Trading’s easy, right? All you do is get a strategy that wins more often than it loses, or wins bigger than it loses (or preferably both), then you buy when it says buy, and you sell when it says sell. What could be simpler?
Well, quite a lot of things. Because it turns out that following a strategy isn’t as easy as it sounds. Risking money by clicking the buy button means overcoming uncertainty about the outcome. It means burying any fear of loss. The same goes when it comes to exiting. Who hasn’t hung on to a losing position longer than they should in the hope that the trade will turn around and become profitable? And who hasn’t jumped ship early, eager to take profit rather than risk hanging on for a bit more?
Sometimes it seems as though we’d be better off if we could become robotic, devoid of fear and other emotional triggers like greed or self-doubt. Taking necessary losses would be a breeze if we didn’t care. But our humanity and our insight are what allow us to read the nuances of the market. They give us our edge because they make us infinitely adaptable.
So emotion for a trader is a double-edged sword. It helps as much as it hinders. Take away the emotion and we lose our edge. Live with our fear and greed, and we can become paralysed at crucial moments, unable to take a loss or accept a risk.
I firmly believe that this conundrum is the single biggest barrier to success for unprofitable traders. Learning a trading strategy is easy. Overcoming the hurdles inside our heads is hard. It’s a question of self-control, like giving up smoking or dieting.
This ‘head stuff’ is something I’ve spent more than a decade studying. What I’ve discovered is that human beings are hard-wired to fail in the markets.
You see, our brains have been shaped and moulded by hundreds of thousands of years of evolution. Successful trading requires taking actions that directly contradict our mental programming. It’s not our fault, stock and futures markets are a new phenomenon. Evolution hasn’t had time to catch up with modern finance. No doubt in another fifty thousand years or so, our descendants will be highly adept at running winners and cutting losers short without a second thought. That doesn’t help us much today though.
Are we all doomed then? Will those traders who possess a mental fortitude of olympian proportions be the ones to enjoy all the profits, leaving us mere mortals to fight over the scraps as we battle our inner demons of fear and greed?
It turns out those inner demons can be put to good use. We don’t have to fight a fear of loss when it comes time to buy or sell. We don’t have to be a slave to frustration when would-be good trades go wrong for no apparent reason. We can and we will overcome these challenges.
This post has gone on for long enough though, so I’ll talk more about how next week.