He’s making a list, and checking it twice

I always feel a bit guilty when I do it – but that doesn’t stop me.

A better parent wouldn’t resort to such blatant threats and bribery.

I’m sure most of us have done it.

I’m talking about that thing when you warn your kids that Father Christmas is watching their every move …

When you think about it – it’s quite creepy.

But this morning, as I was using a bit of “artistic licence” while drawing in some trend lines on a chart, I realized that it might be helpful if I had a similar threat looming over me.

If someone was watching over my shoulder as I traded, I reckon I’d be a far better trader. I wouldn’t dream of making stupid errors, like drawing trend lines where they probably shouldn’t be … or worse still (yes, I have sinned) adding to a losing position … or (straight to the top of the naughty list) trading without a plan.

So be good for goodness sake

It gets to the nub of a big problem with bad trading decisions – they often reap us big rewards. That’s right – I’m sure we’ve all got anecdotes of when we made a trade on a whim, only for it to yield an incredible return … or when you widened your stop loss to keep a trade open and doubled your return …

These terrible decisions that didn’t punish us can leave us feeling invincible – as if we can beat the system.

It’s a state of mind that’s likely to lead to more and more bad decisions.

Of course, deep down, we know that these bad trading decisions will cost us money in the long term – even if we occasionally get lucky. So how do we stop this bad behaviour in the here and now?

We can’t threaten ourselves with the naughty list – but we do know that better trading habits will reward us in the long run.

The problem is that human beings are not (on the whole) very good at waiting.

Human beings are the only animals known that can delay gratification for more than a few minutes. However, we’re really not very good at it. Recent studies show that foregoing a short-term gratification in favour of a larger, later return requires intense activity in the prefrontal cortex area of the brain. We find waiting very hard to do. With immediate rewards available, the midbrain “wanting” system dominates. When markets are volatile, investors’ prefrontal cortices come under pressure. This is precisely when you are more likely to make decisions based on immediate gratification, with little consideration of the bigger pay-off. It’s also worth noting that the pre-frontal cortex doesn’t mature until after the age of 30, and later in men than in women.

I may be a man, but I’m also definitely over 30! So, if my kids can behave until Christmas, surely I can practise a bit of discipline in my trading.

You better not cry, better not pout

The fact that most of us don’t have anyone looking over our shoulders as we trade is what often leads to our downfall. One of the most dangerous things for a trader is isolation. In large investment firms, they keep an eye (admittedly often not a close enough eye) on what their traders are doing. If someone’s behaviour becomes erratic – they have systems in place that should pick it up.

Yet, for most home traders, who these days don’t even need to pick up a phone to communicate with a broker, there are no such checks and balances.

There’s no two ways about it – trading can be a lonely business. Which is why trading communities can be so valuable.

There are a growing number of on-line communities, some more valuable than others. However, it’s always good to be aware that many of these websites have their own agenda, or are peopled by traders who may have an ulterior motive, like their own products to promote, or a personal axe to grind. Trade2Win is a big one, although often branded by its detractors as “trade to whinge”, as there’s a great deal of mud-slinging that goes on!

If you prefer something a bit less “Jeremy Kyle” style, I’d recommend Systems for Traders. The guys behind this site offer genuine reviews of products – actually following the systems with live trading (you can follow what they’ve had to say about TimeShift Trader over the past few months here), and there are plenty of lively trading discussions going on across their threads.

And of course, you can always vent your views on the Trader’s Bulletin website ….

Until next week,

Mark Rose

P.S. I’d just like to add a word about the charity that Thames Publishing support each Christmas. Street Child Africa is the only charity dedicated to helping children living on the streets across sub-Saharan countries. You can find out more about the incredible work they do here: www.streetchildafrica.org.uk

P.P.S. And finally, a quick word about a little Christmas gift that I’m putting together next week. It’s a trading tool that I use everyday, and I’m adapting it so that you can use it for your trading too. It’ll be a great help if you’re looking to get really organized with your trading for 2012. I’ll be sending it to you with next week’s bulletin.

Related posts:

Are you on the naughty list? Overloading: are you making this mistake?