|

Most people do this in their trading – Make it your competitive advantage

Know the feeling?

  • You enter a trade and feel your heart racing as you watch the price move underwater.
  • You've made a mistake and have no choice but to crystalize a loss.
  • Suddenly price moves as you'd planned. You jump back in with a feeling of excitement and relief. You'll make that loss back and some in a minute.
  • But price moves against you for a second time and it's another loss.

You're feeling drained and frustrated. Agree?

In a minute you're going to learn:

  1. Why it happens.
  2. How you avoid it.
  3. And how you monetise it.

There's a part of your brain that can overpower rational thinking, logic and even the will to live

Psychologists James Olds and Peter Milner inserted an electrode into a region of a rat's brain, later called the pleasure centre.

The rat could self-administer an electrical current to the region by pressing a lever. The sensation was so pleasurable the rat endured pain of an electrified grid to get its charge.

Chart

The rat ignored food and drink and kept pressing the lever until it died of exhaustion.

The scientific name for the pleasure centre is nucleus accumbens.

When stimulated, it releases the feel-good chemical dopamine, responsible for energy, motivation and drive. But it's the timing of its release that will intrigue you.

Surprise anticipation of a reward triggers the release of dopamine

In the early 90's, Wolfram Schultz, (Professor of Neuroscience at Cambridge University), and his team had a revelation.

To an unexpecting monkey, revealing a piece of apple sent the monkey's neurons wild. The feel-good chemical dopamine was signalling a reward to the brain.

Chart

But the dopamine neurons stopped firing when the monkey realised the treat was on its way. The key to dopamine release is surprise.

A conflict occurs when you trade. It's your innate human tendency to find a pattern amongst the randomness of market behaviour. And in the struggle to predict when a reward will occur your dopamine neurons' level of activity increases.

Ever wondered why you took a trade for seemingly no reason? It turns out that stimulating your dopamine neurons is the root cause. You'll see why in a minute.

The MRI allowed us to see dopamine in action

In the first experiment, Dr Hans Breiter of Northwestern University and his team administered cocaine to a cocaine addict.

Where you see red and a dot of yellow - that's right on the nucleus accumbens - these colours represent the turning on of your reward system.

But you'll find it fascinating the release of dopamine - your core reward system in action - occurs in anticipation of receiving the cocaine. 

Chart

What other things besides drugs turn on this system?

The next experiment involved subjects playing games of monetary reward. None of Breiter's team predicted cocaine addicts anticipating a cocaine infusion looked exactly like healthy control subjects anticipating a monetary win.

Anticipation is fundamental to your experience of reward

When you trade, you repeat going through an experience of anticipation.
Like the rat, each trade is a jolt in electricity from your reward system.

This is all important because...

In his 1987 letter to shareholders, Warren Buffett said: "If you've been in the [poker] game 30 minutes and you don't know who the patsy is, you're the patsy."

Every day the cocktail of looking for patterns, reward anticipation and the associated neurochemicals gets expressed by people buying and selling without knowing what's driving their actions.

Skilled traders know this and profit from it

Each trade sequence below consisted of a hypothesis for a long trade opportunity.

But preceding each long trade was a short trade to take advantage of the traders who jumped in prematurely and lost.

And whether it was yesterday:

Chart

Or the day before:

Chart

Or even three years ago:

Chart

It occurs very frequently

But the bars on the charts don't tell you who the traders are buying or selling or what motivates them to do so. Correct?

So how can you tell?

First:

If we use driving a car as an analogy - it's quite a few reps before driving your car became unconscious. You know - like when you're suddenly shaken realising you can't recall the last 12 minutes of your journey because you were completely on autopilot - right?

This is why honing in on one playbook trade at a time is so important.

You see:
When you focus all your time on one playbook trade instead of a whole bunch of trades at once - that trade becomes unconscious much faster.

And once you're no longer preoccupied with processing the mechanics of the trade - your full suite of cognitive functions can pay attention to:

  1. Watching for all the pieces of your playbook trade to fit permitting you to take the trade.
  2. Simultaneously noticing all of the pattern-based mumbo jumbo your mind innately produces that's behind the voice that says "enter."
  3. Using your playbook trade as your defence against this voice (not a playbook trade? Can't enter)
  4. And noticing all of the traders unaware of how they are succumbing to entering into what will be a losing trade.

Second:
Ever been to an art gallery?
When you visit an art gallery, you'll see someone sit and stare at a painting for 20 minutes. What are they looking at?

They're looking at what you can only see if you are a painting aficionado. Right? And trading's the same.

Below is my trading station.

Chart

Guess what?

Almost every window is data for the same instrument. I'm looking at many different layers of the same onion. Makes sense?

Oh man that seems daunting

For all of the trades above I simultaneously walked a small group of traders through what the other traders in the market were thinking, what actions they would take, and how to trade amongst them. With sufficient immersion, they moved quickly to replicating the same concepts.

So it's possible to have someone show you how to do this in a way that enables you to get on top of it in a tight time frame if that's what you want to do.

Want more?

See events you can back in to trade in this webinar.

Author

Adam Fiske

Adam Fiske

Boss Trading

Adam is an industry-trained trader with 19 years of professional trading experience.

More from Adam Fiske
Share:

Editor's Picks

Pi Network Price Forecast: PI risks another lower leg as the broader crypto market slips

Pi Network is trading in the red on Thursday, retreating toward a near-term support around $0.0740. The Fear and Greed Index declines to 43 on Thursday, while total liquidations exceed $350 million over the last 24 hours, suggesting a deterioration in investors' risk appetite and a sell-side bias. The technical outlook for PI is bearish, with selling pressure building.

Ripple and Stellar outlook: XRP and XLM lose ground as hawkish Fed tone weighs

Ripple and Stellar remain under pressure on Thursday as bearish derivatives positioning and on-chain signals weigh on sentiment. XRP slides toward key support at $1.30, while XLM gives back some of its recent gains. Meanwhile, the Federal Reserve held interest rates unchanged at 3.75%-4.00% at its two-day October policy meeting.

Cardano Price Forecast: ADA extends bearish reversal as sell-side pressure intensifies

Cardano faces intense selling pressure, with over 4% losses so far on Thursday, pushing the price below $0.2000. The sell-off aligns with the broader cryptocurrency market pullback after the US Federal Reserve decided to pause the federal funds rate at 3.75%-4.00% on Wednesday.

Cardano Price Forecast: ADA extends bearish reversal as sell-side pressure intensifies
Cardano (ADA) faces intense selling pressure, with over 4% losses so far on Thursday, pushing the price below $0.2000. The sell-off aligns with the broader cryptocurrency market pullback after the US Federal Reserve (Fed) decided to pause the federal funds rate at 3.75%-4.00% on Wednesday.
Bitcoin extends pullback as ETF inflows clash with risk-off sentiment

Bitcoin remains under pressure, trading around $81,800 on Friday, recording modest losses so far this week. Despite a mild pullback, institutional demand showed signs of a comeback with spot Exchange Traded Funds recording $442.67 million in net inflows through Thursday.