Last updated on March 17th, 2020
Impulse trading, rejecting legitimate setups, exiting profitable trades too early. These are some of the most common trading errors people make.
When we look back on certain trades it seems so clear why we should have followed our trading plan and not done this or that to sabotage a particular trade.
However, what’s so confounding is our ability to make the same mistake over and over again, yet somehow we’re almost powerless to prevent it from happening.
Trading is a game of logic and calculated risk taking, but when basic instincts show up all that can go out the window.
Markets Are Not The Jungle
Survival instincts are what kept us alive in the wild and were probably formed over thousands and thousands of years, if not longer. So we shouldn’t be surprised that they are still part of our makeup as human beings.
In response to particular circumstances/stimuli, they create strong emotional drives in order to elicit a reaction which may be able to either keep the individual alive or ensure the survival of the species.
The trouble is that although it might seem like it at times, the markets are not the same as the jungle.
Instincts Can Destroy Our Trading
Some instincts in particular can be especially detrimental to a trader’s efforts to be consistent.
The first that’s sometimes overlooked is the hunter’s instinct and the drive to chase moving things (prey drive). You can see it in your pet dog or cat if you have one when you move something away from them quickly.
And it is this “getting away” of prey that has the potential to trigger a response in us when trading the markets.
If prices start to move away from our entry point quickly and we’ve recognized the that there is:
- Money to be made
- The chance of the opportunity escaping us
there’s a good chance there will be some kind of urge, which may at times overcome us, to “chase the market”.
However, the markets are always there (unlike prey) and the chance of a big catch with heightened risk is far outweighed by the ability to scale up (trade more contracts) a consistent plan.
Fight, Flight or Freeze Instinct
In the face of perceived mortal danger, waves of strong emotion come over us to motivate us to take a course of action in order to survive. We can fight if there’s a chance the additional levels of adrenaline our bodies are pumped with give us the physical strength to fight off the danger.
With the same adrenaline, we can take flight and run away faster than we’re usually capable of doing. We can also freeze in the hope that the danger will pass and we’ll be able to come out of the ordeal unscathed.
But what have any of these responses got to do with trading?
Of course it’s necessary at times to swiftly take action in order to avoid taking a big loss, but perceiving the market as dangerous can be a problem. This mostly occurs when volatility suddenly increases.
There could be a Fed speaker for example, an unexpected event or an HFT algo gone haywire – in reaction to which, the markets start swinging violently. Fighting a market in these circumstances is not likely to end especially well as I’m sure you’ll agree, even for a trader with deep pockets.
Normal market behavior just won’t apply.
Flight is perhaps the least damaging on a per trade basis, but over time it can be crippling if it prevents you from managing trades effectively in normal circumstances. Clearly freezing is just pot luck and the extreme level of pain experienced when the trade is so far off side is likely to force you to bite the bullet anyway.
Finally, you’ve chased and fought the market.
You’ve been emotionally and financially battered and bruised.
What do you do now?
Do you go right back at it and trade your plan immaculately? Possibly. There is a more likely scenario that is bound to play out.
Lick Your Wounds Instinct
(I’m not talking about the actual urge to lick your wounds which is a separate thing). You’ll go away and feel sorry for yourself and it’s unlikely that you’ll want to face another trade which looks even remotely “dangerous” to you.
Therefore, the trades you do take often end up being small losers.
This is the instinct to avoid further danger.
Break The Instincts Chain
So what if anything might you do to avoid these basic survival instincts?
It’s less than likely that you will actually be able to completely eliminate something which has developed over millennia.
If you’re unaware of how you’re affected, it’s important to journal in order to identify which instincts you in particular are prone to and when they tend to occur.
Once you know what’s going on and quite how much it’s costing your account, you’ll be in a much better place to avoid the problem. However, there are still times during the course of trading when these instincts are so strong due to what’s happening in the markets that some traders have “blowout” days.
All the hard work and control are undone by one or two catastrophic and often short-lived periods. So once you’re aware of the instincts you must still plan for how to avoid their occurrence.
This can be done in a number of ways.
The first possibility is a simple trigger response to conditions where the instinct often occurs.
Something happens in the market and an alarm goes off (either in your head or a specific alarm you’ve set up on your charting platform) and you do something before the instinct has chance to take hold.
- Take a walk
- Grab a coffee
- Shut off your trading platform completely.
You take a cue to “clear your head” before there’s a problem.
But there’s still a chance you’ll not adhere to that so it’s as well to train yourself as well.
If you’re prone to chasing markets for example, look for an instrument which is range-bound and ideally with low liquidity. Trade it on the sim for a week or so and attempt to catch moves after they’ve started.
Your results are likely to be very poor and so long as you have a respect for the exercise, you can create an aversion to chasing markets.
Kinda using the lick your wounds instinct to counter the hunter’s instinct.
The way to finally take control is to trade without fear at all.
However, this is something that takes time and success in the markets to understand that you’re not in mortal danger, but still might need to act quickly.
Basic survival instincts can be extremely powerful in how they shape our views on situations and the actions that they can force us to take. This is the reason why it’s perplexing to look back on trades where it should have been entirely obvious to us that we should have acted in a certain way and yet somehow we didn’t.
Once our survival instincts kick in and really take hold, they can literally blind us to the reality of a situation and give us temporary “trade plan amnesia”.
So if you’re having trouble in repeating certain trading mistakes over and over again, look to see if there’s a chance that there’s a basic instinct at work.