EZBreakouts

The mind can play tricks on us. Hindsight Bias causes traders to underestimate the difficulty of trading, while Competency Bias causes them to over-estimate their ability to do it.

  

The following information on Trading Psychology is the life work and passion of Dr. Kenneth Reid.  Kenneth is a practicing psychotherapist, trading coach and trader. He also works as a Senior Analyst and Editor for three national stock market newsletters with thousands of subscribers. He has appeared on CNBC and written for Forbes.com and SmartMoney.com.

 

This page describes Mind Traps, which are natural human cognitive errors made worse by Aversive Conditioning & Random Rewards. Follow the links to read about the other causes.

 MIND TRAPS

The mind can play tricks on us. Hindsight Bias causes traders to underestimate the difficulty of trading, while Competency Bias causes them to over-estimate their ability to do it. These are mental banana peels that set you up for a fall.  

HINDSIGHT BIAS
Trading appears easy because when you look at a chart, the attractive low-risk entries and ideal exits are obvious, in retrospect. The false impression that entries and exits would also be clear in real time is created by “Hindsight Bias,” which is the illusion that the past was predictable.

Real-time trading does not happen on ‘cold charts,’ but rather at what Alan Farley calls the “hard right edge.” The experience of trading is ’hot’ not ‘cold.’ It happens fast and we always lack “confirmation.” Paradoxically, once you have “confirmation,” you no longer have a low risk entry. Trading well is about getting comfortable with uncertainty; being willing to take action when one does not know quite enough.  

COMPETENCY BIAS
Many people who come to trading have been successful in other careers and think their business skills will help them succeed. Unfortunately, this is rarely the case. Neither prior success, IQ, market savvy, maturity, creativity, management skills nor any other business leadership qualities will prepare you to succeed as a trader. Instead, they are more likely to set you up for failure. Why?

The world of modern business rests on principles of social order and behavioral predictability that simply do not exist in the trading environment. For example, if you drive a car, you have been conditioned to expect a certain minimal amount of orderly behavior from your fellow motorists. Along with you, they will stop on red and go on green; they will stay inside the white lines; they will mostly drive near the speed limit.

That orderliness and predictability is just not present in the market environment. Quite the reverse. One is much more likely to encounter paradoxical and unpredictable reactions to news and other obvious catalysts. Markets can reverse on a dime for no apparent reason. Trying to “make sense of the market” can drain all your mental reserves.

Overall, the ratio of signal to noise is much poorer in the markets and cannot be filtered to achieve a comfortable predictability. Perhaps the best preparation for trading is martial arts or combat experience because combat teaches us to expect the unexpected.  Conclusion: Although you should approach trading as a business, it is a business unlike any other. Trading is a business in which you have a single customer who you entirely depend upon and who constantly changes his mind about what he wants, when he wants it and how much he will pay. Can you learn to not only tolerate that level of chaos, but thrive on it? If you want to be a professional trader, that is your challenge. 

  

BOTTOMLINE: To trade successfully, you need to eliminate Mind Traps. My FREE Risk Profile is one way to evaluate your susceptibility to Mind Traps.  My coaching program is focused on installing a mindset that is effective for trading. Email me to schedule a FREE 15-Min. CONSULTATION or click here to sign up now.

If you take no other action today my friend, be sure you order my premier neuroprogramming MP3 ACCESSING THE WINNING TRADER’S MINDSET for just $99. Nothing is more important than becoming proactive about your mental-emotional state while trading. It could save you thousands!