"Magical Thinking", Thinking in Probabilities and Being Objective

In the article "Magical Thinking", in the third item of discussion titled "3. Mind rules over matter", it states that "Wishing is probably the most ubiquitous kind of magical spell around, the unreasonable expectation that your thoughts have force and energy to act on the world." Many traders falsely believe that they can move the markets, or at least wish the markets in a particular direction while placing a trade. This unrealistic expectation often leads to anger and frustration as money is lost in the trade.

This is one of the reasons that Mark Douglas in "THE DISCIPLINED TRADER: Developing Winning Attitudes" states that traders must think in probabilities and be objective. By this he means that "if you can't personally move the market, then you will want to be able to identify the group that is demonstrating the greatest possibility of moving the market and you will want to trade with that group. Or you will want to determine the prevalent beliefs being expressed in the market and how those beliefs will affect price movement. That identification process requires a detached objective perspective, where you are watching and listening to what the market is telling you, instead of being focused on what the market is doing to you personally."

Being Objective is not an easy thing to accomplish with the human mind, especially when trying to trade the markets. In a diavlog titled "How MacGyver Made Our Minds", Gary Marcus, a Professor of Psychology at NYU and author of "Kluge: The Haphazard Construction of the Human Mind", states that our current thinking is biased by some recent event which tends to nudge our minds to ignore objective evidence that our current thinking is incorrect. For example, most traders will remember what the market did the day before or the hour before and believe that the market will repeat the same pattern. We traders often forget that each moment in the market is unique, and that the market is capable of doing anything at anytime (paraphrasing Mark Douglas).

Gary Marcus states that we must constantly remind ourselves to be rational. Recognizing this problem is the first step to become rational and objective in our thinking. He recommends that we always develop alternative hypothesis to our current beliefs. In other words, always question the basis of our decisions to insure that we are being objective rather than being swayed by some recent event which is biasing our thoughts.

Gary Marcus also states that this occurs in the mind due to the way memory is stored in the brain. Our brains are not like a computer, which places data at specific locations on a hard disc. Our brains store memories in association with other things, such as smells, color, sounds, etc. When trading the markets, we have to be constantly vigilant to the fact that our current conclusions may be based on an association that is leading us to the wrong conclusions about market direction.


Charles