By Kenneth Reid, Ph.D.
You may have been advised to approach trading like a business, but for active traders, trading is more like a sport.
Putting on a trade is like running a play in football… or playing out a point in tennis (my sport). There’s the drama of the game, a winner and a loser. We all want to win.
By the way, winning isn’t just “fun.” Humans are wired to win. It’s a biological imperative and our brain is like a heat-seeking missile when it comes to rewards of all shapes and sizes.
Have you noticed that a modest gain from a challenging trade can feel surprisingly gratifying? It’s because the reward center in the brain responds to wins with an instant jolt of chemical juice that is disproportionately large compared to the size of the win.
In trading, as in sports, therefore, getting the “W” really matters, but for some traders, a winning attitude can inadvertently backfire and sabotage success. Let me explain.
There is a group of traders who take trading (and sports) extremely seriously. These folks are intense and highly engaged with the market.
In this group one finds former pit traders, successful entrepreneurs, well-paid doctors who are bored with their practice, martial artists, weightlifters and young guns (former video-game champions) along with the occasional dreamer who is burning through his inheritance.
I call these folks Heat Seekers because they take on much more risk than the ordinary trader, but it feels absolutely normal to them.
When they sit down at their trading desk in the morning, Heat Seekers enter a bubble of juicy possibility. For them, a big payoff is just around the corner, so why worry about the possible downside?
They may give lip service to more conservative methods, but when no one is looking (which is most of the time) they trade with full margin, don’t use stops and regularly add to losing positions.
While some do well, most have boom-bust equity curves, especially if they are daytrading futures or forex. Curiously, these folks can lose large amounts of money year after year and still feel relatively good about themselves and their prospects.
Dr. N., for example, who is 55 and still has an active medical practice, has been losing $100k/yr for the last 3 years and is nevertheless quite optimistic about his ability to turn things around in the near future. However, he doesn’t think he needs to change anything fundamental about his trading behavior. “Maybe just a few tweaks here and there.”
JUST DO IT?
This distorted fantasy of imminent success isn't just narcissism, it’s also due to brain chemistry.
Dopamine is the neurotransmitter that signals the imminent possibility of reward. A jolt of this powerful drug can hijack our planning brain and trigger instinctual pursuit behavior.
When this happens, the trading plan is jettisoned and we start chasing anything that moves. I know. I've been there.
Interestingly, Heat Seekers, have chronically low dopamine levels that need to be constantly replenished. Since seeking reward in an environment of risk is the most effective way to stimulate dopamine production, the more action they have, the better they feel….regardless of day to day results.
In other words, these folks are overtrading and over-leveraging because they are trading to self-medicate. And it gets worse.
THE SUPERTRADER SYNDROME
Heat Seekers often feel “on the verge of greatness.” This is because when they drive their dopamine meter to peak levels, it generates feelings of grandiosity and invulnerability.
With heroic eyes riveted on the prize, improvisation, impulsiveness and unbridled recklessness become the norm. Supertraders, however, have difficulty even recognizing the deceptive pattern they are in, so they tend to cycle through it over and over.
One’s baseline levels of dopamine are genetically determined, so if you are a Heat Seeker now, you probably will always be one. That said, you have options for improving your trading results if you work diligently on your mindset. Here are a few suggestions.
First, shift your focus from the future to the present. This will feel boring at first, but when you feel the boredom you will know you are on the right track. Learn to downshift a bit.
Second, adjust your Risk/Reward attentional balance so you become more aware of Risk. Imagine the downside of a trade just as vividly as the upside.
Third, as you imagine the downside, determine a stop for every trade before you enter. Draw a “line in the sand” on your chart before you actually enter the trade.
Fourth, shift your focus from your annual goal to your actual daily results.
Fifth, work on winning consistently, every day and every trade. If you can’t win, set a loss limit for each day and honor it.
Sixth, don’t let nice winners turn into losers. It’s OK to take small gains; they add up. Set a profit stop and honor it.
This week, set a goal to remember and apply just one of these suggested changes in real time. I guarantee it will help you boost your bottomline in this sport.
Kenneth Reid is a trading coach with a Ph.D. in Clinical Psychology. He began trading stocks in 1996 and now daytrades futures and Tesla for his own account. His website is daytradingpsychology.com