Q. Is having a (slightly) egotistical brain good for trading stocks?

...a psychology lesson in trading the markets.

6 minute read

Your ego has evolved to reassure you and give you confidence in the things that you do, based on events which have happened in the past. If you are good at a sport, like baseball, and perform well in this area time after time, your ego will be reinforced and you will draw confidence from this. If you score a home run during a match then it drives this home even further, and the more this happens, the more that you start to genuinely believe that you are the Don Juan. If it’s reinforced too much and a person lacks humility, it can manifest itself into arrogance and even cockiness, which can be a hugely negative trait when it comes to trading in the stock markets, especially after a winning streak.

Trading Brain
Letting go of your ego is undoubtedly one of the hardest tasks to conquer, but is also an absolutely essential ability in order to achieve consistent and profitable trading status. The quicker you can drop the need to be right, the sooner you will see your results improving.

There is no doubt that having total conviction when taking up a position in the markets is an essential ingredient (along with a couple tablespoons of humility and a few hundred milligrams of Valium) to good trading performance, and having strong confidence will help you to pull the trigger in this regard. It’s once a trade becomes live that you must learn to switch off your ego and take a logical approach to how you manage the position. This doesn’t mean trading like a robot (as we learned previously) and switching off your emotions entirely, but it does mean attempting not to show any bias. Bias because of the fact that it was yourself who formulated the plan to take this trade on, which therefore means your ego will intrinsically want you to be right.

 

Imagine an individual you don’t really like, you find them arrogant, obnoxious and annoying (Donald Trump, if you have to). If you were competing against them in the markets, and they formulated the exact same plan or hypothesis that you had for for your own trade, and then told you in explicit detail why this trade was going to work, your in-built bias would naturally want them to be wrong and fail, because they are competing against you. Yet, they would be using the exact same trade with the same logic behind it as you had formulated. In one instance you want the trade to succeed, because it's yours, and in the other instance you want it to fail. The ego is competitive and wants you to win by default, and will put a spin on things to give you bias.

 

Whilst this seems somewhat obvious, it’s hugely important because the majority of newbie traders don’t recognize this is going on in the background when they are trading, which can have a massively detrimental affect on their performance. They let losing positions run longer than they should, they add a little extra width to their stop loss because (they are stupid and) it is their trade and so 'it’s probably right', and they will even go to much farther extreme lengths because their ego is telling them that their view on what the market price will do is correct.

 

You might have experienced a situation where you have placed a trade, set a stop loss and the price has then moved to take out your stop. At this point, rather than use this event to take a step back and reassess your original hypothesis for taking the trade in the first place, you have placed another trade to replace the one which has just been taken out because you feel the market is now in an even better position to prove your hypothesis correct. This is more often than not followed by the price moving even further against you and your second trade being taken out just like the first.

"Dumb traders will sometimes make two attempts (or more) at a position because their ego is such that it does not want to accept that the original plan they formulated for the trade was incorrect."

Humans tend to stick by their plans strongly once they have made a decision. If they didn’t the world would be a pretty chaotic place, imagine all the people setting off to do one thing, whether it be going to work, going out to buy a coffee, or purchasing a house, and then have a small thing go wrong, only for them to turn back on their intent and do something entirely different.

 

Human brains don’t operate this way; individuals have evolved to be extremely resilient, even when something doesn’t go their way. If you drive to work and your car gets a flat, you’ll generally fix it and continue with your day. If it starts raining on the way to get a coffee you’ll persevere until you get there, and even if fundamental surveying issues arise during a real estate purchase, you will tend to figure out a compromise and continue with the sale; underneath it all, your ego wants your plan to succeed. It’s subconscious (for the most part) and it's extremely sneaky!

 

Human endeavor has been hugely positive for the species but it is not the best quality for trading. Traders find it difficult to accept their idea is wrong for a particular trade, and even worse, their complete trading philosophy can be very one-track minded . It might be that they feel day trading is the only way to make a success, or it might be that they place higher emphasis on support and resistance levels than is logical. The point is that the brain has an innate way of functioning which can be highly detrimental when attempting to extract money from the stock market.

 

There is a reason why the majority of individuals who attempt to make money in the markets fail, and fail miserably, and that is because they can’t adapt their brain to trade the markets in a way which is profitable. Many people make total sense when they are talking about trading, and in theory should make money, but in practice they simply can’t perform this way because they are not capable of getting a grip of their ego.

 

It’s incredibly difficult to override the way that your brain functions, and this is fundamentally what makes trading the stock markets so difficult. You definitely need some intelligence to understand the basic principles of the markets, but intelligence alone won’t define your success as a profitable and consistent trader. In order to do that, you’ll need to put the reigns on your ego, which has evolved over millions of years. Not an easy thing to do, but none-the-less, definitely possible; and if you are able to accomplish this then you will find trading the markets will become significantly easier.

 

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