Trading psychology is one of the toughest things to master in trading. Novice traders must grapple with greed, fear, and plenty of biases that plague their success. All the while keeping a steady mind to make sound decisions, and keep learning, so they achieve that long-term profitability. Add crypto volatility and leveraged trading to the mix, and it’s no surprise that most are unsuccessful.
In case you are running automated strategies, you might have gone through the bad decisions cycle, finally setting on emotionless precise execution as your best bet. But why is it so hard to get to that point? Or master your mind to the point that you execute a strategy consistently?
Well, there are two people involved in the process and they have very different temperaments and experiences. Both are you. One is your Experiencing Self, the other the Remembering Self.
Your Experiencing vs Remembering Self
Imagine you’re watching a movie and it’s “meh” throughout but manages to surprise you with the most awesome ending you’ve seen in a while. Do you think in the future you would rate it higher than a movie with a bad ending that was great throughout?
Renowned behavioural scientist Daniel Kahneman has proven it is so through experimentation. In the experiment they made participants experience cold. In one case they experienced medium cold for about a minute with 30 seconds of more extreme cold in the end. In the other the temperature was very low throughout the experiment with the temperature being increased at the end. Most participants rated the experience where the extreme cold was at end as worse.
This is why people are willing to put themselves through gruelling experiences like climbing excruciatingly high mountains. The reward of reaching the peak will make it worth it. On the other hand, 2 rainy days at the end of your 2 weeks sunny holiday may dampen the experience in your memory forever.
The experience itself and the memory are different. You are constantly shifting between your Experiencing Self and the Remembering Self.
Hold up, what does this have to do with trading?
Imagine you enter a position with 0 risk management, no stop loss, take profit, and no plan. Price quickly goes against you and you spend days watching the position be underwater. You start making promises: “I will never do this again, from now on my plan is gospel.” Then somehow you manage to break even, maybe even turn some profit.
Because of the fortunate ending after days of agony, you later think of this experience as “not that bad.” That end makes you break the promise you made to yourself, as your Remembering Self changes what actually happened when it commits it to memory.
Likewise, when you are executing your plan perfectly. You do everything correctly throughout placing the position and setting your stop loss and take profit. While at the moment you probably feel relaxed and know that even if you lose it will be ok as it is a part of trading and your risk is managed, if you actually close at a loss your Remembering Self will not pat you on the back. In fact, instead of storing it as a positive memory, they will make you feel bad about the loss which happened at the end.
What can traders do to manage this duality?
Awareness is the first step. Now that you are a bit more familiar with your own mind you can prepare to manage your Remembering and Experiencing selves, so they stop running your trading results: come up with a plan that guides you to your desired outcome. That way you will know that emotions will not ruin your trading:
Prepare versions of your strategies and backtest them
Sticking to something is much easier when it’s probable that you’ll be successful in the end. Backtesting is easy today and you don’t need to know programming or gather any data. It can be done in minutes. There will be loses and they will make you feel like your plan is bad
This is your Remembering Self battling your plan because of bad outcomes. Stick to it. If you see consecutive losses and are confident in your strategy, the wins are around the corner.
Don’t forget your mistakes because you got lucky in the end
A non-devastating end will cover the experience of anxiety when holding a bad position placed without a plan. Write it down in your trading journal or notes. Otherwise you will make it again and luck may not be on your side.
Consider automation
Not just buying shady bots where you don’t know what does into them. If your strategy is good enough to be consistently profitable you might be able to automate it. This will be a learning experience for you as a trader as you improve and tweak it.
There are many reasons why crypto bots can be very usefully in highly volatile, 24h markets.
If you want to learn more about the Remembering vs Experiencing self, check out “Thinking Fast and Slow” by Daniel Kahneman, it’s a really great read.
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