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Where do breakdowns in perception come from and where are losses generated? They come from interpretations based upon faulty conclusions or coming up with meanings not aligned with reality.
Has this ever happened to you? You "see" a symmetrical triangle that to us formed over three months and you "believe" it is going to break to the upside, and you get excited and impulsively buy a long option with only 1 month of time because it’s going to break soon and you don’t need to pay the extra premium, then your emotions (excitement and greed) have misguided your perception.
You find yourself entering the trade based upon emotions rather than logic. In fact, you have a rule about always buying 2 or 3 months of time if the price pattern considered takes several months to form, then your rule says that you should buy more time, but you ignore the trading rule with a rationalization. But rules be damned, it’s time to make some money!
Part of what you tell yourself is that it should break-up and that it should do it soon because it is so perfect. You begin to should on yourself. Language like should, shouldn’t, must, can’t, and “gonna” all have one thing in common: they are not based in fact but assumption. So, based upon what you saw, you entered the trade and as soon as you did the price action went the other way.
And of course you panic and grab the hopium, hoping that it will come back. And it does, 6 weeks later, long after the option has expired and you have taken a hefty loss.
Now the only should that is applicable here is that you should have lost. Yes, you should have lost. Because, you bought just the right amount of time, responded to just the right amount of assumptions, and engaged just the right execution in order to crash and burn.
The universe is based on cause and effect. You created the cause through flawed logic based upon inaccurate data, and disregarded important facts. It’s like the law of gravity. If we drop something it will fall and continue to fall until operated upon by an outside force, like the floor. How do we know that? Because it does. How do you know you should have lost? Because you did. We get the results we should get based upon the circumstances and conditions present. You have probably heard the cliché definition of insanity, “expecting a different result when we keep doing the same thing.” Continuing to trade using the strategy of loss, i.e., "put my head down and barrel forward disregarding my rules and going on what I think—in other words, "gambling."
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"Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative and creation, there is one fact, one elementary truth, the ignorance of which kills countless ideas and splendid plans. That the moment that one definitely commits oneself then providence moves too. All sorts of things to help one that would never otherwise have occurred manifest themselves. A whole stream of events issue from the decision, raising in one’s favor all manner of unforeseen incidents and meetings and material assistances that no man could have dreamed would have come his way."
W.H. Murray beginning of Murray's The Scottish Himalayan Expedition (1951):
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