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The Trader’s Couch Series explores trading psychology and behaviors that undermine trader performance. Tips, tricks and techniques are offered as potential solutions to overcome these roadblocks to consistent profitability.
The Trader’s Couch
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Tightly held beliefs often leads to trouble
Have you ever had the experience of believing in something very intently, even passionately, for a long period of time, then being overwhelmed with contrary facts to the point of capitulating on your long-held beliefs? I think we all have if we’ve lived life for any period of time. I will give you one example. As a young business person, there was this one potential customer I was stalking. My circle of business peers, with a lot more experience than I, gave me a stern warning about my target. “Those people are scam artists” “Those guys will rob you blind and they don’t pay their bills” . So for 3 years I believed that narrative and did not pursue them as potential clients. Then something happened. That potential client sought me out and expressed interest in doing business. I took a chance on them despite the warnings. The relationship started tentatively at first, but grew, then blossomed over time. No scams, no unpaid bills, nothing but good business. My prior beliefs couldn’t have been more misguided or misplaced. I let 3 years go by holding onto an idea that was flawed. It cost me 3 years of profits. Now when others inform me of their opinions of other people I nod politely, then find out for myself.
Zen Essentials shines light on a universal truth. Clinging to beliefs blinds us and makes us largely unavailable to see or often even consider an alternate reality. It closes us off because we have our ego to protect. Some people find it extremely humiliating to be proven wrong. So much so, than not even a mountain of evidence will convince them to change their mind.
What’s this got to do with trading?
To be blunt, everything. I heard somebody say “The problem with the bears is that they never turn bullish“. There is some truth to that. We all know about perma-bears and perma-bulls. Traders who identify and cling to a market thesis, no matter what. Even self-identifying as either a bull or a bear lays a very subtle, but powerful, trap. If we let everyone know we’re a bull or a bear on social media or within our circle of traders what we’ve done is to intertwine an emotional commitment and our ego into our market posture. Over time, it gets harder and harder to extract ourselves from that position. Bulls don’t see downtrends, they see big dips. Bears see up trends as counter-trend rallies. I hope you see the point. These traders literally can’t see the other side. It causes psychological pain to do so. They have to admit they were wrong, and many traders simply can’t do that.
Self – identifying with bull or bear labels can lead to trouble
Going forward, I want you to try this. Stop self identifying as either a bull or a bear. It’s limiting at best and harmful at worst. Do this instead. Look at individual stocks and the market as a whole in terms of “the path of least resistance”. For instance: Chris are you bullish or bearish $XYZ. “Well to my eye, the path of least resistance is lower at this time” . No emotional commitment, no ego, no time commitment, no psychological investment in the position….simply an observation at one point in time. If tomorrow, the path of least resistance is higher, I can easily migrate both my posture and market positioning to a bullish stance. If I am not sure, I can step aside. Absolutely no internal conflicts nor public conflicts to interfere with changing positions.
Imagine market price action as a flowing stream. The stream can be flowing gently or more like a raging river. Your job as a trader, in large part, is to identify the direction of the stream and to a certain degree, it’s pace. Is it flowing gently higher in steady bull mode? Is it in waterfall mode or simply drifting lower? Now picture yourself as a leaf on that stream. A leaf is agnostic. A leaf does not care if the stream wanders left or right, up or down. A leaf has no bias or preconceived notion of where the stream ( price ) “should” flow. It is perfectly happy to ride gently on the surface letting the stream find the path of least resistance as water always does. You need to be the leaf. You should be perfectly happy riding along a bullish flow and then just as easily migrate to floating on a bearish flow should the currents change. For me, its a perfect analogy. The point where traders begin to let bias’, bull / bear labels, and narratives creep into their trading, is usually where the trouble begins. When I think back to my troubles in trading is when I’ve held onto ideas too long, and not being open to contrary price information.
Pulling it all together
Let’s crystallize these ideas as bullet points.
- Tightly holding onto beliefs blinds you to new and potentially very profitable information.
- Be wary of other’s opinions; do your own analysis and you may discover an alternate reality than those espoused by “experts”
- Trash the Bull / Bear label. It locks you into narratives that may be hard to extract yourself from.
- Think in terms of the “path of least resistance”. That thinking will allow you to turn on a dime when new information comes to light.
- Visualize yourself as a leaf ( price) floating on a stream ( market price flow ) . More than happy to follow the flow either higher or lower with no internal or external conflicts to prevent you from making a fluid shift from bullish to bearish as price leads the way and dictates your market position.
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