This mental adjustment might significantly improve trading performance.

To achieve success as a trader, it is necessary to alter your thinking and behavior. Today, I have a highly significant lesson to impart to you regarding this matter.

Nov 22, 2023 - 15:45

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This mental adjustment might significantly improve trading performance.

Imagine yourself having the ability to trade just like the most prosperous traders in history by simply plugging a piece of software into your mind. Unfortunately, we cannot download programs to instantly enhance our minds, like Neo in The Matrix. To achieve success as a trader, it is necessary to alter your thinking and behaviour. Today, I have a highly significant lesson to impart to you regarding this matter.

The fact that your brain can deceive you to such an extent that you remain unaware of its presence is something that the world's foremost traders are aware of, either intuitively or through their experiences. Given that you cannot simply download new software and transform into a robot like Neo, the best course of action is to refine your higher-level cognitive abilities to a level where your innate instincts do not impede your trading endeavours.

You should start by learning about these two brain regions.

Each component of our cognitive faculties is assigned a distinct responsibility. For instance, certain regions serve as reminders of our fundamental necessities, such as the significance of nourishment, affection, and participating in other gratifying endeavours. These long-established and influential brain areas may not always be the most optimal choice when it comes to trading. Despite being unaware of the ongoing events, many traders allow these antiquated brain sections to dictate their actions. Have you ever felt your heart race with anticipation as you prepared to enter a trade based on the desire to capitalise on a strongly trending chart? In such instances, your primal brain regions take over.

The more advanced abilities of our brains encompass strategic planning, logical reasoning, mathematical prowess, and so forth, while the more primitive functions entail the fight or flight response as well as the pursuit of rewards and cravings. It is of utmost importance for traders to skillfully amalgamate these two cognitive processes in order to achieve optimal success.

Neuronal processing

The ancient brain regions I previously mentioned include the reflexive brain system. Due to the rapid operation of this system, it is highly unusual for one to react before their conscious brain even acknowledges the need for a response! For instance, swiftly swerving to avoid an unknown road hazard is an example of this. As mentioned earlier, a trader's downfall often arises from the reflexive system taking the lead in making judgements and decisions. Therefore, emotions and intuitive feelings serve as the foundation of this system.

Let me clarify that I am not suggesting it is inherently malicious; in fact, I have written articles on trading based on gut instincts. Knowing when to trust your reflexive trading instincts and when to exercise restraint is a crucial skill for successful traders, as we will explore in the subsequent section.

The mind that reflects

In opposition to the automatic framework, the brain's pondering systems operate in a comparable manner. The cutting-edge and advanced part of your brain, known as the prefrontal cortex, is situated just beyond your forehead and bears much responsibility for this process. The interconnected neurons in this specific brain region enable you to draw general conclusions from small bits of information, categorise your experiences in meaningful ways, speculate about the world around you, and formulate plans for the future.

"Does my investment portfolio possess adequate diversification?" represents one of the more intricate inquiries that the pondering method frequently tackles and resolves. Alternatively, as Zweig eloquently expressed, "What should I propose to my wife as a gift for our anniversary?"

Excessive use of any substance is harmful.

Excessive indulgence in any activity can have detrimental effects, as the age-old saying suggests. If one allows their automatic or contemplative cognitive functions to dictate their trading decisions, they will repeatedly incur financial losses. It is common knowledge that when we excessively rely on our automatic cognitive systems, we become agitated, our heart rates escalate, and we make imprudent choices such as engaging in excessive trading or taking on excessive risks, among other ill-advised actions.

If one exclusively depends on their automatic cognitive system, which is what most traders do when acting on impulse, they are essentially gambling rather than engaging in genuine trading. You might assume that the contemplative cognitive system is not harmful when utilised excessively. Is that not so? That assumption is completely erroneous. Overthinking is indeed possible and occurs frequently. When you come across a promising trade opportunity, you might become paralysed by excessive contemplation and end up talking yourself out of it due to excessive analysis of the market. I have written an essay on this phenomenon, titled "Analysis Paralysis in Trading.

"It is possible to deceive oneself into believing that a trade is infallible and end up risking one's entire account, which is undeniably a highly perilous and catastrophic strategy. This serves as yet another reason why excessive pondering is detrimental.

Trading with the mentality of a machine:

To succeed in the trading world, it is crucial to embody both human and mechanical qualities. Just like the human brain's reflective system, robots operate in an impersonal, dispassionate, binary, and objective manner. The reflective system serves as the origin of all human emotions, thoughts, and sentiments. The key challenge lies in harmonising the different parts of our brains, ensuring that no single aspect becomes dominant. Let's consider physical activity as an analogy.

Engaging in exercise can evoke strong feelings of motivation, both during the actual act of working out and the satisfaction that follows from seeing progress. However, many individuals struggle to consistently endure the physical demands that come with it—perspiration, discomfort, and even pain. As a result, they opt for short-term relief instead of embracing the long-term benefits. Interestingly, when one perseveres through the initial discomfort and remains dedicated, one can develop a peculiar fondness for the challenge.

This is when both hemispheres of the brain work simultaneously, creating a harmonious union. The reflexive brain, fueled by endorphins, strength, fitness, and overall better health, finds greater pleasure in these activities compared to idleness, potato chips, and television. It is your reflective brain systems that inspired you to plan your fitness journey, and it is your self-control and dedication that enabled you to follow through.

I will summarize the important point of trading:

If you succumb to the immediate temptation of "quick cash" by trading excessively, employing excessive leverage, and neglecting to adhere to your trading strategy, you're relying too heavily on the reflexive approach. Before engaging in any trade or transaction, take the time to carefully review your trading plan. To achieve rapid or any form of wealth accumulation, it is imperative to exercise control over your impulses and approach the market systematically rather than impulsively. The initial step involves utilising your reflective mindset to plan ahead. Develop the practice of evaluating each potential transaction against your trading plan using a comprehensive checklist.

Prior to executing a purchase or sale, take a moment to gather your thoughts (though don't engage in excessive overthinking). Step away from the computer and savour a day of relaxation once a deal is concluded. Prepare in advance, jot down your thoughts, and commit to faithfully following your plan. While trading, feel free to trust your intuition, but ensure it remains balanced by integrating it with your analytical reasoning.

In summary

At the beginning of the movie, Neo discovers that something is not right when he realises that he is trapped in the matrix. This caused his brain to be flooded with positive computer simulations, which greatly stimulated his reflexive brain system and kept everyone under the control of the system's creators. However, Neo was not satisfied with this, and he yearned for the truth. Once he escaped from the matrix, he started using both his reflexive and reflective brain systems, allowing him to truly excel.

Just like Neo, your trading skills in the financial markets should be exceptional. You must understand that most traders end up losing money because they rely too much on their reflexive brain systems. This is something you can easily avoid by taking a proactive approach. You need to disconnect yourself from your emotions and gut instincts when making market decisions. Making money in trading requires a different mindset. It may be challenging at first, but it gradually becomes easier and more enjoyable with time, eventually becoming rewarding.

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