Trading is an interesting field to say the least. It revolves around a great deal of decision making, and a lot of choices which will have diverse effects. What is responsible for the decisions made? Naturally, the trader’s thoughts and considerations in relation to his or her trading experience. So, to a certain extent neuroscience comes into the picture.
Neuroscience refers to the way the brain works, along with its cognitive functions. In fact neuroscientists focus their studies on the human brain, and how it has an impact on behavior and thinking functions.
Financial decisions are very important, and it goes without saying that they are affected by the individual’s financial literacy, experience as well as cognitive constraints. Decisions are also affected by one’s level of confidence, level of objectivity, and the element of risk involved. The amount of money involved is also prevalent, as the higher it is, the bigger the risks are and the more cautious one is more likely to be, as long as greed and over confidence do not cloud one’s decision. Thus, there are several factors which all have an effect on the decision that is finally made.
Therefore the neuroscience behind trading decisions is a very complex matter. Despite efforts to try to understand how the brain works and how it effects trading psychology and the subsequent decisions made by traders, one cannot say for sure how it all works out as there are so many factors and issues involved. There are however some patterns and trends that were noted after neuroscientists conducted certain studies in this regard.
For instance, there is a general belief that traders invest in a diversified portfolio in order to limit risk, and once this is done, they are less pressured to make substantial trading decisions since they have their investments spread out quite well. There are others who prefer to take bigger risks because they want to stick to certain stocks only, because they have a belief that they are going to do better off that way. Evidently in this case pride and confidence comes into play. (more…)
There is a reason why so few traders succeed. It is not for lack of study or effort or passion. It is not for lack of education or a Bloomberg platform subscription. It is not because only a select few have access to technical “secrets” (a.k.a. indicators). No. So few succeed at trading for the same reason that so few succeed at living an abundant life.
The unsuccessful refuse to think differently when faced with difficulties believing that luck has passed them by. They do not succeed because the want of instant gratification and its fleeting rewards has replaced the need for sustainable, hard fought, earned rewards indicative of a mindset prepared to tackle failure as nothing but a mathematical equation: here is the problem now let’s find the solution.
The mediocre search for easy answers to difficult problems believing that the right answers to their questions are found somewhere “out there”. The successful make difficult decisions where there are no easy answers, questioning whether their perception of what is out there is a distorted reflection of what is inside of them.
The best traders, according to Mark Douglas, think differently than others because they know that what is most important is “how they think about what they do and how they’re thinking when they do it.”
1.Does your self -esteem rise and fall with your latest trading ?
2.Have you ever taken a trade just to prove your ability as a trader ?
3.Do you brag about your winning trades to others ?
4.Do you try to hide your losing trades from others ?
5.Do you ever make up false stories about your trading to impress others ?
6.Do you worry about what other people think of you as a trader ?
7.Make an honest self-assessment of your trading.
8.Compliment yourself and give yourself credit when you do something right.
9.When you make a mistake or do something that doesn’t serve your trading ,plan how you will correct this tomorrow or in the future.Say to Yourself ,”That’s not like me.I can do better.”
10.Notice your improvement and commit to doing better each day ,week ,month and Year.
Trade what is… for in doing so your trading is based on fact, substance and reality. It provides clarity, confidence, manageability, and useful feedback for consistent success where appreciation for winning, and respect for losing, keeps you in the game.
Do not trade what you think should be….for in doing so your trading is based on egotism, a false sense of foresight, the desire for validation and approval, and the “win at all cost” mentality, which leads to confusion, anxiety, anger, and despair…not to mention the inability to trade another day.
There is a reason why so few traders succeed. It is not for lack of study or effort or passion. It is not for lack of education or a Bloomberg platform subscription. It is not because only a select few have access to technical “secrets” (a.k.a. indicators). No. So few succeed at trading for the same reason that so few succeed at living an abundant life.
The unsuccessful refuse to think differently when faced with difficulties believing that luck has passed them by. They do not succeed because the want of instant gratification and its fleeting rewards has replaced the need for sustainable, hard fought, earned rewards indicative of a mindset prepared to tackle failure as nothing but a mathematical equation: here is the problem now let’s find the solution.
The mediocre search for easy answers to difficult problems believing that the right answers to their questions are found somewhere “out there”. The successful make difficult decisions where there are no easy answers, questioning whether their perception of what is out there is a distorted reflection of what is inside of them.
The best traders, according to Mark Douglas, think differently than others because they know that what is most important is “how they think about what they do and how they’re thinking when they do it.”
In my opinion, this is the ultimate goal for all traders: Get to the point where you can make confident decisions on your own and trade with complete independence. While I tremendously respect the opinion of my colleagues, I DO NOT rely on them. I can turn off Blue Channels, and all communication to the outside world…and still be fine with making my own decisions and letting THE MARKET tell me if I’m right or wrong. I apologize if this sounds cocky, but it’s simply the truth.
How do you get to this point? Make decisions and learn from them! I openly admit that I have made TONS of mistakes in the market, and I still make mistakes EVERY DAY. The key is I’ve learned from them and now try my best to minimize those mistakes. As Tony Robbins says: “Good decisions come from experience, and experience comes from bad decisions.” The key is to MAKE a decision without worrying that you might be wrong. As long as you learn from it, you can correct it the next time. Again, just make the decision! Who knows, it might end up being a good one
This post will begin a new category specifically focused on the military principles of SUN TZU and their relevance for contemporary traders. My goal is for you to find my interpretation of this 2500 year old military treatise as beneficial to your trading success as I have.
If you trade and study the market for a living as I do, or have a desire to do so, I suggest you read SUN TZU’S ART OF WAR. You can read the complete text here:
SUN TZU ON THE ART OF WAR: THE OLDEST MILITARY TREATISE IN THE WORLD
WHY SUN TZU?
Anyone who has attempted to trade the markets, and by markets I mean any number of financial instruments from oil futures, forex, equities, options, etc., has found out in short order how difficult trading can be. In fact, I would venture to say that trading is one of the most difficult endeavors any of us could ever attempt to master. It is estimated that only about ten percent of those who attempt to trade for a living ever succeed. The ten percent who do eventually succeed will most likely tell us that they lost a few fortunes along the way. It is hard emotionally, mentally, and physically. Only the strongest will survive on this battlefield and is the very reason we need the principles of Sun Tzu to help us along the way.
Now you know the reason for my site’s motto:
TRADING IS WAR. PREPARE YOUR WEAPONS. (more…)
I have seen too many traders that randomly add condition after condition to their trading strategy, hoping that it will increase their hitrate. What they are trying to do is to add assumption after assumption to their hypothesis, until their hypothesis (“price will move in to this or that direction for this or that amount”) is hopefully correct more often than not.
Going this way usually ends in paralysis through analysis or in total chaos because there are so many conditions when entering a trade that it is impossible for a human brain to follow the system, thus inducing mistakes.
Enter: Occam’s Razor
Occam was one of those scholastic philosophers, living around 1300 A.D. He developed a principle called Occam’s Razor which states that “among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected. Other, more complicated solutions may ultimately prove to provide better predictions, but—in the absence of differences in predictive ability—the fewer assumptions that are made, the better.” But Occam was not the first, even Aristotle, who was living a mere 2000 years ago, theorized about this concept.
Now the thing is that of course when you add or remove certain conditions to your trading strategy, the predictive ability of your strategy will vary thus rendering Occam’s Razor seemingly invalid. Seemingly. Because trading is a game of incomplete information, we can never exactly know the predictive ability of a model.
Even after testing thoroughly, we will always only get an estimate (our winrate). Because of this fact you should base your trading strategy on as few assumptions as possible. (more…)
