Our Actions Are Not Rational

Did you know that our actions are seldom entirely rational? And this is especially true for money, finance …and trading. Recent studies by 2017  Nobel Prize Winner in Behavioural Finance, Richard Thaler, and even your personal experience will prove that to be true.

• Have you ever bought something that you wanted, perhaps a pair of shoes or even a car, only to regret it afterward? That’s because your emotional mind made your choice, and you rationalized your decision with your reasoning mind because you wanted it.

Even though classical economic theories see us as rational human beings, we have emotionally driven “animals.” Most of our actions are emotionally driven, even if we don’t realize it. Our emotional mind reacts faster than our rational mind, and then we use our sound mind to convince ourselves that our emotional decisions are appropriate.

This happens in all area of life;

• You may know that water is healthier to drink than Coke or any other …, but if your emotional mind has decided that it’s time for a Coke, your rational mind will find a way to justify your decision.
• Like having mid-January completely forget great New Year’s resolutions, this is also true in trading.
• You probably have a trading system you know you should follow, but when the stock moves in the wrong direction, suddenly you decide to move your stop-loss further out or cancel it altogether. Or you choose to make a trade that looks good before entry, only to see the accurate picture after getting into the trade, wondering, “Why did I do that?” What is that thing within you that causes you to sabotage your actions?
• Rationally you may know that you should get out of a losing trade NOW. Still, your emotional mind has decided that it’s a wrong decision, so you hang on to a losing trade far too long until the emotional pain is so significant that you can’t take it any longer. You capitulate out of sheer emotional exhaustion. You can’t take the pain any longer.

When I started trading, I developed a trading system, and I learned about trading discipline. I found it easy to stay disciplined when I was trading virtually, but as soon as I put real money on the table, the whole energy around my trades changed completely. I become more emotionally involved in the trades, and I started making mistakes that I had never thought I would make.

Why is that?

The Rational Decision-Maker and the Irrational Action-Taker

The decisions we make on a rational level are often just a way for our mind to justify the emotional decision that we have already taken unconsciously.

Our decisions are made on two distinct levels; On the rational level; We decide with our mind that.

1. This happens because our rational decision-making is being outplayed by our irrational action-taker, which is not logical and easy to please.

• The Rational Decision Maker may decide to enter a position with a definite, clear exit plan, exit at a certain level, or activate specific triggers.
• The Irrational Action Taker may very well decide NOT to follow the trading plan, which means you will repeatedly struggle with losing trades.

If you want to become a profitable trader, these two parts need to work together.

It is not enough to expect a profit when the master fails to follow the rules he makes. Just like a professional golf player or an expert in any field, as a professional trader
you need to master your inner game to be successful.

Expect more powerful information about the
5 Pillars of Successful Trading over the coming weeks!

• Some of the most ….
• Freeze instead of pulling the trigger when it is most needed.
• Cut your profits too soon.
• Move or close your pre-defined stop-loss and end up with a losing trade.

There are many aspects to trading.

Trading is not just a one-legged stool where you can focus on one thing and expect to be profitable. Several pieces need to be in place to be profitable in trading. 4 of them are well-known, the 5^th one is often overlooked, downplayed, and forgotten about.

A Trading Plan

Of course, you need a trading plan. Your trading plan needs to be specific, detailed, and proven to work. Tested.

Journal

It would help if you journaled to stay profitable and learn from your mistakes. Journaling is a proven tool to track your performance and improve your system further.

Stress Management

It will help if you manage your stress. Stress management will help you deal with the uncertainties of the markets and your personal reaction to unexpected situations.

Mental Discipline

And it would help if you had mental discipline. Mental discipline is often looked upon as trading-psychology, but it is actually not. It would help if you had mental discipline to stay focused on your trading plan, learn from your mistakes, and manage your stress. It would help if you had tools to stay disciplined and execute your proven system in any situation.

but it would help if you also had something that is even more important, and that is

Emotional Mastery

Emotional mastery. Your innate programming of emotions (fear, greed, anger, frustration, revenge…) will cause havoc to any trading account if you cannot master your emotions.

Because emotions can whack up any trade; You can suffer from optimism to enthusiasm, to anxiety, fear, panic, discouragement, hope, and relief, all in one single trade, and it can go up and down in a continuous cycle until you are broke unless you learn to master your emotions.

And the emotions you really need to master to be a profitable trader are the following;

• Anxiety
• Panic
• Worry
• Despair
• Denial
• Discouragement
• Greed
• Fear

Greed and fear are the most debilitating emotions for most traders.

The 2 Rational Pillars

• Trading System;  A definite system you have back-tested, refined, and that is known to work.
• Journaling;  A way to track your performance and improve your system further.

These are external pillars….

The 3 Irrational Pillars

• Mental Discipline Tools to stay disciplined and execute your proven system.
• Emotional Mastery Your ability to stay calm, laser-focused, and completely in control,
  even in difficult situations, without causing havoc to your trading
• Stress Management Specific ways to deal with uncertainties of the markets and your personal reactions to the markets.

These are internal pillars that you need to master to be a profitable trader.

80% of Trading is Psychological.

This is what you need to be a profitable trader

1. A trading-plan
2. To journal
3. Stress management
4. Mental discipline
5. Emotional Mastery

The most important part is to manage your emotions because if you cannot manage your emotions, you can have the best trading plan in the world, but it won’t work. You will lose money because you cannot master your mind, and you won’t execute your trading plan as you should.

So, the ONE essential element to profitable trading is emotional mastery!

Improve Your Trading Edge!

Why are Emotions Important to Profitable Trading?

Isn’t it enough to spot the correct entry and exit and have an excellent trading system?

These are essential parts, intellectual parts, but it is more to you than just your intellect. And it is important to combine all parts, your intellectual brain with your emotions.

You had probably had days when after a fight with your wife or someone close to you, you weren’t able to focus 100% on what you were doing intellectually. Or; you made bad decisions that ended up costing you a lot of money.