Learning to Think Outside of Heuristics
This article may not appeal to most. The reason being, it calls out a few objective truths that will make you uncomfortable. It calls into question your beliefs, ability and self-image in an attempt to open you up to the reality of trading.
"The thing that you have to worry about is the thing you never thought of" -Howard Marks
If I told you that the way you see the world is completely distorted and most of your beliefs have been subconsciously wired into your brain, would you reject that?
If not, then you are probably a fantastic trader who cuts losses, does not jump in and out of trades and is on track to build a decent account or hedge fund. You also have fantastic relationships, are a great judge of character and there is no point in living because you have done it all. I hope you can read in-between the lines here.
I truly believe that our ability to deal with what is real separates the novice trader from the master, and thus distorts our perception of what the reality of trading actually is . However, to deal with what is real, we need to think critically about what we read, let into our consciousness and do on a daily basis. It takes a great deal of hard work to unlearn what we have been force fed since birth.
Most of the time we are on autopilot. We fail to see that reality is something we can create - not something that happens to us.
Trading is Reality in Action
In the world of trading, if you fail to realise that fear and greed are simply illusions of your mind, you will never excel and profit. Being 'right' or 'wrong' is ego in action and most novices end up tying themselves to stocks, losing strategies and self-destructive behaviour. This is also true in life. If we can't face the reality about a situation (divorce, work, etc) then we are living a false life.
Typically this manifests in jobs we take because of money, houses we buy because of neighborhoods and cars we drive because of image. Very few people step back and ask themselves 'why am I doing this?'.
One of my own lessons in this game was holding a losing stock and becoming an "involuntary investor". This was a phrase coined by Jesse Livermore - one of the greatest traders who ever lived. Most people buy a stock, watch it tank and then buy more. How low can it go?
Holding Losing Beliefs
In a strange paradoxical twist, people double down on losing trades (and relationships, houses, social situations etc.) and simply can't deal with what is real. The stock is moving down, it is losing value, it's in high supply and poor demand. Your partner cheated and is of low quality, you hate your job but need the money and the list goes on. So we hold. We hold on for dear life as our trading accounts grind down.
It is sadomasochism in action - not the sexy kind.
The fear of confronting our mistakes is less than selling a stock for a small loss. We become embroiled in an internal struggle and get caught like a fox in the headlights. Our ego kicks in and it becomes about how we feel, not what is real. To understand the reality of trading we must understand ourselves first.
Our end result is damaged relationships, fragile mental health and being burned out, broke or dead. The very neurological defense mechanism that saved us all of those years ago (amygdala) , can lead us to situations far worse than if we confronted the truth. We rest on our sense of self that sits in the comfort zone. Lying to and deluding ourselves into mediocrity because trying would be too damn hard.
If you fail to see the truth, it will eventually impose itself upon you. Trading is not forgiving. It will punish those with a distorted reality and reward those who confront it. you need to move outside of your predisposed norms and challenge your comfort zone. If not, you will stagnate.
Symptoms of Avoiding Reality in the Market
Some typical patterns and behaviours that indicate you are not seeing the market as objective are as follows:
- Blaming circumstances, politics or news. Trump said this, Putin said that but failing to realise you shouldn't have YOLO traded your entire portfolio on one stock
- Not taking full personal responsibility for results.
- Feeling elation when you win in the market and that you are bulletproof. This one is my favourite because it usually is a precursor to a massive feel. When I get over-excited about a winner I sell half almost always!
- Hopium (addiction to hope). When you watch a position close in on your stop loss and gently move it out further because you 'feel' it won't get stopped out.
- If you notice yourself getting angry when losing a trade. Wins or losses are part of a strategy. Getting angry serves no purpose.
- Losing sleep thinking about the market. Typically as a result of having positions on that are far too large or leveraged for your account.
- Watching every tick. Thinking that somehow if you stare harder at the screen, the institutional buyers will start pumping your stock
- Day dreaming about making millions or similar in a very short space of time.
- Holding on to bad trades. Here we make our own realities instead of seeing the true reality of trading.
- Making impulse trade after impulse trade.
- Not keeping a diary and reflecting on your results.
- Feeling that the market is unfair or 'manipulated'.
Just a Sample
The above is just a taste of the emotional experiences I went through myself when I began trading. To this day I still take a cheeky trade here and there, however a few years ago my strategy was practically a blindfolded chimp throwing darts into the market.
The market will produce what you expect of it. If high risk is what you want, you will get it. If gambling and stories to tell your buddies at the bar is what you want, you will get that too. I prefer making money and understanding the true reality of trading. I am no longer ashamed.
How Your Reality is Formed
Reality and our perception of the market (and other things in life) is formed in a number of ways, some more subtle than others. This includes our upbringing, significant memories or events that have occurred in our lives and of course our own genetic predisposition.
Without understanding how are thoughts, patterns and habits are created it can be challenging to find the root cause of our assumptions. Without digging deeper you may have massive cognitive dissonance when trading. You know what to do, yet somehow you always fuck it up. This is the ultimate challenge, executing your plan time and time again - yet each time you fall short, why?
Society, how we are incentivised during our formative years and media propaganda are to blame. Here are a few examples of how we are influenced and how they impact our trading:
- Your parents will instill values from a young age. Think "money is bad". "money is good". When you make large money in the markets you could end up taking profits too soon on these assumptions.
- Monkey see, monkey do: If you come from a household where money is poorly managed, this becomes the norm. You therefore will gravitate towards poor money management and lack of discipline.
- Instability in a household can cause massive uncertainty. In the market uncertainty is guaranteed. This trauma could be replayed every time you enter the market!
- Expectations: You will feel compelled to act the same, believe the same things and form part of your group. In a family it is no different, perhaps speculation is frowned upon, what then?
There are of course multiple examples of how family can influence our decision making process. I suggest you look at this and contemplate it. How much of you is... you? And how similar are you to your parents. Can you admit that your similar or does it hurt too much? Yes people - trading is some deep shit.
This one is too easy.
- Having too much money automatically makes you evil in most religions. Let's not comment on the Vatican though.
- Money is the root of all evil (unless you give it all to us during confession).
- Share with thy neighbor.
Although the influence in the religious sphere is waning, the influence on our psyche remains. To make money in the stock market is not a sin. It is freedom of expression at it's finest. If you believe on a philosophical level that money is bad, you will struggle to get it in the first place.
No more catholic guilt for me. I want money, don't be ashamed to say it. Why else are you trading?
Societal Influence and Perception
Similar to religion. Society has a strange take on the pursuit of capital:
- If you want money that makes you greedy! I truly love this one. How insane is it that you want to better yourself?
- People who make money are bad people. This is true, of both wealthy and less fortunate people.
- To make huge money you need to work really hard. This is the root cause of many peoples anxiety in and out of the market. I would rather buy one stock that makes me a millionaire than frantically look for a few pennies here and there.
- Money as 'things'. The perception that to have money you must look rich. So people go about buying houses and cars they can't afford. You win the perception game and give up your freedom.
- The reality of trading, like almost everything else in life is hidden from plain sight. If you want to see the truth you must open your eyes.
- To be successful you need an education.
- To be successful you must have high 'grades'
I am sure you know the story here. Another myth that can be debunked quite easily if you look under the hood.
Everybody is a Genius. But If You Judge a Fish by Its Ability to Climb a Tree, It Will Live Its Whole Life Believing that It is Stupid - Albert Einstein
In our 9 t0 5 work-life very little time is left to contemplate what is truly going on. We are whipsawed from one place to another being distracted by news, gossip and the fear factory.
Big media and mass marketing make their money through selling us things. To sell people things they(the person being sold) need to believe them to be important. Some advice on this matter - they aren't.
These weapons of mass distraction and societal norms are programming you to follow and not to lead. To see through the mist you need to be objective. If you can remain in society and look at it from above, what do you see?
I see confusion, delusion and anxiety. The perfect concoction to profit. Only if you can extricate yourself from the grand delusion.
If you can see the game from above, you will be far more dispassionate about the small things enabling you to profit on the fear and greed cycle that is the economy. After all, the economy and all it's trimmings are in themselves just a giant religion or belief system. This is our current reality, whether you feel bad about it or not. The reality of trading is just another system to be understood.
Creating your own reality
Fear not, there is a silver lining to this post.
As the master sculptor of your own life it is up to you whether or not this information will serve you. Trading enables you to remove the shackles of 'normalcy' and experiment with your own reality. My own suggestions for shaping your own reality, in life as in trading would be:
- Question why you make the decisions you make. Are your values your own or are they formed from other's opinions.
- Are you being honest with yourself about your trading results and results in general? If these aren't written down - do that now.
- Are you scared of trying? Does questioning your circumstance make you feel uncomfortable? I sure hope so.
- Read broadly on philosophy and genealogy.
- Do not accept what you hear as face value. Try and find out more.
- Write down your own values and what you truly want. Make sure it's your own.
- Understand that the reality of trading might not conform to your own current beliefs.
- Take full responsibility for your own life. Nobody else is better at knowing how to manage it than you.