Innovative Trading - Day Trading

UNDERSTANDING OUR NATURE

“A man’s character is his fate” --Heralatus

What actually is man, why does he think and act in the way that he does? What is the relationship between mind and body? What influences his behaviour? Since the ancient Greeks defined Psyche as the Goddess loved by Eros, philosophers have produced numerous conflicting theories of human nature.

In 1762 J.J. Rousseau wrote his famous test “Emile”, which introduced a revolutionary theory of childhood and human nature that is still relevant today. Rousseau argued that man’s nature was essentially good; however, his nature was influenced and corrupted by society. Rousseau believed that a child’s mind was “Tabula Rosa” or a clean slate when the child was born, and it was at this stage that the child has the potential within itself to develop almost unlimited talents. The clean slate has experiences and rules written upon it as the child learns and develops. As a child moves from birth to adulthood, he effectively becomes a reflection of his experiences.

Rousseau’s theory is very idealistic and perhaps naïve; however, he does pose two very important questions. First, how much of human behaviour is learned and how much is genetic? Secondly, how much influence does society have upon us? There are undoubtedly instincts and primary needs that we are born with, and no two infants are exactly alike, i.e. children have different responses to stress. However, it is the environment that is the major influence on our behaviour. Children take on the attitudes, behaviour and opinions of those around them. With investment there is no doubt that all aspects of investment behaviour can be learned.

“It’s the psychosomatic form in which man experiences his estimate of the beneficial or harmful relationships of some aspects of reality to himself.” --Definition of Emotion

As we have stated earlier, method and knowledge by themselves are simply not enough. If there is one crucial factor that makes an investor a winner, it is emotional discipline, which gives the will and ability to execute knowledge. In order to acquire it we need to look at our desire and motivation, and how these two conflicting emotions need to be reconciled in order that we can trade successfully.

All of us, at certain times, lack motivation. We may desire a whole host of different goals, yet we lack that spark of motivation to get us there. To fulfil our desires and reach our goals, we need to channel our desire through positive motivation.

Positive motivation is needed to get us to our goals. Without it, all our knowledge and desires are useless. Consider the area of weight loss. You can go into any bookshop and you will see countless scientifically proven methods of losing weight. Yet out of every 100 people who start a course, only 10 succeed in losing weight, and only 2 in 100 keep it off for more than a year. The success rate is less than futures trading! Ever seen those step-by-step language courses - just follow the tapes and in no time at all you will be speaking your desired language with fluency. Now everyone can learn a language, yet the success rate here is about the same as in the area of weight loss.

“People who deal with stress believe that an increase in the pain and strain must happen before the pain will go away. Their approach to stress and life is similar to Nietzche’s statement ‘whatever does not kill makes me stronger.” --Salvadore Madd

There are two fundamental emotions that stand in the way of positive motivation. The two emotions are the need to avoid pain and the desire to achieve pleasure. In order of importance, the need to avoid pain dominates. If our desires remain unfulfilled we will, however, feel empty, depressed and dissatisfied. Our motivation to reach our goals is continually undermined by conflicting emotions.

To achieve our desires and feel fulfilled, we need to suffer some pain. It is the ability to see this pain in a positive way that will help us reach and fulfil our desires and give us happiness. In the case of the language course, it is working with boring repetitive material; with the diet it is the pain of being deprived of food we crave. If you think of the pain/pleasure relationship in trading, you should consider the fundamental rule of trading: cut your losses and let your profits run and you will see why the majority of investors find it so difficult.

Taking a loss, however small, is painful and ego deflating. It means an admission of being wrong. Rather than take the loss, people hold on and hope that it will turn around and become profitable, and therefore pleasurable. In the world of trading this very rarely happens - the result is normally a bigger loss and greater pain. Similarly, when we see a profit in the market, the pleasure we derive from this means that most investors take it before it has the chance to turn around and cause pain. To be successful, it is clear that one needs to be able to positively accept short-term pain to reach our ultimate goals and desires.

“Let me tell you the secret that has led me to my goal: my strength lies solely in my tenacity.” --L. Pasteur

To achieve positive motivation you need to set clear, long-term goals and motivate yourself towards them. An acceptance of short-term pain, therefore, is inevitable. If you make a complete honest commitment on what you want from life, why you want it, and how you intend to fulfil your desires and goals, this personal honesty will release you from the pain/pleasure paradox that most investors suffer from.

INVESTOR PROFILES:

I have worked in several commodity brokerages, introducing accounts, and now write books and newsletters in addition to running my own commodity brokerage. I have probably introduced around 6,000 investors to trading over the years, and have encountered a broad cross-section of investors. In his book “Beyond the Investors Quotient” J. Bernstein puts the investors he has come across into categories. I have done a similar exercise below, and tried to put investors into six main categories. They are not etched in stone and some categories obviously overlap.

The Universe is governed by law There is a huge marketing campaign in futures trading based around Holy Grail systems that are able to accurately predict future price movement based upon scientific law. They normally claim fantastic results and yet will only cost you a few hundred dollars.