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Be Careful of Ego-Entangled Trades

Dr. Woody Johnson

What happens when you get the urge to do something in your trading that could otherwise be termed “bone-headed?” You may have done something like that as recent as your last trade. It’s when you know that the urge to “move that stop” or to “chase that trade” is a violation of your rules; but you do it anyway. Have you ever noticed that there was a small voice, maybe even a whispered voice, deep down in your head that said, “Pssst, yeah, go ahead and do it, you don’t want to miss out … do you?” That voice is coming from your ego and your ego can get you in a world of trouble with your trading.

Have you ever heard someone comment on another person’s behavior by saying that they have a big ego? What does it mean? Generally speaking when someone is saddled with this label it means that the individual is perceived as conceited, self-centered, perfectionistic, having to always be right, having difficulty accepting criticism, self-absorbed or arrogant. Of course they may exhibit all or none of these negative traits, but more than likely they may have an inflated opinion of themselves that gets between them and healthy relationships; one of which being their relationship with the market as they trade. The person in question may be a good guy overall, it’s just that they may be so caught up in self-protection (defense mechanisms that thwart an honest interaction with the environment) or self-promotion (inflated notions of one’s importance over others) that they become distracted and begin to distort data. Often, the individual that suffers from ego inflation issues also has a part of themselves that is not only aware that there are issues, but actually attempts to override the self-sabotaging behavior that develops as an outcome of self-defeating emotions like anger, fear, anxiety, stubbornness and impatience. It’s tantamount to having different parts of yourself show up in challenging situations that make mindful execution of the trade all but impossible causing impulsive entries, chasing trades, moving stops and other unwanted rule violations.

You don’t have to be mentally ill to have different personalities reside in your body? Actually, it is quite normal to have various “parts” of yourself emerge at different times depending on what is going on at the moment. If fact, these parts of the self speak different languages and see different things as well; which is why you may wonder how you made a glaring mistake after becoming seduced by your illusions of what the charts were really showing in the wake of a loss. This kind of personal and emotional volatility can wreck your trading account. Similar to the market, personal volatility is a direct reflection of the emerging emotions of the masses as they trade furiously, impulsively, compulsively and at times capriciously. The market is continually sending messages; messages about volume, momentum, and volatility. But, those messages are best captured by first attending to your own volatility so that you can see the charts as they are.

The financial markets are neutral representations of all the hopes, fears, and decisions of everyone executing a trade. When you trade you slip metaphorically into the skin of the market and see yourself in its reflection. And, of course every blemish, character flaw and weakness that you have is in that reflection, because you “express yourself” while in the markets.

The successful trader can “feel the markets” through insight and intuition that has been developed through countless hours of observing market charts; but she does not get lost in those feelings. The successful trader has an intimate understanding of the delicate balance between emotional intelligence, i.e., managing emotional volatility through protocols, routines and habits and tracking the mechanical data of the markets. They focus on doing the “right” things habitually (following trading plans, rules, money management and position sizing) as if their life depended upon it…and their trading life does depend upon it. In this way they set themselves up to get the right results habitually. They know that consistent successful execution is intimately related to mastering this process of focusing on what matters most. It becomes a Zen of trading by losing the ego attachment and using mind management tools that engage the subconscious to work “for” them rather than against them. This is accomplished by redefining the relationship to the trade. Your relationship to the trade becomes accentuated as in a business transaction with another human being; the objective is to be in the flow. Being in the flow means that you develop a detached interaction where you are not attempting to get each and every tick of a move, but on the contrary aiming to come away having executed well with a good return. To be and stay in the flow you must be self-aware and “watch” what you are doing. You want to activate your “internal observer” and this is accomplished by relaxing at every opportunity and creating the habit of “being in the moment; fully present and in the Now of the trade.” In this way you can maintain a fierce focus on what matters most and promote a shift from fear, frustration, irritation, and stressful tension to relaxation, mental clarity, and self-confidence. Doing this you will be better positioned to do the “right” thing in the trade. There are many, many internal resources that you have, some of which, you may not even be aware. Internal resources like for instance, the ability to discern chart details, see the big picture of the trade, initiate a mindfulness regarding supportive beliefs and others. But, it is very difficult to access and activate internal resources without first ensuring that your internal observer is online.

Activating the internal observer can be accomplished by doing the following:

Get up out of your chair and do something different; you might drop down and give yourself twenty push-ups

  • When you stand up again straighten your body
  • Take a good stretch
  • Take a few deep breaths, in this way you are dilating your arteries and increasing blood flow to your brain causing you to be more alert
  • By increasing oxygen to the brain and muscles you are slowing things down and initiating a “Relaxation Response.”

When ego investment and emotion rise, trading becomes a reflection of the ego, in other words defensive reactions to neutral events and inflated self-seducing illusions that really distort reality. Overly invested egos create a sort of delusion, and consequently, what you thought was a great trade was in reality a “fake out” or something that came from internal bias not the objective reality of the charts. For example, Jack, a novice trader, while in a position on the YM E-mini futures, violated his rules and failed to maintain a hard stop. It was on a day when the YM lost over 300 points. The second rule that he violated was to “think” that the ATR (Average True Range) had been breached and that since its average daily range was violated, it would “come back.” The third rule he broke, after finally closing out of the trade for a significant loss, was to believe that increasing his position size and essentially “doubling down” would bring him back to break-even in another trade attempt. Now this is a prime example of delusional, ego fueled thinking. The analysis was distorted by the emotional upheaval taking place after incurring the original loss.

So, your ego can really get you into hot water. You’ll want to get the internal observer involved early and often by being self-aware and wary of ego driven tendencies that come from unsupportive thoughts and emotions. Trading with your highest and best interests in mind is critical to your success. This hinges on promoting a mindset that uses mental and emotional tools and techniques that are designed to shake you out of that self-sabotaging delusion. Remember; as you trade it is important to identify what part of you is showing up to trade your account. Is it the strong, healthy, grounded, centered and focused part; or is it the fearful, frazzled, and fragmented part that is torn by ego driven thoughts and emotions? Monitoring your ego can keep you from getting into trade trouble. This is what we teach in the “Mastering the Mental Game” Online and On-location courses. Ask your Online Trading Academy representative for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading,

Dr. Woody Johnson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.