In trading, we automatically have two of the red flags the authors raised in Think Again:

• Self-interest
• Attachment

The two emotional stimuli are part of the reasons that we hold on to losers and cut our winners. And because markets are ambiguous and uncertain, the other two red flags come into play:

• We are misled by false patterns - patterns that appear similar to the one we are considering but in fact are different - and
• Misleading prejudgments - often the result of our last trade, sets us up for the next: whether the previous trade was a winner or loser, its results can impact on our analysis for the next trade.

So, how do we overcome the problem?

1. The first step is to be aware of our emotions - are they genuinely warning us of danger or potential or have they shanghaied our cortex with a fight or flight response.
2. The second step is to prepare. Part of that preparation involves making sure we adopt an open mindset - that we take in sensory data that is contrary to our view of the market. In this regard, using probability language, ‘the market may’, ‘the market could’ etc is important. Research shows that once we have made up our mind, it usually takes much more evidence to change it.
3. Use visualization before the market opens to prepare for your trading.
4. Acknowledge the emotions you are feeling. Denise Shull suggests we ask: “What do we want from this trade?”. By asking this question, we lay open the unconscious motivations that may block an objective assessment of the current situation.

This completes the series. Back to the markets tomorrow.

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