CHAPTER 5

The Traders' Psychological Edge Lies in a Different Kind of Thinking

Effective trading calls on traders to confront significant psychological challenges. Facing and overcoming these challenges is not an easy endeavor. The difficulty lies in the fact that our mind, our biology, and even our genes are not naturally suited for the mental demands of trading. In fact, our minds, our biology, and our genes tend to work against us in trading, as we have seen in the first few chapters. As we have also seen, the solutions traders develop to address these challenges—especially the notion that emotions should be eliminated—often compounds their troubles. We are not able to simply eliminate emotions or thoughts at will. That's just not possible on a consistent basis. Our minds are more complex; a simplistic, naïve approach not only does not work, it makes matters worse. We need to approach the psychology of trading in a different way.

Mind, Genes, Emotions, and Biology

One of the psychological challenges we face is the fact that our minds freely apply mental shortcuts that tilt toward cognitive biases in rendering trading decisions. Costly errors do not come from conscious intentional actions, nor are they always the results of emotions. Rather, many costly errors result from actions that appear to our mind to be correct at the moment and that later, on reflection, are seen as flawed and faulty. When we apply mental shortcuts, we ignore base rates and consider only the more ...

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