What is meant by living in the present? And why is it so important when trading?
Let’s start with a look at trading psychology.
Anyone who has ever traded with real money will know that it will soon become quite an emotional experience.
Strong emotions such as fear, greed, hope and even anger come to the fore very quickly.
But traders usually know that acting according to these emotions will damage their performance.
Trading on the basis of emotions is, in many respects, the opposite of acting on the basis of what is actually happening in the market.
The Ideal Trader
The ideal trader is not one who wins all the time. That is simply not going to happen.
The ideal trader is one that achieves the best possible outcome in a market.
This trader will have a plan that provides an edge and then follows the plan perfectly.
This ideal trader accepts any losses and gets the maximum profit while controlling risk optimally.
So, is it an appropriate objective for you as a trader to aim to become like this?
Definitely not. Because every trader has one thing in common – they are all human beings.
You cannot achieve this ideal because it requires a fully rational being. You are not such a being.
As a result, this ideal is unattainable.
You should never aim for something that is achievable because you will just end up disappointed and disillusioned.
Therefore, aiming for this ideal is the wrong strategy.
You’ll Never be Perfect
People are particularly irrational when dealing with risk because they are influenced by many cognitive biases and distortions.
Among the biases are the following:
- Loss aversion which is a well known situation where the pain that results from the loss of a certain amount is felt so keenly that it is not negated by the well being derived from a gain of a similar amount. This engenders risk aversion whereas rational behaviour requires risk neutrality.
- Probability Weighting Bias where people wrongly assess probabilities and give an unlikely event a high probability. As a result, people may accept poor investments, have unfounded expectations or over-insure. At the same time, likely outcomes are given too low a probability.
- Narrow Framing which exists when a person makes a decision as though that decision was taken in isolation from all other decisions. In fact this is not the case and the risks that are adopted in trading are in addition to the other risks you face in life.
- Reference Return which means that we tend not to see or assess returns as absolute values but relative to their context. Thus, a trader who makes 10% on a trade when an alternative would have yielded 15% will be a lot less satisfied than making 10% when the alternative only made 5%.
- People act according to a Curved Value Function. This means they are risk averse with respect to gains but are much more willing to take risks when facing a potential loss. They ‘throw good money after bad’ and refuse fair bets. This also leads to traders holding on to and extending losing trades.
Minimize these Weaknesses
Look at almost any website about trading. There will probably be 3 elements present: some information about the market; a product that is being sold; and some prediction about a market.
This prediction may be the product and make take many forms such as software, a new indicator, or a tip sheet or some other way to see what is going to happen.
The idea being sold is that being able to predict what will happen in the market is the way to profits.
Except that it is not. You cannot know what is going to happen in the market so prediction is futile and any trading plan or product that is based on prediction will fail.
Following a plan that is doomed to fail is not the way to profitable trading.
Living in the Present Moment
You cannot know how the market will move but you do not need to know in order to be profitable.
Don’t ask: what will happen? Instead, always ask: what is happening in the market?
Focus on what you know and use this information to guide your trading by making decisions regarding different possibilities.
Then assess and control the risks that are associated with your decisions.
This is what is meant by living in the present and why mindfulness is such an important skill for traders.
The whole focus of mindfulness is the present moment.
When you achieve this you make decisions according to what is happening in the market in the present moment.
Your decisions will be based on the facts that are in front of you, not on fears, hopes or memories of past events, both good and bad.
In this way, the psychological biases are reduced.
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