Self-Control
Trading is a very difficult job, not only because of the technical requirements but also because of the mental toughness and discipline it requires. In this article I'm going to talk about self-control, which is a sub-component of discipline, and see how it can translate into better trading practices.
1. The Marshmellow Test
"mmmm...yummy!!!"
Source: https://www.youtube.com/watch?v=QX_oy9614HQ
"You can have 1 marshmellow now...or you can have 2 marshmellows if you can wait until I get back". That's the game. It's called the marshmellow experiement and it's based on the premise of delayed gratification: it has been demonstrated that children that were able to withstand the immediate gratification of eating a delicious marshmellow, were generally able to do better in life. The quality they possess - the study says - is self-control and grit. The children can stay focused on the prize and the future accomplishment and not get side-tracked by the sub-optimal yet immediate gratification.
In trading, for example, this translates into not being able to hold onto a winning trade. Or not being able to stick to your plan every trade, every day. Or not being able to wait for high probability setups. Obviously all these qualities are fundamental in order to become a successful trader, because trading really is 80% psychological and 20% technical.
Behavioural economists Richard Thaler and Shlomo Benartzi have studied this dynamic, the lack of self control, by looking at three common human short-comings:
1. People want to save more, but tend to procrastinate; it's the “I'll start my diet tomorrow” mentality. It takes decisive action and commitment to stay afloat in the markets, not procrastination.
2. People are loss averse. The pain losing 1 dollar is worse than a missed profit of 1 dollar. This is also why people tend to average down, or loosen their stops when they're losing. It's the “well i'm already at a loss so what the heck” mentality. Trading their equity instead of trading the market.
3. People are reluctant to move from the status quo. There is a wide gap between knowing what to do, and actually doing it.
2. Where there's a will there's a way
Following are some suggestions that apply to real life, which can be practiced and then transferred into your trading habits. I have understood, through my battles with the markets, that it's equally important to know your own strengths and weaknesses, as well as it is to know the market you're trading. So ask yourself: how much self-control do I have?
To sum up: one of the main qualities I believe a person must have in order to overcome the difficulties of trading, is self-control. There are many practices in common day life we can use to verify whether we're good at controlling our impulses or whether we tend to make excuses and procrastinate. Of course, you also need to look yourself in the mirror and be very sincere with yourself in order to do this properly.
Good Luck!
REFERENCES
1. http://en.wikipedia.org/wiki/Stanford_marshmallow_experiment
2. http://faculty.chicagobooth.edu/Richard.Thaler/research/pdf/SMarTJPE.pdf
1. The Marshmellow Test
"mmmm...yummy!!!"
Source: https://www.youtube.com/watch?v=QX_oy9614HQ
"You can have 1 marshmellow now...or you can have 2 marshmellows if you can wait until I get back". That's the game. It's called the marshmellow experiement and it's based on the premise of delayed gratification: it has been demonstrated that children that were able to withstand the immediate gratification of eating a delicious marshmellow, were generally able to do better in life. The quality they possess - the study says - is self-control and grit. The children can stay focused on the prize and the future accomplishment and not get side-tracked by the sub-optimal yet immediate gratification.
In trading, for example, this translates into not being able to hold onto a winning trade. Or not being able to stick to your plan every trade, every day. Or not being able to wait for high probability setups. Obviously all these qualities are fundamental in order to become a successful trader, because trading really is 80% psychological and 20% technical.
Behavioural economists Richard Thaler and Shlomo Benartzi have studied this dynamic, the lack of self control, by looking at three common human short-comings:
1. People want to save more, but tend to procrastinate; it's the “I'll start my diet tomorrow” mentality. It takes decisive action and commitment to stay afloat in the markets, not procrastination.
2. People are loss averse. The pain losing 1 dollar is worse than a missed profit of 1 dollar. This is also why people tend to average down, or loosen their stops when they're losing. It's the “well i'm already at a loss so what the heck” mentality. Trading their equity instead of trading the market.
3. People are reluctant to move from the status quo. There is a wide gap between knowing what to do, and actually doing it.
2. Where there's a will there's a way
Following are some suggestions that apply to real life, which can be practiced and then transferred into your trading habits. I have understood, through my battles with the markets, that it's equally important to know your own strengths and weaknesses, as well as it is to know the market you're trading. So ask yourself: how much self-control do I have?
To sum up: one of the main qualities I believe a person must have in order to overcome the difficulties of trading, is self-control. There are many practices in common day life we can use to verify whether we're good at controlling our impulses or whether we tend to make excuses and procrastinate. Of course, you also need to look yourself in the mirror and be very sincere with yourself in order to do this properly.
Good Luck!
REFERENCES
1. http://en.wikipedia.org/wiki/Stanford_marshmallow_experiment
2. http://faculty.chicagobooth.edu/Richard.Thaler/research/pdf/SMarTJPE.pdf
Author
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JupaFX
Independent Analyst
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