In my last article, I talked about how traditional trading psychology is dead, and that there is another version called trading psychology 2.0. In today’s article, I’m going to talk about bias, the brain and evolution.
Simply put – your brain is biased, in trading and life. It has a default tilt, and that is towards the negative.
Unless you’ve specifically trained to rewire this tilt, your brain has a massive bias towards the negative. Why?
Evolution & Survival
Over millennia, our brains were wired to react first and respond later. To quickly assess threats with alacrity vs. observing positive stimuli. We have gotten so good at recognizing ‘threats’ that we can react to them instantly.
This mechanism is called the ‘fight or flight’ reaction. However, recently we’ve learned that we have one other ‘reaction’ to such ‘threats’. They are: Fight, Flight, Freeze.
Because of this, we have more neural pathways devoted to detecting a threat versus that which helps us, and the ratios are not even close.
Translation for us as traders? We notice more of what’s wrong than what’s right.
Case in point, if you have 10 trades on a day, 8 are profitable, one is break even, and you have one big loss, which trade are you going to remember the most on that day? The big loss.
This negativity bias is simply the death of successful trading (and a successful mindset). Why?
Because we’ll react with hyper-sensitivity to every pip and point the market moves against us.
Because we’ll see more of what’s wrong with our trade versus what is right.
Because we’ll notice with greater detail the inherent flaws in us (and others) versus what is positive.
Your Brain Is Biased, and It Is Negative
What this means for us as traders is we have to go beyond the said slant. What it means for us as traders is the path to successful trading has to go through our brains and mindset. Otherwise, we’ll get out of positions too early.
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We’ll be more worried about taking a loss (and the resulting pain) versus letting the trade run for a big winner.
We’ll have a fear of missing out and get ourselves into bad positions.
We’ll constantly replay mistakes in our head over and over again, wiring that behavior deeper into our brains.
So How Do We Change This?
How can we rewire our brains to go beyond its natural negative bias?
Below are 3 tips you can use to change your mindset and trading psychology:
1) Spend more time seeing what you are doing right versus wrong with your trading
2) Spend more time noticing what is good about others versus what is neurotic
3) Spend more time observing what is positive about the world versus negative
By doing the above, you start to unwind these negative pathways which cause you to fear, doubt and worry. Being freed of these emotions, you start to see more clearly, and that leads to better trades, letting the winners run and exiting out of bad positions.
You start building positive implicit memories, which create what it ‘feels like‘ to be you.
Hence the bedrock of this is – if you want to think and trade successfully, you’ll have to build a positive self-image.
How do we build a positive self-image? We’ll be getting into that shortly in this blog series.
Until then, take time out to examine the three tips above, and how much time you are spending on the negative versus the positive. It might just give you insight into how strong this bias is, and how much you need to re-wire your brain for a successful trading mindset.