The Power Of Association

Although risk is relative, the perception of risk by hot-blooded traders appears absolute. Despite the fact that this emotional response seems irrational from the seasoned traders point of view, it is nearly implausible to change the perception of the emotional trader without proper training and understanding. It is the power of association that drives this emotional response. Our minds have an intrinsic design characteristic that causes us to link and associate anything that exists in the external environment that is identical in quality, characteristics, properties or traits to something that exists beforehand in our mental environment as a distinction or memory. Many traders associate trading with pain as they have experienced many maddening & emotional monetary losses.  

The tendency for our minds to associate is an unconscious cognitive function that occurs by itself. It is not something we have to think about, unless we are making a conscious association. This unconscious mental function is akin to an involuntary physical function like a heartbeat. Thus we don’t have to think about linking experiences and our feelings about them, it is simply a way in which our minds work. Of course this has a discerning effect on the way we experience our lives.  

For traders that are struggling this has crucial implications. The internal negative energy of the association of trading being painful, is tough to override. When we observe an external form of positive structured energy in the form of “the perfect setup” there is a conflict. Both forms of energy have the capability to express themselves. The strongest force ends up winning. 

The external energy has the potential to act as a positive force on the trader, however, his experience and association of trading being painful gives rise to an internal conflict before and during the trade. This internal conflict is loaded with energy. The amount of discomfort experienced is unique to each individual and is in relation to the degree of emotional duress that the trader has suffered.  

The experience of pain during a new trading experience is what psychologists refer to as ‘projection’.  You are instantly projecting your past experience onto the current situation. The trader is projecting their pain onto the market and it is reflected back to him and is recognized as painful even though we know the market is neutral.  

The emotional pain makes us lose focus and it becomes difficult to perceive new possibilities, which in turn inhibits our ability to learn something new.  

Though the market is presenting a new opportunity, yet the trader’s automatic involuntary mental process inhibits his potential to act consistently. This association is recognized as a self-generated experience. One basic objective of traders is to perceive opportunities and not the threat of pain. This makes it essential that one understands the source of the threat. It is not the market. Again the market produces information about its potential from a neutral perspective. At the same time it presents an unlimited stream of opportunities to the observer. Thus, the question you must ask is whether the information is inherently threatening or is the potential to feel pain simply the trader’s own state of mind being reflected back to himself?  

For untrained traders their minds will instinctually and unconsciously associate the “now moment” opportunity based upon their most recent trading experience. Thus if you have experienced a chain of losses you feel threatened, if you are coming from a series of winners you may be overly optimistic.  

Understanding and becoming consciously aware of this process of association permits you to circumvent, and direct this process. Taking conscious control of the association process is a powerful tool and will increase your consistency and ease your anxiety.  

The best traders have advanced to the point where they believe without a shred of doubt or conflict that anything can happen. Their belief in uncertainty is so robust that it thwarts their minds from associating the “now moment” opportunity with the outcomes of their most recent trades.  

By preventing this association they are able to take advantage of whatever opportunities the market may offer at any given moment. This outlook allows you to consider both the known and unknown. Your meaning of an opportunity or edge is known, however you do not know the pattern or outcome of this edge. This edge places the odds in your favor yet you totally accept the fact that you do not know the outcome of any particular trade. Your mind is open to any possibility, it is open to grasp something new, and it is helpful in creating the mental conditions necessary to “enter the zone”.  

When you are in “the zone”, both your mind and the market are in sync. To be in sync with the market you must completely accept the psychological realities of trading.  

Most traders are of the view that being a good market analyst is the key to trading. Although market analysis is vital, it is not the most important tool in a successful traders repertoire.  

Your knowledge about the psychological characteristics of a successful trader does not necessarily translate into acceptance and belief. When something is truly accepted there is no conflict with any other component within our mental environment. When we believe something, we operate out of  that belief as an inherent function of who we are without struggle or effort. Knowing this, it is easy to understand why such few people are successful traders. They simply are not aware of or don’t do the mental work that is required to reconcile the many conflicts that exist between what they have already learned and believe, and how that learning clashes and acts as a source of defiance to implementing the principles of successful trading. To get into a free-flowing carefree state of mind that is ideal for trading, it is imperative that these conflicts are thoroughly resolved.  

The market's underlying characteristic is that it can express itself in nearly an infinite combination of ways. 

As the amount of people participating in the market at any particular time and their opinions about the market at that time present a nearly infinite number of combinations. Especially if many of the participants are experiencing emotional duress thus altering their opinions based on the markets every movement. Moreover, there are traders on the sidelines waiting for their definition of opportunity and they can tip the balance for buyers and sellers at any time. This is the harsh & cold reality of trading that only the best traders have embraced. Anything can happen, and it only takes one trader to invalidate your position or belief about the future direction of the market.  

By invariably accounting for the unknown the best traders predefine their risk, cut their losses,  and systematically make profits. The fundamental belief that anything can happen acts as the foundation for building every other belief and attitude that is necessary to be consistently successful. By establishing this belief you can start training your mind to think in probabilities.  

How does one produce uniform results from an uncertain probabilistic outcome? This is another anomaly of trading, random outcome, consistent results.  

The best traders treat trading like a numbers game, quite similar to the way in which casinos approach gambling. Casino events have consistent probable outcomes with the odds on their side.

What makes thinking about probabilities so tough? It demands two layers of beliefs that on the surface seem to contradict each other. First you have to believe in the uncertainty and unpredictability of the aftermath of each individual trade. Second you have to believe that the outcome of a series of trades is fairly certain and predictable. 

You must learn and completely accept the fact that you don’t know what is going to happen next, and in fact don’t need to know, in order to be consistently profitable. Since you don’t have to know the result of each trade you do not place any significance, emotional or otherwise, on each individual trade. You will not be hindered by unrealistic expectations, and as a result it is easier to stay concentrated on keeping the odds in your favor and to execute your plan.  

Your personal edge and “rules of engagement” are the known variables that put the statistical edge in your favor. The unknown variable also includes all of the other traders in the market. The collective behavior of participating traders form noticeable patterns in the market and will produce opportunities on the basis of your definition of an edge. Although the current pattern appears to be the same as past opportunities, the participants, their behaviors, and the nature & timing of their decisions are different for every edge. Thus the outcome remains uncertain.  

Being mindful of the uncertainty and the nature of probabilities does not equate with the ability to function effectively from a probabilistic perspective. Our minds cause us to perceive what we know, and what we know is a function of our past, yet every moment in the market is different even though there may be similarities to something that has occurred in the past.  

Therefore, you must adapt your mind to perceive the uniqueness of each moment in the market.  

Most of the traders believe that they are accepting the risk by placing the trade and establishing a stop loss.  However, this is not necessarily the case. They might act in a responsible manner but not actually believe that they will be stopped out or that their trade will move against them. Therefore, they have not exactly accepted the risk and are unable to face the possibility that their analysis is wrong. 

When you train your mind to think in probabilities, it means you have fully accepted all possibilities with no cognitive dissonance, and you always take action, and always take the unknown forces into account. Thinking in this manner is nearly impossible unless you have done the mental work that is needed to let go of the need to know what is going to happen next.  

Successful traders who have learned to think in terms of probabilities have no doubt in their overall success since they commit themselves to take every trade that conforms to their definition of an edge.  They do not try to select the edges they think, assume or believe are going to work, nor do they avoid edges that they believe won’t. If they did, they would be contradicting their own belief that the “now moment" is always unique, hence producing a random distribution between wins and losses on any given string of edges. By taking every edge, you amplify your sample size of trades,  which in turn gives whatever edge you have a lavish opportunity to play itself out in your favor.  Successful traders have realized that trading has nothing to do with being right or wrong on any  given trade.  

The successful traders may have just as much negative emotional baggage as unsuccessful traders. But as long as they befittingly define trading as a probabilities game, their emotional response to any outcome of an individual trade is equivalent to how a trader feels about flipping a coin after calling heads, and seeing the outcome as tails. A wrong call for most people would not tap into their stockpiled pain of every other time when they were wrong in their lives. The majority of people realize that the outcome of a coin toss is random thus they expect a random outcome. Randomness implies some degree of uncertainty. If you believe in a random outcome, there is an implied acceptance that you are unaware of its outcome. When you accept in advance of an event that you don’t know its outcome, that acceptance has the positive effect of keeping our expectations neutral.  

A probabilistic mindset pertinent to trading consists of five fundamental truths.  

1. Anything can happen.  
2. You do not need to know what is going to happen next in order to make money in the market. 
3. There is a random distribution between wins & losses for any given set of variables  that define an edge.  
4. An edge is nothing more than a citation of a higher probability of one thing  happening over another.  
5. Every moment in the market is unique.  

This makes the paradox relevant: In what way does a trader have to learn to be both flexible and rigid at the same time? Traders ought to have rigid rules and flexible expectations.  

Once a trader has accepted the five truths, your expectations shall always be in line with the psychological realities of the market environment. With the appropriate expectations, you will abolish your potential to define &  perceive market information as painful or threatening ergo neutralizing the emotional risk of trading.