How to 'Refuse the Cake' in Trading

07/21/2014 6:00 am EST

Focus: STRATEGIES

In trading, rather than simply ignoring our emotions or pointlessly fighting against them, John Locke of SMB Training Blog thinks it’s better to ‘trick’ our emotions into believing the logical approach is actually the more appealing one.

As humans, we make decisions based on emotions. Of course, we sometimes use logic and change our decisions, but our initial decision, and the one we are most likely to act upon, is always based on emotion. This is because our emotions are much more powerful and react much more quickly than our logic. Therefore, our emotions quickly send us down the path that we unconsciously think will give us the most pleasure or the least pain before we even realize what’s happening. This is why we often do things we logically don’t want to do.

You see, many of the challenges we have with emotion isn’t the emotion itself. The emotions are doing exactly what they are supposed to be doing. They are directing you away from danger and/or toward pleasure based off what you are focusing on and the meaning that you’ve taught yourself to give you what you are focusing on.

Rather than ignoring our emotions or pointlessly fighting them, we can work with our emotions.

Our emotions may be more powerful and quicker to react than our logic but they are not smart. They simply make decisions based on the meaning that we give to a particular situation.

Knowing this, we can plan ahead and use logic to change the meaning of a situation before it happens. We do this by purposely directing our focus and reframing events to change the meaning of the event. We simply make what we logically want to do more appealing to our emotions than the destructive actions we’ve been taking.

For example, if you logically know you have to lose weight and someone offers you chocolate cake, then logically it should be easy to say no. However, if you’ve trained yourself to focus on the pleasure of eating the cake, your emotions will overpower your logic. You will eat the cake. On the other hand, if you train yourself to focus on how that cake will keep you fat and miserable and shorten you life, your emotions will still take over but this time you will easily refuse the cake.

Applying this to trading, if you hit your stop on a trade, and cannot get yourself to exit, it’s usually because you are focusing on the short-term pain of a trading loss rather than focusing on the long-term benefits of being a great trader. As long as you think this way, you’ll stay in the trade until the pain of a further loss is worse than the pleasure of a possible win or you blow out your account. While it’s true you may get lucky and pull off a win, all that does is reinforce poor risk management, making it more likely you’ll blow your account out next time.

No matter the result, this is poor trading and will eventually lead to failure. However, if you hit your stop and you decide to focus on how being disciplined will allow you to reach your long-term trading goals, then you will be compelled to exit and move on to a better opportunity.

By John Locke, Contributor, SMB Training Blog

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