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How do traders make decisions?
Trader’s actions are influenced more by their subconscious beliefs and values than they are by the logical processes we put in place to achieve success. Our habits, perceptions, and fears account for approximately 80% of trading behaviours, while mechanical risk management and strategy is only 20%.
Though knowledge is important, often too much logical thinking can lead to analysis paralysis, which is an issue for many traders. It’s common to think about strategy in terms of the actions we take, but to be a successful trader there should be balance between your mind, body and emotions.
How should the brain be used to support trading activity?
We often believe that the way we are is determined from birth, and cannot be changed – however, research has shown that this is fundamentally untrue.
Mental capacities, such as IQ and personality, can be improved through self-awareness and reflection. It is a principle known as neuroplasticity, which means understanding that your brain is a muscle and that it can be trained. Though humans do not usually actively condition their minds, mental strategies can be used to challenge each behavioural trait that we experience.
For example, when trading the markets, loss aversion is an understandable fear, but some of the worst behavioural traits come when we lose money – making excuses and putting blame elsewhere can create a spiral of anger, frustration and denial.
In order to take loss and turn it into a positive training experience, traders should accept responsibility for their mistakes, and focus on what they can learn and change in the future.
How important is body fitness and wellness?
It is common for traders to blame a lack of time in the day as an excuse not to exercise or adopt healthier eating habits. But being healthy is crucial to overall success – this by no means implies you have to be an athlete, but simply realise that discipline is key.
From analysis, we can see that traders have a stimulant-based diet that includes high levels of sugar, caffeine and processed food. Though this is an effective way to get on with the day, in the long term it isn’t sustainable.
Taking the time to be healthy, in terms of exercise and diet, can increase energy levels and focus, which ultimately sustain the very trades we do.
How can traders balance their emotions?
Our emotional state alters our biochemistry – meaning our feelings can transform our body for the better, and for the worse.
A frustrated mental state can cause the mechanisms that allow us to make logical decisions to become paralysed, which can lead to mistakes if we don’t rebalance our emotions. So when we are fearful of a trade going wrong, it is important to try and moderate our emotional reaction.
The easiest way to do this is by keeping a trading diary – documenting how you react, and whether you make a profit or a loss.
Markets operate through cycles, going from the excitement and euphoria of the ‘last buyer buying’, to the despondency felt when we lose and a market collapses. In order for traders to profit, it is important to understand these human emotions at both the top and bottom.
The market is fuelled by emotions but a successful trader follows the price and emotional cycle, rather than becoming part of the pattern themselves.
Watch the full interview above for all of Ron’s insights into how you can improve your trading psychology, including the benefits of yoga and meditation.