Do you ever wonder why trading can feel so hard? The answer is simple. Humans are naturally bad traders. It’s true. If you are reading this, there was a time, if not now, that you struggled with your trading. Why does it seem like when we trade with our gut, it always seems to result in a loss. When we make decisions with anything in life, our brains use the inputs it is given, computes the information, and decides on the action required, usually in hopes of having the best outcome. Inputs are things we perceive through our senses. Did you know the body has more than just the five widely known senses? You know… sight, taste, sound, touch, and smell. There’s actually around 21 depending on who you ask. I want to focus on senses numbers 6 and 7 and why they make bad traders.
Our 6th sense is what is able to “feel” what is indefinable. Do you know when you just have a bad feeling about someone? Yeah, that sense. It’s that “gut feeling.” It is this sense that allows you to sense body language, tell when your kids are lying just by the way they talk and gives you the “heebie-jeebies” when you walk into a creepy house. This sense also gives you a sense of the future. Using this sense as a trading tool will more than likely lead to ruin.
Our 7th sense is our emotions. You may not have realized that your emotions are one of your senses. In trading, we deal with emotional pain and emotional pleasure. When you see your account numbers turning green, your brain releases little bits of dopamine which is the chemical that lets you experience pleasure. This feeling is highly addictive and gives you that feeling of “wanting more” which can typically lead to overtrading or over position sizing when times are good. But when you start seeing all those little numbers turn red or put in little parenthesis, your brain produces glutamate which signals the fight or flight response and the release of adrenaline, both of which lead to poor trading decisions. Using these emotional senses to guide your trading will also lead you to ruin.
The market is just a sea of randomness driven by the emotions and feelings of all its participants. Only when a majority feel a certain way will the price move a certain way. It’s our job as traders to take advantage of other people’s emotions and feelings by not using our own. How many times has you 6th sense told you the price was DEFINITELY going to go up only for the chart to laugh in your face and prove you wrong. How many times has your fear of missing out got you into a trade with no technical set up just to go against you immediately? How many times has greed kept you in a trade too long and you end up losing all your gains (I’m talking to you, Bitcoin holders)? How many times has your fear of losing profits got you out of a trade way too soon?
This is why a process needs to be established. You need to think of yourself as a computer. Computers have no senses. Only inputs and outputs. They are programmed so that if one thing happens then this action will be taken. Think of yourself as two separate individuals. One individual is the logical person and the other is the emotional one. The logical person has a process. This individual knows what he/she will do when something happens. There are no debates. Its patterns and math for this one. If something doesn’t fit within his/her parameters for trading, it gets discarded. This individual knows he/she will make money over time but not every day. The emotional person is chaotic. It trades on the fly because it just “knows” what is about to happen. This person is typically wrong but when he/she is right, it likes to brag about it to the logical person. This person HAS to make money every day or so help me… This person is not allowed to push buttons. They can only look over the shoulder of the logical person and watch. They are going to complain and cry when things look grim and cheer when things look great but they are not allowed to make decisions.
This is just a fun illustration I like to play out when trading. Before I hit the button, I ask who is at the wheel? Logic or emotions? I ask myself why I am taking this action. Does it fit within my rules? Sometimes I wish I could go back and slap myself from when I first started trading for all the dumb decisions that were made out of emotion.
Becoming a professional trader requires a professional trading plan. To make a plan you need to backtest systems until your fingers bleed. You need to understand your system from top to bottom. You need to understand that no system is perfect and that there will be times when your system thrives and others when you take drawdowns. I feel that having a system is a recurring theme in my blogs. It’s something that I struggled with for a while and I think that it’s the one thing that holds people back from being successful in the markets.
Become a computer. Keep the emotions in the back seat and don’t let them drive. Don’t wonder every day if you are making the right decisions. Have a plan. Trade it. Stick to it. Do it over and over.
Until next time, happy trading, traders.
Justin started his trading journey during a 3-day workshop with Tim Justice in April of 2018. He has always been interested in the financial markets and the opportunity it potentially provides. He likes trading stocks and options. Outside the markets, he’s a husband, father of two boys, and full-time automotive technician.
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