Trading Psychology – Leave Your Baggage at the Door

Published August 13th, 2021

Psychological fortitude is without doubt one of the strongest tools in my trading kit.

The market throws curve balls constantly. And as I have said many times before, if you play this game long enough, you’re going to get slapped around occasionally.

The secret to success is not avoiding the slap. You can’t.

The secret is keeping risk under control, understanding that your strategy has an edge, that you truly understand how and why the strategy will make money and then applying it for the long term.

My style of trading is trend following.

It makes money by staying with high beta names during sustained up trends. Limits losses by exiting and reverting to cash in adverse market conditions. It loses money when the market gyrates back and forth in a range.

Which is what’s happening now. The slap.

We bring a lot of baggage, aka biases, to the trading arena.

One is hindsight bias and I see it regularly.

For example, I recently sold all positions only to see the market rally straight back up again.

Would you find that annoying?

If so, that’s hindsight bias.

You can only act on information you have at the time. Had the market plunged back to the Dec 2018 lows my exit would garner a very different reaction.

Which leads to a second bias known as recency bias.

I briefly covered this HERE.

Amateurs are very quick to want to make adjustments to the strategy when the slap comes.

But usually the first reaction to the slap is the wrong reaction, which I discussed in THIS article.

Yes, I could remove the Regime Filter which means I would be riding this wave higher. It would also mean I would be crushed should a repeat of 2008 ever transpire.

It’s not easy to overcome these biases.

It take years of being slapped.

But you can wear the slap if you have the backing of critical research and a true understanding of your strategy.

Only then can you freely accept any outcome.