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Random Rewards, Mind Traps and trading with Scared Money will undermine your ability to follow a trading plan, leading to additional Procedural Errors such as reactive trading and intuitive trading.

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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 Procedural Errors, which are natural human tendencies made much worse by Aversive Conditioning and Random Rewards. Follow the links to read about the other causes.

 

PROCEDURAL ERRORS

Random Rewards, Mind Traps and trading with Scared Money will undermine your ability to follow a trading plan, leading to additional Procedural Errors such as reactive trading and intuitive trading. Ultimately, this results in excessive risk aversion and negative expectancy from emotional wounding.  

Lack of a Trading Plan
An awareness of risk stimulates planning and rule-based behavior. You wouldn’t jump out of a plane without being sure of the exact procedure for opening your parachute and having practiced it on the ground.

If you assume trading is easy or that you already have the necessary skills to trade successfully, then you will fail to formulate an adequate trading plan and fail to develop the skills to execute it flawlessly. You will be tempted to leave too much to discretion. In trading, discretion should be only relied upon by advanced traders. For most traders, discretionary trading exposes you to the risk of random reinforcement, which produces a chaotic and even addictive state of mind. Hello Las Vegas.

Reactive Trading
Rules give structure to an otherwise chaotic flow of information and enable traders to be proactive. Traders without a clear set of rules will find themselves riding an emotional roller coaster, at the mercy of his or her instinctive emotional reactions to market movement and to gains and losses. These reactions are rarely conducive to profits.

The market is setup to stimulate primitive emotional reactions from reactive traders and take full advantage of them, without mercy. No wonder Jim Cramer uses the cry of a baby as a sound effect on his Mad Money Show.

Intuitive Trading
Intuitive trading is a natural response to excessive randomness and non-linearity in the market. But making informed guesses is not the same as formulating a rule-based pattern-recognition system that gives a trader a true edge. Without a rule-based plan, intuitive traders expend a great deal of energy mindreading the market, which will not improve your odds of success.    

Risk Aversion
Once trading becomes associated with painful experiences due to these procedural errors, traders become overly risk averse. Because risk cannot be eliminated from trading, the inability to tolerate the elevated levels of risk works against you. It makes you late in pulling the trigger or makes it impossible to stay in a good trade and let winners run. See the Random Rewards and Scared Money sections for more details.

 

 

BOTTOMLINE: To trade successfully, you need to reduce procedural errors to minimal levels.  My FREE Risk Profile is one way to evaluate whether you are prone to make procedural errors.  My coaching program will help you eliminate Procedural Errors.

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