How You See Affects How You Trade

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Dr. M. Woodruff Johnson

04 May, 2012

in Psychology

How often have you seen something that upon closer examination turned out to be something very different?  Or, have you ever looked at the price action and acted upon what seemed to be a perfect price pattern; then wrote your plan, executed the plan, and summarily were stopped out; only to go back to what you thought was the price pattern that now looked entirely different?!  It was like a dream.  What you perceived was predicated upon how you “filter” information.  You interpreted what you saw through mental models of how the world appears to be.  In other words, what you “see” and interpret as reality is created by internal working “models” in your mind.  Mental models of the world are formed in your earliest years of development and continue to expand throughout years of living.  These mental models or paradigms are built around everything that you have learned and make up the conscious and unconscious beliefs that motivate you to both good and bad behaviors.  Additionally, these mental models or programming also involve how you perceive the world; in other words, the lenses we use to “filter” information.  There are as many ways to filter data coming into the brain/mind for processing as there are people on the face of the planet.  And, it’s important to understand some of the more general ways that filters work.  In this way, you will be able to promote changing what you do through how you do it.  If you are getting results that you don’t want then you must change something.  But, it is very difficult to change in the “right” direction, if you aren’t clear about objectives and the direction to begin with.  Doing things differently as a result of seeing and experiencing things differently is what we are talking about and this is the beginning of making changes in your trading in order to get better results.

Let’s look at some of them:

Associated/Disassociated Filters

Associated filters are distinguished by your perception of an event and imagining it from being “in” your body.  Think about one of your most recent trades.  If you are able to experience it again by hearing the sounds through your ears, seeing the charts through your eyes, and touching the keys of your computer with your fingers, you are filtering the event in an associated way.  If on the other hand you saw yourself as though you were an outside observer and experienced yourself as if in a movie, then you are dissociated.

Why is this important?  The ability to associate or dissociate is a fundamental skill, with each state offering different benefits in order to at times experience feelings, emotions, and events as though you were there in an associated fashion, or to distance yourself from unpleasant, or traumatic situations. Difficult events can sap your strength and compromise your resolve.  It is not only helpful but also empowering to be able to dissociate and distance yourself from those events.  When you distance yourself, you are actually detaching as well from the intensity of the emotions; which can be very supportive in honing your focus in the trade.  This is quite helpful if you are dealing with a trade that went sour, or the memory of a past trauma.  Additionally, you can manipulate the filter by exaggerating the distance as you see yourself far away and hear the sounds of the experience from a distance.  Conversely, uplifting and supportive visions of what you want can be used by associating into the experience and feeling, touching, tasting, smelling and seeing what it will be like when it is achieved.  And, in this instance, dissociation can be used as well to “see” and otherwise experience yourself in the future reality in order to clarify it in your mind as “you are achieving it.”  And here’s something you probably didn’t know: with regard to stress and trauma, those that relive the memories in an associated way add to their stress and experience longer lasting and more intense emotions because they inflict the intensity of the event as though it were happening again and again.  Those with the lowest levels of stress are able to dissociate and detach from the experience.

Past/Present/ Future Filters

Some people have a penchant for the past; among other things, they are enamored with back testing.  On the other hand, many will tell you that back testing will only tell you what the price action did in the past under those circumstances.  Others prefer to be in the present, and still there are those that are firmly ensconced in the future.  For instance, questions like: What’s for dinner?  How long until we get home? What’s next on the agenda?  All look to the future.  There is no right or wrong, good or bad, but it does present a filter for how you communicate with yourself regarding what you see and how you process the information.  One thing is for sure, when you trade, it is critical that you be in the Now of the trade.  You cannot live in nor can you trade in any other moment but this one; and if you are distracted by the past or the future then you will be diminishing your trading power significantly.

Internal/External Filters

Internally-referenced people rely on their feelings, thoughts, images and voices as evidence of being correct, appropriate or being fulfilled.  Externally-referenced people look to evidence outside of themselves for validation of their opinions and ideas.  Your preference will play a big role in the way that you trade.  If you are externally referenced, you are more susceptible to the influence of the “experts” and prone to heed the opinions of others while in a trade.  People who are independent in style are usually internally referenced.  They may listen to the opinions of others but rarely do they depend on them for validation of their own proclivities.  When they have analyzed a trade, they feel confident.  Conversely, people who are more driven by an external perspective will place a substantive portion of their confidence in what the pundits have to say.  Again, the important thing is to be aware of how you think, embrace reality and find a balance that honors your own analytic abilities, but appreciates outside resources as beneficial modes of additional information.

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TLDR but...

Absolutely. Cognitive bias is used on internet forums day in, day out to try and hoodwink the unwary. How mnay times do we see a string of 'profitable' 'trades' in a certain direction completely ignoring all the ones in the opposite direction or all the losses because people only see what they wish to see.

May 09, 2012

Member (647 posts)

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