using a scientific human-like reasoning method which is fuzzy logic. The resulting application was a tool for assessing accuratly the traders behaviour, pinpoint which trader is best and which is worst, and finally fuzzy control would suggest what actions should be done for various traders to emphasise their "good" behaviour.
Traders Psychometrics:
Traders Psychometrics are very specific metrics that are tied to the trader's various psychological conditions such as emotions, personal feelings of well-being, and opinion about the market amongst other things.
These external factors are found to affect the traders’ performance in the market (P/L Wins/Losses, Long Wins/Long Losses etc ..). These factors would also affect the traders’ judgement in identifying the different market conditions such as very bearish, bearish, sideways, bullish, very bullish etc… as well as the degree of volatility and amount of volume on the day.