My last two posts have been on temporary insanity and how it can affect the markets. Before I leave the psychiatrist’s sofa and get back to the trading desk, there is one more psychological phenomenon I would like to discuss. It came to mind recently when I lost more than I usually do on a couple of trades in the E-Mini. I was doing my usual autopsy on those trades to try to figure out what I did wrong and it soon became apparent.

Before I tell you what the problem was, I must regress a tiny bit and tell you what is involved in the decision making process for a trader – particularly a technical trader like me. There are several charts, of different time frames, and each chart has a variety of technical indicators. Generally, the process of entering and exiting a trade is determined by interpreting these charts. It is not easy at times – particularly when the signals are mixed – and the time frames show conflicting patterns. Such was the situation when I made my two trades that cost me more than they should.

The reason was pretty simple. My interpretation of the charts was flawed. The reason it was flawed, is that I am human – and did not compensate for it. Sound weird – well, it is pretty simple. We humans look at a situation and tend to see things that confirm our predisposition far more clearly than things that might conflict with our predisposition. Said another way, humans tend to see what we want to see.

In my trades, I had a predisposition that the market was going up as a result of temporary insanity – and I still believe that. The problem was that I ignored obvious signals that the insanity had not yet run its course – and ignored them – and the market made me pay for it.

The market, by definition, is always right – even when it is temporarily insane.

Trading with a good trading system is like piloting an airplane – generally safe – but can be very unforgiving of even small mistakes. I should know this – I have been trading for many years – and for many years I piloted a small airplane.

It seems like we humans never get so good at anything that we cannot find a way to screw it up now and then. As my parents always said, “Live and learn”.


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