Trading Psychology : Walking The Plank

By Andrew

The mind is very powerful. We interpret things based on how comfortable we are, and we decide to take action based on that perceived comfort level. It reminds me of something I once heard from a psychology professor giving a lecture. I’ve adapted it a bit for trading.
I want you to imagine that trading is like walking across a 20 foot long wooden board that is 12 inches wide and 2 inches thick.

In the first scenario, the board is on the ground and your task is to walk across it. You have all the physical and mental skills needed to walk across the board. It’s a pretty easy task, right? If you want, you can close your eyes for a moment and think about or imagine yourself standing on one end of the board and facing this task. You can probably see yourself doing it without any problems. A very simple task indeed.
For the next scene, you have to walk across the same board, but this time, it is suspended between two 10 story buildings. Close your eyes and imagine that you are standing on one end of the board and faced with this task. What are you thinking and feeling now? What are you saying to yourself? Things are different now.If you’re like most people, you’re probably thinking about the height and the possibility of falling and smashing into the pavement below.
What’s happening here is that your focus on the danger has made you forget the utter simplicity of the task itself. You’ve now forgotten that you have the capability of walking across this board, it’s the same 12 inch wide board that you walked across a moment ago very easily. Your focus on the danger has taken you from being calm to feeling quite anxious, but the task itself has not changed, only the consequences of making a mistake have changed. You’re feeling the adrenaline rush associated with fear and danger.
On a psychological level, what many traders do is raise the board up off the ground by taking a straight forward task such as following an entry or exit signal and turning it into a task about one’s survival as a person. They think that one possible mistake could mean the end of the world. In other words, it’s very easy to confuse the task of doing your job with testing your self-worth. People who have tendencies toward perfectionism often have a strong reaction to this exercise….Part of the early life experience of a perfectionist is that they’ve come to believe that their self-worth is determined by their performance, so they must focus on self-protection from failing.
In Third scene involving the same foot wide board. The board is still spanning across two 10 story buildings, but this time as you stand on one end, you feel heat behind you. You take a quick look behind yourself and you see flames, the building supporting your end of the board is on fire. What are you thinking and feeling now? In the previous scene you were probably like most people and frozen with the fear of falling ten stories and smashing into the pavement below. What are your thoughts now? Most people think, “I’ve got to get across this board, there’s no time to worry about falling or doing it perfectly”. A lot of people will start thinking creatively about how to get across the board…they might crawl or scoot across on their rear end.
Notice how quickly and easily your thoughts and feelings change when faced with a more immediate danger, the fire, as opposed to the danger associated with the possibility of falling. What happened here is that once you made a decision to get across the board you re-directed your attention away from worry and toward a solution. Another way to look at it, or why you made the decision to get yourself across the board…. is that you’re no longer facing a possibility, or fear of pain or death associated with the possibility of falling; now you’re facing inevitable real pain and death from being burned to death.
Pain is a huge motivator. Faced with two difficult tasks we must choose from, we will usually choose the one that causes less pain and/or has less of an immediate potential for pain. You’ve probably heard about how often traders won’t exit a loser until the pain of losing money is greater than the pain of being wrong…..and in many ways this is similar to the task of walking across the board with flames licking at you from behind.
Let’s do one more scene with the wooden board. The board is still 10 stories high, but now it has a strong, supportive safety net 10 feet below. If you’re like most people, you can see yourself going across the board, you might be somewhat anxious, but falling no longer means certain death, you can now recover from a fall. You are now operating with an image or within an envelope of safety.
One of the lessons here is we traders will do lots of things to avoid pain, or the perception of pain. In trading, the safety net is your pre-defined risk level, or stop level. It is there to protect you from further pain.