Trading Decision Making: How to Trade With Confidence // Ep. 51

In This Episode

• Buridan's Ass definition
• Why having good records gives you confidence
• The thing most traders do during times of indecision

How to Trade With Confidence

Listen in as we sit down to talk about Buridan's ass and how it manifests in the trading world. As we have said many times before, trading is a learned skill. The “natural born trader” is extremely rare and most high performing traders had to go through a lot of pain before they became successful.

So we discuss the common issues that traders face when it comes to trading with confidence and give you a couple of strategies that you can use to build your confidence.

Read the Transcript:

Hugh:    Hi, Walter. This is something that you probably know about from your studies in Psychology. This idea of the paradox of indecision. I think they call it Buridan's ass or something like that. Where the donkey is between two: the food and the water. And can't make a decision and then he dies because he doesn't get either one.

How do you see that playing out in trading? How do you see that manifest?

Walter:     I think in trading our gut instinct is to take the profit and to not wait. Let's say, you are in a trade and your trades in profit but it hasn't gone as far as you had hoped it would go. Let's say, for example you risk a thousand dollars and you want to go to your two thousand dollar target.

You want to make two thousand on your thousand dollar risk. It's really tempting when it's at eight hundred bucks for you to go, “It's almost Friday, maybe I should just take that profit you know” and the problem with that, is that it messes up all of your stats. So I think when people are stuck and they're indecisive, they usually, the instinct for traders, for us is to do the wrong thing.

Hugh:    Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.

At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.

So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.

Walter:     It's usually to take the profit; it's usually to you know put off the pain. So take the profit quickly or take the nice feeling thing quickly and to put off the thing like the losing trade. Move the stop away. Move it further, move it further so you don't get stopped out yet. Give it more room like those sorts of things.

I think traders, when really it's interesting that some of the most successful traders what they've done instead is they learn to adapt. Interpret the market information and feedback that they get differently to most traders. For example, trading really low win rates strategies or you know not taking a lot of trades and having a lot of restraint. Do you know what I mean?

It is really easy to get stuck in that situation where like: I don't know what to do, I don't know what to do but I think the tendency for most of us, at least for me and a lot of traders I've talked to, especially when you first start trading is to do the wrong thing.

So to take that quick profit, to put off that painful loss, all those sorts of things are kind of like what we're built to do. It's why the markets you know, it's classic like I was just reading the other day about this hedge fund. This hedge fund had been bearish for years. They had been banking on a market collapse.

The interesting thing about it was this year. They had finally decided you know what? We're going to go long. We're going to go long the markets. We're not short anymore and then March 2020 happened and with the coronavirus streak, it freaked out and of course the markets all went down.

So they literally decided to flip right at the point, do you know what I mean? Everything turned around. It is so amazing how we are so good at that as people, at picking the exact turning point and deciding, “Do you know what? Maybe I'm doing the wrong thing here. Maybe I should do this instead”. It's always you know right around the point where you should actually not do that.

I think that kind of tells like that's the story of the markets. That's why it's so difficult for a lot of people to make this work. It is because you're just built to go against it. Including you know that being indecisive or deciding to do sort of the you know the wrong thing mathematically, financially.

What do they call behavioral economics? They say that we should be very rational and make rational decisions. The one that makes the most money and all that but we don't do that. The data is pretty clear on that. I believe that we don't do that. We don't make those decisions that are most rational and so instead we have these driving things like the drive to be right.

The drive to be right is to take profit quickly. The drive to avoid saying you know avoid losses and say that you're incorrect. Both of those are kind of the same thing. It is like you do not want to take the loss and you also do not want to say that, “Oh, I made the wrong decision here” you know all that stuff.

So it is a tricky thing. What are your thoughts?

Hugh:    For sure. I also think it's worth mentioning that you should make a decision. The worst thing you can do is kind of just say, “I'm going to take the trade. Am I going to get out? I might not”. Make a decision, whatever you think is the right thing. Just make the decision and then number two, record it.

If you can do those two things I think you'll learn much faster because you'll understand, “Okay, I have a tendency to do this. Take profits early” whatever it is and then I record that in my journal and I can see that, that doesn't result in much. I think a lot of times people get stuck with a decision.

They are like, “Oh, maybe I should do that. Maybe I shouldn't” and then they kind of flip a coin and you're not really sticking to one path. If you can stick to one path I think you can understand your logic. How you really feel about the trade and then that will allow you to either continue on that path. If it's working or take another path if you know it's not or whatever.

Walter:    That is a really good point. I learned that lesson. I was reading about a famous surfer and he was saying how as the waves get bigger, I don't really surf like huge waves or anything but when I was younger, I did more I guess. He was saying that the worst thing you can do in big surf is to be indecisive.

It is so true because it's exactly what you're saying. It's so bad because when you're paddling out, you've got to decide where you are going to try and get a duck dive under the wave or are you going to ditch your board. When you're paddling forward, you’ve got to decide: Am I on this? Am I definitely going to try and catch this wave?

What happens sometimes is people get a little bit fearful when they pull back and then they're stuck in the wave, and then they really take a pounding like all that stuff. So it's the same with trading. Your point about having a record is really good because you then can learn.

You can learn obviously from experience but it's so much better because we kind of trick ourselves. We cloud our memories by thinking that we're better than we are or sometimes worse than we are. I think for most of us, we think we're better than we are. So having a record is really clear because  that clarity can keep you sort of grounded at where you're really at. So that's key, for sure.

Hugh:     Cool, all right. Thanks, Walter.

Hugh:    All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

Enter the Monthly Contest

We give away a trading prize every month, so be sure to enter to win.

You can win by doing one or more of the following:

• Leave a comment on YouTube
• Leave a review on iTunes

Each action counts for one entry in the month that it was posted. We will pick a winner at random from the entries that month.

The giveaways can include books, coaching sessions, trading tools, or surprise gifts.

Click Here to Suggest a Podcast Topic

Listen to the Audio Version

Click the play button below to hear the audio-only version. You can also download the mp3 file below.

Podcast: Play in new window | Download

How to Get New Episodes of The Think Profit Podcast

You can get notified of new episodes of the podcast by subscribing to our email list, or subscribing via any of the major podcast platforms that can be found here.

If you enjoyed this episode, a 5-star review on your favorite podcast platform is always greatly appreciated!

Thanks for listening and we hope that your trading is going well!