How To Teach Your Brain To Trade

A lot of books have been written about the two sides of our brain. The Left Side which is the more linear, formula based, procedure oriented brain and The Right Side which understands design, symphony and context. Nobel Laureate Daniel Kahneman calls it System I and System II.

System I – is the one which came up with the word HILL ( jack and Jill went up the ____ ) It prompted you. It always does that. Bad news is you can’t even shut it down. Want a proof ?

Which line is bigger ?

There is a voice inside your brain which says left at the first instant. But if you look closely they are both equal. Now look at it again. Still the left one looks bigger. This is the problem. System I does not shut the hell up.

System II on the other hand thinks hard, understands and then responds. It gets activated when System I fails. Only when System I fails.  Let’s activate it.

47 * 53 = ?

System I is now buzzed. It doesn’t know what to do. Now system II takes over.

( The experiment above is copied from Thinking, Fast and slow – A pathbreaking book in psychology.  )

But what has this got to do with Trading ?

Here is the problem with Trading. Trading is fast. No time to react. System II needs time to assimilate, absorb and respond. And System I is like a drunken lazy slob who will just pick whatever comes. It hates hardwork. The same System I is your friend in trading. System II goes to sleep when the market is open. That’s the whole problem.

This is why TRADING IS HARDD!!

Now you have 2 options. Don’t trade – Only Invest – Use System II.

OR  – Take a whiplash and train System I to obey your commands. It’s far from easy. It’s like trying to push a mountain. But that’s the only way out. Pushing mountains takes years. Hence great traders take years to develop. Their reflexes need years to reshape.

But what is the process ? How does one tame System I ?

The 3P Process I call it . It applies to every single drastic change in life. Its PRACTICE, PAIN and PROOF.

PRACTICE – Practice does not perfect. Practice makes permanent. Bruce Lee explains it better.

Habits are never broken, they are replaced. ( Read Charles Duhigg – Power of Habit ). Old habits take time to replace. You need to hammer them out. Do it over and over and over. Do it 10000 times like Bruce Lee

PAIN – Every great achievement needs pain. Your birth was painful. Building muscle is painful. Running the full marathon is painful. But it’s always that last  pushup which builds muscle. That extra power you get when you run the last lap – its called the Runners high. That’s the one which makes you who you are. That’s how a moth breaks out and becomes a butterfly.

Muhammad Ali explains it well…

PROOF – Back test your system. Back test your beliefs. Back test all signals you wish to trade on. Test it a thousand times. Convince your brain they work. You brain needs to react in seconds and it cannot do that if it does not trust the data. From Trust comes confidence. From confidence comes victory.

And after all this is done comes discipline. Stick to it. Follow it. Trust it. But just like something has to go wrong in every movie just at the last minute it does in trading too. There are a few demons to conquer before you get the princess.

THE 6 DEMONS WHICH WILL COME BETWEEN YOU AND THE PRINCESS.

INFORMATION – Information during market hours is distraction. Shut it down. Have a plan. Stick to it. Switch off the TV, switch off the phone and especially watsapp.

IMPULSE – This is child of information. You see some news, some header on CNBC and you let yourself go. This is not what ace traders do. They don’t get carried away

INSOMNIA –  Rest well everyday. Trading is a discipline in all walks of life. You are a samurai. Remember that. Your brain needs rest. If you tracking Dow Jones at night it means only two things – You are stuck in a bad position which you need to get out of or you are over leveraged which is equally bad.

IGNORANCE – Be well aware of news related to your stock. Be well aware of Macro data figures to be released  during the trading day and factor that in your plan.

IDEALOGY – As a trader, don’t be fixated on one method. Learn to evolve. Market evolves. Systems work and then suddenly stop working. Different systems work in different markets. Be aware of that. Keep adapting.

I – I here means YOU. It means EGO. Don’t have an ego. Price is your inside man to the market floor. When it tells you to get out, run like your tail is on fire. Don’t ask anyone what to do. Nobody knows anything anyway 😛

( ‘ I’ can also stand for Intraday – But that will be just a rude joke to some people)

After you have done the 3P Process and fought these demons you will get your  princess.

And this , Ladies and Gentlemen is How you become a Great trader

By Rahul T