At our recent gathering in Perth we looked at quite a bit of the trader psychology that occurs around certain moves. LB has an exercise where she puts up a given chart with the sort of generic responses that traders generate at each phase of the move. The audience is then asked to critique what is being done incorrectly. During the session one of our mentoree’s Con came up with an interesting observation that had not been raised before. He made the point that for our archetypal trader their emotions were their trading system – that is they were reactive to the market based upon what they were feeling. This is instead of being proactive and basing trading decisions upon some form of logical framework.
Each win or even the hint of a win was greeted with exaltation and each loss with absolute despair. This then guides the traders actions as they try to defend these feelings by whatever technique is available, even if that technique is illogical and counter-productive. Such a situation is to be expected in a novice trader because they have fallen victim to their own psychology (this is a psychology we all possess). All trading situations we encounter are filtered by our emotions first, then they are subject to logical interpretation. Our emotions are the initial drivers of any decision that is made – in novice traders they become the only drivers. In those who have been trading for awhile these drives are ignored and the system is left to take over. Powerful instincts were a valuable survival strategy cognitive processing was a luxury that could not be afforded in times of stress.