Trading psychology should not be under estimated with regards to making trading decisions. As traders, we often find ourselves making very difficult decisions, such is the life of the trader. Making decisions can typically end in one of three scenarios, good, bad or neutral. Good if the decision resulted in a positive outcome, bad if the decision was poor, resulting in a less than positive outcome and neutral if the decision was poor yet well managed. The emotions associated with the potential outcome of any given decision can either motivate or demotivate us. Why is this aspect of trading psychology useful to the trader? In this post, I will discuss a strategy any trader can employ to discourage bad and encourage good trading decisions, a strategy that has been used for therapeutic purposes for years.
When I was a little boy my mother smoked cigarettes, which was something I always disliked. Many children dislike smoking for many reasons, but what was my reason? When I was about 10 years old, I asked my mother what smoking was like and when she gave me her answer, I was surprised. While she may not have been aware of it at the time, how she decided to tackle the situation would have a very profound impact on me for the rest of my life. In short, her answer went something like this:
Would you like to try?
I was excited with her response! She showed me how to hold a cigarette as not to burn my fingers and told me to take a big puff. I held the cigarette up to my lips and did as she told me. I took a big puff and inhaled the smoke deep into my lungs and all the way down to my toes. My smile quickly disappeared as my facial colour changed from normal to green. Dizzy, I began my coughing fit. That was the end of my short carrier as a smoker. While the intensity of the experience has subsided, over 20 years later I still feel the effects of what happened to me that day. Just holding a cigarette in my hand and bringing it up to my mouth brings back many of the same physical reactions I felt so intensely back then. Why is this so and what does this have to to with trading or trading psychology?
Any time we experience significant levels of pain (negative emotions) and pleasure (positive emotions), our brain will immediately begin to look for the cause so it can recreate the physical and emotional reactions, which either protect (pain) or encourage (pleasure) us in the future. Initially, it will look for something unique at the time of the experience (stimulus A) and then look for something else to be happening (e.g. seen, heard, smelled, touched, tasted) simultaneously or at approximately the same time (cause B). If B is present at roughly the same time as the initial event which caused us pain/pleasure, an evaluation process begins in attempt to assess if B was the cause of A. If our brain evaluates B to be the cause of A, it will then look for a degree of consistency in an attempt to confirm that B is indeed the cause of A. If successful, a new belief such as one of the following may be created:
- Fire burns
- Dogs bite
- Yorkshire tea tastes great
- John is rude
- I’m not lucky
This process is no less than astounding, as it clearly illustrates the associative power of the human mind, especially when it enables the mind to keep us safe from danger. Due to the fact that the entire process can create new beliefs relatively quickly – and sometimes base them on questionable evidence, also known as false neuro associations, this amazing process can quickly become a double-edged sword.
What my mother did to me at the age of 10 was very clever, and actually something we do to ourselves all the time, the outcome of which can either be positive or negative. In my situation, she assisted in associating the act of smoking a cigarette with negative emotions (pain, coughing, nausea), creating a new belief, a neuro association. As a result, each time I was exposed to cigarette smoke or the act of smoking, the same negative emotions I experienced at the age of 10, would be reactivated. Rather clever.
Here’s a little experiment. The next time your children argue about not wanting to brush their teeth, show them a few of the worst pictures you can find of rotten teeth on the Internet, and tell them that that is what their teeth will look like if they choose not to keep them clean. Do this a few times and note how their motivation for teeth-brushing improves.
When I was studying to be a hypno-therapist, I learned much about our belief systems, our neuro associations, and how they can effect virtually any area of our life. Whilst in therapy, a 50 year-old man was asked what he could remember most about a bad experience he had with a dog:
Him: Opera music is playing very loudly in the kitchen
Therapist: How do you feel about it?
Him: Not good, it’s stressful, I want to turn it off!
Needless to say, when asked how he felt about Opera music over 40 years later, the answer was as expected, as the innocent, beautiful sound of Opera music was convicted of causing him the pain inflicted upon him by the dog. A false neuro association.
Neuro associations and trading psychology
When I studied at university, I wasn’t one of those students who wrote everything the teacher said down. Instead, what I did do was write down the “good stuff” (which seemed to be far from all of it). When I wrote down what I deemed to be useful for me, I used a certain pen, which was green and had a certain feel to it. In doing so, I conditioned myself only to write good information with my green pen and when I had it in my hand, I seemed to know what I needed to know at the time. I don’t know if this worked for me during examinations but you get the idea.
How is this aspect of trading psychology relevant to trading? Through which limiting beliefs and false neuro associations are you viewing your ability to trade? Do you even feel that you deserve to be a success at anything not to mention trading? Due to the nature of trading, limiting beliefs concerning money can play a major role in one’s ability to remain consistent, as self-sabotage often plays the role of the jury when rebalancing the scale. Your beliefs, your neuro associations, both negative (dis-empowering) and positive (empowering) are most definitely defining who you are as a trader and how successful you allow yourself to be.
What about neuro associations with specific types of trades? How we traded yesterday does not dictate how we’ll trade today. When we sit there looking at charts, stalking trades, we are generally looking for specific price movements that we have seen in the past, a stimulus. If we are able to recognise these specific price behaviours and use them to qualify trades, then we have what we can call an edge – and probably one that we have used many times in the past to enter trades. This is when it gets interesting. How would you feel about your edge if the last five times you used it to enter the market, your full stop was hit? Most people would probably begin to question this particular setup, even if the 10 trades prior to the five losers were winners.
Five trades ago we held a belief that this particular trade was a winner, a neuro association linking a specific stimulus (a recognizable price behaviour) to a pleasurable outcome (profit) and now this once cherished belief is falling to pieces. Ultimately, trading challenges our beliefs about a number of things all the time and that’s OK. We don’t need to change everything each time we win or lose a trade, as you can’t have one without the other, such is the nature of trading (more on this in a later post).
Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom. (Viktor E. Frankl)
How can we create an empowering environment in which to trade? As discussed earlier, when we experience a novelty, either positive or negative, our brains automatically begin to look for something else to be happening at the same time – and due to the fact that there is generally a lot going on, many things can be “hijacked” into being the cause of the stimulus. Knowing this, one could consider purposely utilising the presence of sensory stimuli (e.g. visual cues, sounds, smells, physical sensations, tastes) when the brain is making associations at lightening speed (see, the first paragraph of the Neuro Associations section for a review) to help maintain control of the situation.
Consider the following:
- What is going on around you when you educate yourself, when you’re getting the good stuff? (think green pen)
- When you trade, what sensory stimuli (e.g. seeing, hearing, smelling, touching, tasting) are you exposed to that may potentially be influencing your behaviour. If you’re experiencing a period of losses, consider altering the environment’s sensory stimuli (e.g. sit somewhere else, change the colours of your charts, change the music you listen to, the smells)
- Keep something with a pleasant scent close by (e.g. a sachet of Lavender) and have a good smell of it when you’re making good trading decisions, really breathe it in, do this over and over again. Doing so will help enable you to re-create the same desired state you experienced at the time you conditioned yourself, whenever you smell the scent
- When you’re studying the good stuff, play a record that you enjoy and use it to trigger your optimal state whilst making trading decisions
If you have a problem with e.g. chasing trades or some other extremely detrimental trading activity, consider the following:
- Identify a piece of music you hate (there must be a strong, negative emotion associated with this particular piece of music) and if you can’t think of any, record some horrible, random noise and make it so you can play it back to yourself
- On a demo account, chase trades over and over again whilst listening to the negative emotion inducing music/sound, loudly (without damaging your hearing)
- Each time you find yourself chasing trades, slam your hand in the door (just kidding)
What we’re doing here is creating a new neuro association that links poor trading decisions to something very unpleasant, via one or more of our senses. Our brain’s natural reaction will be to prevent this kind of behaviour in the future (if it was unpleasant enough), as last time we acted in this way, we experienced pain/negative emotion in the form of very unpleasant music/sounds. New neuro associations are created all the time, so why not grab the wheel and use them to our advantage.