BarroMetrics Views: Emotions and Trading III
Concluding the series…..
I received a couple of emails asking about the Decision Tree figure in yesterday’s post.
A Decision Tree is a decision-making tool which identifies the ‘optimal’ path in conditions of uncertainty(http://www.youtube.com/watch?v=a5yWr1hr6QY). I use it more as a tool to formalise my thinking on the various scenarios I create, and my responses to those scenarios.
Anyway, we are speaking about emotions and trading – on one hand, the research shows we need emotions to make effective decisions; indeed without emotions we seem to be unable to make any decisions. On the other hand, we find it extremely difficult to avoid the “fight, flight or freeze” response from kidnapping our decision-making processes; “fight, flight or freeze” responses tend to be sup-optimal.
I suggested that preparation was a way out of the conundrum and was illustrating my approach with an example.
As I was saying yesterday, I came up with four possible market paths in the AUDUSD. Once I am satisfied that I have adequately covered possible paths (scenarios), I decide on my responses – in the form of journal entry. Then I, and this is the key step, take a moment or two, to visualize my acting on the response.
I have found that the visualization process makes it easier to execute the planned response. So, it was yesterday, when the AUDUSD accepted below my critical level for my long positions, I executed the planned response.
I think it’s important to understand that current thinking suggests that we cannot trade robotically (unless we are using computer-generated buys and sells). Our emotions are always with us; in fact, often our emotions (intuition) are very useful – warning us of dangers and opportunities that our conscious mind has not recognised.
We have no choice about whether or not we will feel fear, or feel the need to run away, or feel the desire to dig in our heels; we have not choice about ‘feeling’; our choice lies on whether or not to act on the feelings. And, for me, preparation is one effective way of ‘doing what I know’.