Yesterday I talked about cognitive bias and learned behaviour and how they are fighting us when we trade. Our natural aversion to loss can make it hard to run winners and cut losses early. Greed has advantages for the survival of the species, but can be catastrophic when trying to execute a trading strategy profitably. Frustration at having our stops continually hit can make us give up and walk away, and thus miss out on the big winner that more than makes up for the many small losers. In short, our brains are screwing us over.
It’s time to take control.
Have you ever seen those judo experts who take on a challenger about three times their size and somehow manage to throw them through the air as if they were made of cardboard? It’s amazing to watch. I have a friend who is tiny, but who regularly throws around blokes twice her weight. She’s not stronger than them, not even close. Her advantage is her technique and her experience. She studies how her opponents approach, she anticipates their next move, and then she wrong-foots them and uses their own strength and momentum to hurl them over her head.
Using your adversary’s strength is smart. The stronger the enemy, the harder they fall when you wrong-foot them.
This is how we overcome millennia of evolution. We’re no more able to erase our mental programming and carve out new neural pathways than my friend is able to become twice her height. Instead, we let that programming do exactly what it’s trying to do, and then step in and wrong-foot it at the crucial moment.
Here’s an example. One of our built-in cognitive biases is called optimism bias. Very briefly, optimism bias works a bit like an email spam filter for our brain. It sieves information and removes anything it thinks we don’t want to know. Bad stuff. Stuff like “this trade isn’t working out the way it should.” This bias can be so strong it can cause us to physically not see exit signals on a chart. Sounds crazy, but it really happens.
How do you overpower something that you can’t even see? You don’t. You wrong-foot it and use its strength against it. Overcoming optimism bias is ridiculously simple when you know how: you flip your chart upside-down.
Again, sounds crazy, yes? Perhaps, but it works. If your upside-down chart says that your trade is working and you should be staying in, then you’ve just used your optimism bias to highlight the true direction of the price rather than hide it.
This trick sounds like it shouldn’t work, after all, you know the chart is upside-down because you turned it yourself. But your cognitive biases work at a lower level than your conscious mind. They’re easy to trick when you know how.
Of course, optimism bias is just one of a whole host of cognitive biases, learned behaviours, and emotions that we have to deal with. But for every bias or emotion that’s standing in the way of profit, there is a way to subvert it.
In my last book, How To Day Trade Forex For Profit, I talked a bit about cognitive biases and some of the tricks to overcome them. Since that book was published in 2012 I’ve gone way deeper into the trading mind. Over the past three and a half years I’ve worked with a vast pool of traders to develop new techniques that don’t just bypass fear, greed, and other destructive emotions, they actively recruit them, brainwash them, and have them do our bidding like a powerful army.
More about that, tomorrow.