Usually we convince ourselves we are acting logically, and making the best choices. This convincing actually allows us to function in the world, because if we fully realized what we are doing at all times we’d drive ourselves nuts and probably get very little done. A little bit of self deception, it would seem, is necessary; it is impossible to be totally honest with ourselves all the time. But trading is one area where this self deception, or things hidden in your psyche, can hurt our performance. Here are a few obscure human quirks which may be affecting your trading.
Law of Consistency
People tend to remain consistent with past statements or actions. Past behavior sets a precedent for futures behavior, even if isn’t in our best interest. If you skip a trade once and publicly stated that you didn’t like the set-up, then chances are you will continue to skip that type of trade…even if it is a profitable set-up. An extreme case is someone who states “I am going to buy this stock even if it goes to zero.” And they do!
We all have seen this type of stubbornness, but usually we only see it others. Markets are dynamic, which means they are constantly changing, which means as traders we need to change with it. Realize when you are doing something self-destructive for the sake of consistency, and create a new plan instead.
Stuck in the Moment
Visualizing, or getting yourself out of the current moment is actually fairly hard work. Have you ever tried to do it?
You’re sitting at your computer watching the markets and the price is approaching one of your entry levels. Before that trade executes, visualize yourself following your trading plan–you execute the trade at the time and price dictated by your plan, the position size is correct and you can see yourself exiting (or choosing your expiry) according to your plan.
Most people don’t visualize in this way, and if they do they tend to focus on results. They visualize the money are about to make. That isn’t ideal though. Visualize following your plan, not results. Doing so reinforces good habits and is likely to result in you actually following the plan. Follow the plan and results will come…not the other way around.
Loss of Word Power
Over time, the more you hear something, the less powerful it becomes. Consider a smoker who constantly hears “That is going to kill you!” Maybe the first time the smoker heard it the statement had an impact, but since they just starting smoking they responded “I got time.” After years of hearing “That is going to kill you!” it has no impact though, and does not affect behavior in the least.
Traders face the same thing. They try to consume so much information that they re-read the same thing, said in many different ways, over and over again. What do you think happens? What they read loses it’s impact, because they skip over the things they read most often, such as creating a trading plan and keeping risk on each trade small. The scary thing is that these are the most important aspects of trading, yet most new traders just ignore these pieces of information because they hear them so often.
Did you just say to yourself “Yeah, I know that?” Many likely did, but knowing and doing are very different things.
The Bottom Line
After looking at these three psychological quirks we realize they are not that obscure at all, we yield to them every day. Being aware of them can help us alter course when it is prudent to do so. If we have developed consistency in something that is harming us, we have the ability to change it. We can visualize ourselves sticking to a process which is beneficial; this takes some work but pays off because it helps develop consistently good habits. And just because we hear something a lot doesn’t mean it isn’t good advice. Take information in and analyze it for what it is, don’t assume it isn’t worthwhile because you have heard it before.