To be a short-term trader is also to be a aware of how the mind works. We have to blame someone, right.
I’ve previously mentioned ‘Thinking, fast and slow’ by Daniel Kahneman. A detailed, and in parts, academic book covering decades of his life. Within which Kahneman refers to our thinking as two modes: system 1 which is fast, instinctive and emotional; system 2 which is slower, more deliberative, and more logical.
System 2, the slow system, is the mode we need when trading.
Prof./ Dr Steve Peters book ‘The Chimp Paradox’ uses a simple analogy to explain system 1 and 2.
Peters describes ‘system 1’ as the chimp and ‘system 2’ as the human. These are easy to grasp explanations of our subconscious and conscious mind.
If we take a moment to observe ourselves, particularly during times of stress, then we notice the chimp clearly. Peters explains that the chimp is several times faster and stronger than the human. All to do with millennium of developed fight or flight instinct.
The point is, I recognise this all the time in short-term trading. It is powerful indeed and without being aware of the paradox can lead to a good deal of poor trading decisions.
As I’m preparing to take a trade my ‘chimp’ is saying ‘buy it, buy it, buy it…. My chimp is fearful that it will miss the trade if it waits too long. Oddly, if I then take the trade (more often than not too early because the chimp is working from emotion) then the chimp immediately sees the error of its ways and, fearful that it will have a loss, says ’sell it, sell it, sell it….
And this is all before the ‘human’ (system 2) has had a look in.
How we pacify the chimp and keep it controlled is by trading via strict, practised rules. Rules that we accept don’t always work but work more often than not. This calms the chimp and allows the ‘human’ to get a look in and trade rationally.
Thank you to Dr Peters and Kahneman for clarifying this for me.