Lessons from the Pros

Specialty Skills

When Trading…It’s Best not to Think

What a crock! … you might be saying. You might also be commenting that thinking is critical to the trading process and that you must think to do well.  However, even though what and how you think affects all of your trading from start to finish, it is still a variable that requires monitoring and, where appropriate, you’ll want to curtail thinking as much as possible.

OK, we’re going to back into this, slowly, so it will make sense.  If you have been involved with OTA for any length of time you might remember the T+E+B = R formula — where T=thoughts, E=emotions, B=behavior and R=results or outcomes or consequences. This formula constitutes to some extent the rudimentary basis for Cognitive Behavioral Therapy or CBT.  It is the gold standard of psychological interventions and it is one of the ways that we approach supporting new traders at OTA.

Woman sitting at a laptop thinking.

Next, it’s important to point out that brain energy, which was first visualized and monitored using the fMRI (Functional magnetic resonance imaging), is not a visual anomaly.  See, thoughts are forms of beliefs, biases, values, perceptions and attitudes and they are activated in most cases by things like an attention getting event.  They are the initial progression of the brain firing neurons. So, say price action is moving towards your stop-loss.  When you perceive this, it will trigger an interpretation of the event.  The interpretation is cognitive processing (thinking) that categorizes the thought into how it will be acted upon.  The thought might be, the price is going to hit my stop and create a loss.  For most people, this prospect of loss is emotionally and psychologically unacceptable and, therefore, stress producing… In fact, you may have as an underlying belief ‘I must never lose’, which is activated by the perception.  This and other similar beliefs, for example, ‘I must not fail’, set the trader up for some very strong physiological reactions in the form of a racing heart, elevated respiration and muscular-skeletal tightening, to name a few.

The limbic system is the emotion producing part of the brain.  Some of the major parts of the limbic system are the hippocampus, hypothalamus, pituitary, amygdala and adrenals.  These are the parts that yell warning and begin to initiate feelings of discomfort like fear, anxiety, worry, anger and doubt. Now, thoughts are perceptions of the internal and external environment and these perceptions initiate, construct and determine the appropriate emotion, thereby triggering the physiological responses.

Free Trading WorkshopThis is important because when you perceive an event as painful, for example – the price-action moving towards the stop, it triggers an interpretation of the event. In this case the interpretation is, ‘this is going to stop me out and I’m going to lose’, leading to feelings of pain triggered by the underlying belief that, ‘I must never lose’. The ensuing conflict created by the expectancy gap of, ‘I must never lose’ vs. this event is going to cause me to lose is intolerable and promotes an urge or an impulsive reaction that is designed to reduce the discomfort or the pain.  This impulsive reaction is called a rule violation.  So, it is not now, nor has it ever been about the loss; it is actually about the pain and discomfort experienced when the limiting belief, ‘I must never lose, is triggered and the corresponding physiological response of agitation, irritability, tension, confusion, fear and anxiety drive the rule breaking behavior.

One of the ways to positively impact upon the system’s propensity to go negative resulting in a rule violation and consistent losses is to reduce the cognitive processing or the thinking.  This is because the whole dynamic or internal physiological and emotional reactions were predicated upon cognitive processing of the original event.

Now, the first thing to change is the type and intensity of your thoughts about the event which originally triggered the dynamic.  This is done by first identifying the thoughts associated with the emerging pattern of thinking, feeling and doing, then changing the thoughts in order that the beliefs about loss are revisited and modified.  This, of course, includes changing the interpretation that the price-action is going to hit your stop-loss… because reality is, it may or might not.

As you change your thinking and underlying beliefs, you also change the way that you respond. As a result, it becomes possible to change the outcomes by fiercely focusing on the process or what matters most in the trade.  In this way you’ll start to change the underlying belief from, ‘I must never lose’, to, ‘losses are a part of doing business’ and ‘every small loss gets me closer to a big win’. The goal is for these new beliefs to form the alternative foundation of your thinking so that you are prompted to use alternative behaviors in the process.

A great way to achieve this goal is to make a list of the trade behaviors that you want in your routine.  The routine is crucial because this is where you write the list, prioritize it and use it as a check list.  One of the best things about having a credible checklist is that it reduces thinking because as soon as you do one of the items on the list, you’ll cross it off and move to the next item.  Every time you cross one more things off your list, dopamine – a hormone and neurotransmitter is released and you’ll feel a boost in self-esteem and accomplishment.  Additionally, another of the more essential benefits of crossing off the checklist item is that you will automatically and inadvertently begin to build new habits as you repeat the process.

So, there you have it.  If you reduce the thinking that prompts negative emotions you will interrupt the energy that drives unwanted behaviors; and this is done by A) changing the thoughts that are part of the problem and B) reducing the thinking associated with limiting beliefs by using a checklist.  This is what we teach in Mastering the Mental Game online and 0n-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.

Joyous Trading

DISCLAIMER 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.