I have been reading Mark Douglas’s excellent book Trading in the Zone and he hits on the most amazing point regarding the effect of random rewards. In brief, it goes like this:
If you teach a monkey to do a certain task and reward him when he does it, he will learn how to keep doing the task to get the reward over and over.
Following this, if you cease to give him the reward he will quickly cotton on and stop doing the task.
However – if you give the monkey a RANDOM reward, he falls into a sort of mesmerized state of addiction where he will keep doing the task continuously, even if no more rewards come. This is exactly why people are addicted to gambling, and if you look at your trading life it might be the same: random rewards.
This got me to thinking about how a trading plan combats this effect and once again proves itself indispensable, because in a sense you move the whole pattern over to the first scenario where if you follow the plan you get the reward. The effect will still be there of course because not every trade is a winner, but it is the only realistic antidote to this obviously primal reaction to receiving random rewards.
I’ve heard this from other sources too – in Robert Greene’s 48 Laws of Power he talks about how random patterns of reward and punishment are actually a key factor in both manipulation and brainwashing. This is known to also drive animals of all kinds mad.
You see how deep and penetrating this effect could be if you are trading without a plan? No plan means basically random trading, which means random reward and punishment dished out from the market, creating an addicted state of anxiety crossed with eurphoria – you know what it feels like I’m sure.