Markets reward you for having self-control, which is a very valuable trait because it is typically left out of the spotlight. The difference between those traders who make disciplined trading decisions and those who do not is whether or not they can maintain self-control. Those who are able to maintain self-control will buy at low prices, sell at high prices, and take credit when things go well. Whereas those who are lacking in self-control will buy at high prices, sell at low prices, and blame others (such as market manipulation) when things go wrong.
It does not mean that you never experience emotions. It means that you are intentional about your actions despite your brain telling you there is no reason to delay gratification. Markets are essentially live test tubes of human emotion. Traders who exhibit self-control will pause, think, and continue to follow their plan will be truly rewarded by the market.
Self-Regulation Is a System, Not a Feeling
Most psychologists define self-regulation as constraining your urges so that you can pursue future goals that are longer than the present. This is a valid definition, but it doesn’t take into consideration that your urges are not evil. They were once programmed for survival in a world that is no longer at risk of extinction. Your mind recognizes uncertainty as dangerous, novelty as an opportunity, and losses as a personal attack. Financial markets provide all three of these types of reinforcement in abundance.
Self-regulation is what helps you manage the time difference between the response and the stimulus (feel/want/act). That time difference is what gives you your edge (the space between stimulus/response) in your decision-making process.
Why Markets Tend to Trigger Impulses
Markets can be a trap for impulse buying due to their design that imitates slot machines by having multiple levels of reward and reinforcement from being able to win a significant prize. A trade tick can create the same feeling that you’re playing a slot machine, as each tick creates dopamine within the brain.
Behavioral patterns of impulsive buying can be observed through the following:
“Chasing trades” because feeling “left out” of a profitable trade makes them feel “lost”.”Recouping losses” from a losing trade by allowing emotions to be the driver of the trade decision-making process.”Over-trading” as the perception of “doing something” gives individuals the feeling of having more control in the market.”Changing the definition of winning” because an objective plan is only valid until the market tells you otherwise.
Markets do not “punish” intelligence, just reward people who are consistent in their actions. And one more important note – the market does not care about “intentions”, only rewards the patterns of behavior that are repeated.
The Unseen Price of Reactive Decisions
Making decisions as a result of reacting seems reasonable at the moment. You’re adjusting and responding to new influences, so you feel like you’re “in touch” with everything going on. But without any framework in which to adapt, you are only using improvisation as a way to cope with the stress of these changes, and stress is not the optimal time for people to do their best math.
There are forces in behavioural finance at play that systematically undermine our discipline when we make reactive decisions.
Loss aversion
The pain from losing something exceeds the pleasure from acquiring something of equal value, which means that we are inclined to retain our losing investments and liquidate our winning investments earlier than needed.
Recency bias
What just happened will seem like what will continue happening.
Confirmation bias
Once you’ve made a commitment to an investment you can find an overwhelming amount of evidence to support your decision and look at your decisions as a fan club.
Overconfidence
After winning a few times we are likely to put ourselves into the category of “investment guru.”
Although self-control helps mitigate these biases, its presence does not eliminate them, and therefore, they still lead to costly habits for investors.
Strategic Patience vs. Free-Riding
When people think of being patient, they typically envision a lack of action. However, being patient with discipline involves actively preparing, following rules, budgeting for risks, and waiting until conditions meet your criteria before trying to get the market to validate your feelings.
In the galaxy of trading, being patient usually refers to giving compound returns enough time to develop (and usually develop in an extremely boring fashion). Being patient also means waiting until you have the correct configuration, liquidity, or risk/reward profile to justify your trade. And finally, it’s about not having to pay the “impulse tax” – the added cost associated with making an impulse trade by entering too soon, exiting too late, or changing your trading plan midway through a trade.
This is why the markets reward self-control: due to the consistency of one’s plan, one gives probabilities the maximum opportunity to develop. Probabilities are the best thing that the markets have to offer as fairness.
Become a Self-Controlled Trader with These Tips
Self-regulated traders:
a) Make better choices when executing than they do in predicting outcomes. When making decisions;
b) Create a structured decision-making process rather than an emotional reaction;
c) Establish rules or terms to define the right time to execute their decision before risking capital. They identify what conditions constitute an entry to trade; under what conditions will they consider an entry invalid; and what does “done” entail;
d) Separate their decision analysis and execution process. Decision analysis occurs during times of calmness, whereas execution occurs only when their entry or execution requirements have been met. If you are in the middle of the execution of your trade and still trying to analyse it, you will be unsuccessfully trying to remodel a house with an earthquake occurring around you;
e) Position sizes will help ensure you maintain control of your pst. You should size your positions so that you do not panic, but will still be significant in importance. Your objective should be to reduce your emotional response associated with normal market fluctuations;
f) Create a checklist when executing trades or investing. All due to the stress associated with emotions caused by executing trades, can cause all people to forget the right things. Everyone tells themselves what they remember differently from how they remember things.
It doesn’t really matter if you are trading with a broker like JustMarkets, Octa, or XM, or managing all by yourself. Just use these tips, add your own, and always try to do a smaller number of impulsive decisions.
Your Self-Control Will Be Rewarded by the Market
While self-control does not guarantee that every decision will be successful. There are occasions when someone has been disciplined and successful. However, markets can sometimes provide ample compensation for those who make rash or foolish decisions.
The rewards are temporary and often occur in a very loud manner, and generally come back to bite you later. When considering several different decisions, self-control can be one very strong advantage because it decreases the number of unforced errors you make, keeps your risk under control, and enables your strategy – not your emotions – to be the driving force behind your outcome.
Risk Warning: Trading financial instruments involves significant risk and may not be suitable for all investors. Market conditions can change rapidly, and losses may exceed deposits. Ensure you understand the risks involved and trade responsibly.
This press release has also been published on VRITIMES
