Why Is Trading Difficult?
|January 30th, 2010, 02:09 PM||#1 (permalink)|
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Why Is Trading Difficult?
Is it? Or are we making it difficult? I guess this is the eternal question!
In order to get the answer to the question I guess we have to dive into
the construction of our inner mind and the way it's behaving out there.
Let me give you a couple of examples that includes irrational thinking.
Among a deep see of tests made out there, there is one that sticks out
that explains irrational thinking in a way that's making a lot of sense to us.
Or does it?
They took a lot of people and divided them into pairs. They gave them
(they are the people conducting the experiment) 10 dollars.
Along with the 10 dollar came two rules. Rule no 1 was that one of the
partners were to decide the amount to be divided into two.
And rule no 2 was that in order to keep the money the partner
that didn't participate in the decision had to agree to the decision
taken by the other partner in order to keep the money.
That is in order to get get any money at all.
In those cases where people decided to share the money 50/50
there weren't any problems at all. Everyone got to keep the money.
The interesting part is that, in those cases where the deciding
part decided to keep more then 50 % of the amount to him/her self,
the other deciding part decide to a degree of 100% not to go
along with that decision, meaning that nobody kept any money at all!
Now, if we look at the irrational part of this.
It tells us a lot! It tells us that 2 dollars is more then 0.
But we seem to base our decisions on justice instead of the rational
thinking that ought to have won in this case.
Now, if we translate this into to trading terms, we find a factor
that's reminding us a lot of this behaviour. Picture yourself gaining,
let's say 20 ticks or more. How come you're almost always
ending up with probably less then 0?
Somehow we get caught into this because the factor of injustice
is making itself present when we start giving back to the market.
We get stuck! We had a gain of 20+ ticks and now we're giving it back.
It's not fair!
Other experiments shows us that when we get involved into a loss,
then a part our brain lights up and causes us pain!
If we take these two factors and mix them together,
do we then get the most common feelings that happens in a traders life?
I would say yes!
How about life? It's been said that life is pretty easy because
it's only about two things:
1. We do everything in our power in order to experience pleasure
2. Again we do everything in our power in order to avoid pain!
What is injustice? I believe that it really doesn't matter in which
way we put it or how we perceive it! The effect of it is pain!
Can it really be that simple? I mean does these rules aply to trading?
Do we get out there with the intention of gaining pleasure and avoid pain?
Take a look at your own life, and try to translate these factors
into everyday life. I believe you'll be amazed.
It's also been said said that in order to become a good trader,
we have to learn how to loose! Am I now telling you that in order
to become a good trader you'd have to learn how to stand pain?
And if that's the case how would that be possible to get it into
the equation of the way our life is unfolding.
Well, it isn't it. And the more you look into the way the markets are built,
the more you start to get into conspiracy theories out there.
By conspiracy I mean that it is somehow constructed (read manipulated)
by the people conducting it this way.
Would that get us into the most rational thinking ever?
I mean would the most rational way to aproach the markets be
- STAY AS FAR AS POSSIBLE FROM THE MARKETS IN ORDER TO BEAT THEM- ?
Yes and no! But if we approach the NO answer we'll get the rational
side of why there's only less then 5 % wining in the markets.
A distant approach to make us understand why and how these
people function, is that they know something that regular people don't.
Or that they're somehow supernatural.
Would that be the truth? Or is there something beyond that?
Let's get back to our brain and the mind. A lot of research points out
to us that we have a rewarding part in our brain that leads us
to actions that belongs to the, or let us put is this way instead.
There are certain actions that activates that part of our brain!
That part of the brain being the reward centre. Think of drugs.
People that take drugs, keep on taking drugs very much because
they want that part of the brain reactivated in order to get their plasure.
In other words, the intention of our actions are engineered due
to the fact that we constantly seek for pleasure/reward .
So far, we don't have anything that aims to get us into trubble in our trading.
We plan our plan, involving entry, patterns, etc, with the intention
of getting our reward. I don't think that there's anyone out there
that have had or will ever have an intention of not getting money
out of his/her trade.
When we're in the trade. We still have the intention of getting the reward right?
That's what we're aiming for!
Unfortunately that's the part were we get lost! Remember the part
that has to do with us doing everything in our powers in order to avoid pain!
Well, that when we get busted.
So, I'm in a trade with the intention of getting a profit (read stimulation).
That trade while it's happening can either turn into an immediate looser
or an immediate winner. Somehow it would be easier if it got into
an immediate looser, because then it would give us the
opportunity to re evaluate.
Unfortunately that process is also based on a further continuation
of our built in reflex that has to do with the need of avoiding pain.
Meaning that, in case we've taken a loss, we're getting our focus
due to those factors, automatically on the process of avoiding pain
by taking the "appropriate" action towards getting pleasure. In other
words, we're stuck in a labyrinth. All we think of is to gain pleasure.
Because we lack the right filters in order to observe the information
the way it actually is unfolding, meaning that in more then 50% of the time,
it is unfolding in the oposite direction of our previous understanding or belief.
Think of it this way. You missed out on your trade because you
were wrong. You misinterpreted the market. I know, that a lot of people
will want to interfere here and say that the market suddenly changed
its direction and that their analysis was correct from the beginning.
I'm sorry to disappoint those of you that is thinking that way, but being wrong,
simply means that you were wrong about interpreting the chaos
that is present out there in that particular moment.
In order to keep out with the chaos you'd have to adapt to the chaos,
meaning that chaos is chaos, and one of its premisses is that it
never presents any certainty about its next move, and it can also
change suddenly those present presumtions.
That too gives us one more variable to play with. Uncertainty!
What is that! Well, nothing else than the simple fact of lack certainty.
Can you beat that?
I don't know! Can you?
Let's get back to our previous discussion about pleasure and pain.
If you've taken a loss, your focus is never going to get back to ones
pure perceptions of what is really taking place out there.
You'll get stuck somehow. The task of your focus is to get to that
reward center of the brain and light it up.
Because of the lack of "real" perception this process is going to
lead you forward by reimplementing old information into your system.
What does this mean? Well, you're going to keep on looking for the
"right" entry that was present in your trading plan, telling you that
the "market has to go up" or down.
Will that keep you away from the real perception of what's really
happening out there?
You tell me!
How about those cases when you get your 20+ ticks, ending up
by giving them back to the market?
What kicks in then, is the part of injustice. The pain makes itself
present again. You loose your filters and you concentrate on
that rewarding centre. If only I can get my, well maybe not 20+
but maybe 15+ then I'll be happy. And the market continues down.
From 15+ you get down to 10+ and so on till you've ended on minus.
If you've ended on minus, you'll get into that mode described above.
So, what the solution to all of this? By the way, don't believe them
when they tell you that only 5% are constantly making money out there.
If you do that, it's like painting mount Everest in front of you.
Meaning that you've allowed your expectations to be led by a
random outcome. Go on thinking in terms of,
"How can I become one of those 5 %"?
SO, how can I? I'm going to give you two solutions.
1. Narrow the amounts of trades to the number you can tolerate.
Meaning that you will never find any comfort in making a lot of trades,
as long as you stick to your plan. You'll only end up with a lot of over trading. And:
2. Decide in advance -by mathematically calculating the right
Risk Reward Ratio- your profit target, and implement that as an equally
important part in your entry/trading plan.
That ought to keep you out of irrational behaviour!