BarroMetrics Views: Our Decision-Making Processes
I have been in the markets since the mid-70s and a professional trader since mid to late-80s. If you said around 30-years of using technical analysis tools to successfully trade the markets, you would be close to the mark. For twenty of those thirty years, I have been a trading coach. From an early age, I wanted to leave my mark on the world and learnt from my Dad that the best way of doing that is by providing a service to others.
If you have never tried it, you may think that coaching is an easy enough job. Take my word for it. Helping another attain trading success in any market – stocks, FX and.or futures – is no mean feat. Part of the problem is those pesky core, unconscious beliefs that create a default future. By ‘default future creating behaviour’, I mean our behavioural responses are automatic and unconscious, and therefore come in under our radar – we don’t even realise we are doing it but because they are habitual the results we get are the same every time.
Let me give you a couple of examples:
- Joe is intelligent and is a professional – doctor, lawyer, engineer etc. He says he wants to be a successful trader. Each time we cross a critical juncture, Joe finds he has to travel, do a another course, take some time to smell the roses etc. On the face of it, each reason sounds logical and reasonable but when you string the events together, you find a pattern of behaviour that shows that Joe will back off and cause his progress to stagnate and regress whenever he feels he is closer to his goal. The important event here is the pattern not the reasons.
- Justine married and has time to spare. Her trading track record is abysmal. Her win rate is fine, over 60%, which is a remarkable rate for someone who holds positions for weeks. But when we worked out her Expectancy Return (Avg$Win x WinRate) – (Avg$Loss x Loss rate), it was well into the negative.
Justine is intelligent, works hard and has a natural aptitude for the markets; these factors coupled with her spare time ought to have meant she’d succeed relatively easily. But when I took her under my wing, the ‘default future’ soon reared its head.
Justine is predisposed to regret. As a result, she sacrifices being right for making money i.e. will exchange making money for being proven right by not having a losing trade. As a result, her Expectancy Return moves into negative territory. If she were prepared to reverse her attitude, she will be a trading super-star given her natural ability.
You’d think it will be enough for her to change if I just pointed out what she was doing wrong. But nope, it’s like having an alcoholic in the family – she finds all sorts of excuses to ‘drink’ i.e. take premature profits.
Tomorrow I’ll look at God’s joke on traders – how our brain is built in ways that bring up roadblocks to our success. I’ll also show the other side: that our brains are malleable and with the right process, we can change our behaviour.