Most People Do This in Their Trading – Make It Your Competitive Advantage
Know the feeling?
You enter a trade and feel your heart racing as you watch the price move underwater.
You've made a mistake and have no choice but to crystalize a loss.
Suddenly price moves as you'd planned. You jump back in with a feeling of excitement and relief. You'll make that loss back and some in a minute.
But price moves against you for a second time and it's another loss.
You're feeling drained and frustrated. Agree?
In a minute you're going to learn:
Why it happens
How you avoid it
And how you monetise it
There's a part of your brain that can overpower rational thinking, logic and even the will to live.
Psychologists James Olds and Peter Milner inserted an electrode into a region of a rat's brain, later called the pleasure centre.
Rats could self-administer an electrical current to the region by pressing a lever. The sensation was so pleasurable that they'd endure the pain of an electrified grid to get their charge.
The rat ignored food and drink and kept pressing the lever until it died of exhaustion.
The scientific name for the pleasure centre is nucleus accumbens.
When stimulated, it releases the feel-good chemical dopamine, responsible for energy, motivation and drive. But it's the timing of its release that will intrigue you.
Surprise anticipation of a reward triggers the release of dopamine.
In the early 90's, Wolfram Schultz, (Professor of Neuroscience at Cambridge University), and his team had a revelation.
To an unexpecting monkey, revealing a piece of apple sent the monkey's neurons wild. The feel-good chemical dopamine was signalling a reward to the brain.
But the dopamine neurons stopped firing when the monkey realised the treat was on its way. The key to dopamine release is surprise.
A conflict occurs when you trade. It's your innate human tendency to find a pattern amongst the randomness of market behaviour. And in the struggle to predict when a reward will occur your dopamine neurons' level of activity increases.
Ever wondered why you took a trade for seemingly no reason? It turns out that stimulating your dopamine neurons is the root cause. You'll see why in a minute.
The MRI allowed us to see dopamine in action.
In the first experiment, Dr Hans Breiter of Northwestern University and his team administered cocaine to a cocaine addict.
Where you see red and a dot of yellow - that's right on the nucleus accumbens - these colours represent the turning on of your reward system.
But you'll find it fascinating the release of dopamine - your core reward system in action - occurs in anticipation of receiving the cocaine.
What other things besides drugs turn on this system?
The next experiment involved subjects playing games of monetary reward. None of Breiter's team predicted cocaine addicts anticipating a cocaine infusion looked exactly like healthy control subjects anticipating a monetary win.
Anticipation is fundamental to your experience of reward.
When you trade, you repeat going through an experience of anticipation.
Like the rat, each trade is a jolt in electricity from your reward system.
This is all important because...
In his 1987 letter to shareholders, Warren Buffett said: "If you've been in the [poker] game 30 minutes and you don't know who the patsy is, you're the patsy."
Every day the cocktail of looking for patterns, reward anticipation and the associated neurochemicals gets expressed by people buying and selling without knowing what's driving their actions.
Skilled traders know this and profit from it.
Each of the trade sequences below consisted of a hypothesis for a long trade opportunity.
But preceding each long trade was a short trade to take advantage of the traders who jumped in prematurely and lost.
And whether it was yesterday:
Or the day before:
Or even 3 years ago:
It occurs very frequently.
But the bars on the charts don't tell you who the traders buying or selling are or what's motivating them to do so. Correct?
So how can you tell?
First:
If we use driving a car as an analogy - it's quite a few reps before driving your car became unconscious. You know - like when you're suddenly shaken realising you can't recall the last 12 minutes of your journey because you were completely on autopilot - right?
This is why honing in on one playbook trade at a time is so important.
You see:
When you focus all your time on one playbook trade instead of a whole bunch of trades at once - that trade becomes unconscious much faster.
And once you're no longer preoccupied with processing the mechanics of the trade - your full suite of cognitive functions can pay attention to:
Watching for all parameters of your playbook trade to show up permitting you to take the trade.
Simultaneously noticing all of the pattern-based mumbo jumbo your mind innately produces that's behind the voice that says "enter"
Using your playbook trade as your defence against this voice (not a playbook trade? Can't enter)
And noticing all of the traders unaware of how they're succumbing to entering into what will be a losing trade.
Second:
Ever been to an art gallery?
When you visit an art gallery, you'll see someone sit and stare at a painting for 20 minutes. What are they looking at?
They're looking at what you can only see if you are a painting aficionado. Right? And trading's the same.
Below is my trading station.
Guess what?
Almost every window shows data for the same instrument. I'm looking at many different layers of the same onion. Makes sense?
Oh man that seems daunting.
For all of the trades above I simultaneously walked a small group of traders through what the other traders in the market were thinking, what actions they would take, and how to trade amongst them. With sufficient immersion they moved quickly to replicating the same concepts.
So it's possible to have someone show you how to do this in a way that enables you to get on top of it in a tight time frame if that's what you want to do.