In this episode of Truth About FX, Walter talks about rewarding yourself and how it affects your trading psychology. He also touches on neuroscience and this unique technique he learned in graduate school called “REM sleep”. According to him, your brain chemistry actually effects the decisions you make. He also shares a good book about this and some insight on good rewards that could work for you. You will also know how you can recover from losses and get back on your feet using psychology.
Download (Duration: 10:16 / 23.5 MB)
In This Episode:
00:39 – brain Science
02:27 – pokey machine
04:08 – a hit of dopamine
06:06 – rewards ideas
08:17 – gold movies
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. You’re one of the few people I noticed who talked about rewards. Rewarding yourself for things in your trading. So how does that work and how’s that help you become a better trader?
Walter: This is kind of more getting into like brain Science or what we call “Neuroscience” and I was really lucky. In graduate school, I went to a school where they had a Neuroscience programs. So there were other students, I wasn’t in Neuroscience. I was in what they called “Experimental Psychology” and so I was focused on Cognitive Psychology. Specifically, teaching little kids to think about their thinking which sounds crazy but I guess, as a father it comes in handy.
One of the things that was really cool about this school that I went to is they discovered REM sleep there. They were known as being a brain lab way back in the ‘60’s or ‘50’s or whatever it was.
In fact, they had a big computer that took up the size of a room. Like, this is the computer that REM sleep was discovered on and stuff like that. There are all these students, actually some of my best friends in graduate school were Neuroscience dudes. So they’re getting their Doctorate in Neuroscience. I actually even got an opportunity to take a class, like a graduate level class in Neuroscience.
The reason why I mention this is you’ve got to dive in to the brain chemistry to get at why this works. What we’re talking about obviously as you mention, Hugh, is rewarding yourself.
The way this works is whenever you get a little reward or you win in a video game or on your Apple watch or on your Fitbit or whatever or on your trading platform where you take a trade and it makes a little ching noise for you. That’s just like video poker in Vegas. That’s the same thing. They reward you with this little “Yeah, you bet it all” or whatever it is. You put on all your credits on the next spin of the pokey machine. Slot machine is what it’s called in the US. We call them “pokey machines” in Australia.
That’s the thing that you’re getting. You’re getting a hit and this is why this works because I read a book the other day, actually and they were talking about making good decisions in life.
What was so interesting is the author was saying that whenever something goes wrong, what you needed to do is sit down and write it out and figure out what went wrong and fix it.
You know what? That probably works in just about every level of life but when it comes to trading, it is the exact wrong thing to do. When you try to do this, what you would do is you will ruin your trade.
The reason why is because you have a trade, everything is lined up. It’s a perfect trade. You take the trade and then guess what, the trade goes bad, you lose money. So, you sit down and you write it out, “Why? What happened here? What did I do wrong?” “Okay, next time I’ll take the profit more quickly because my trailing exit here didn’t kick in and I’ll maybe take a loss when I could have taken 55 pips on the trade if I would’ve taking quick profit. I’ll do that on my next trade.”
Well, that is the road to disaster as a trader so you can’t do that. All those things that you can do in business or relationships or life or whatever, that doesn’t work in trading. Because trading has that element of chance. It’s kind of like gambling in that sense where we don’t know whenever we’re going to have the next winner. It’s a function of your win rate and just a lick of the draw.
So what you do when you reward yourself, is your giving yourself a hit of dopamine which is the exact same thing that your Fitbit does or your trading platform does or your Apple watch. They give you a hit of dopamine everytime it vibrates “Oh, you did your 10,000 steps today” or whatever,
That’s what we’re doing aas traders. We reward ourselves the right way. When you get out the trade the right way, you give yourself a little reward in your journal and then you add up those rewards. What I do after a certain amount of rewards, every month usually — you can hit a target every quarter in every year — you reward yourself based on not what your account is doing but based on whether it’s up or down or whatever, that’s irrelevant because the belief is that with the positive expectancy system. It’s going to make money eventually.
So what happens is you’re rewarding yourself, you’re getting that hit of dopamine, it’s the feedback loop. It’s keeping you in the game because if you were rewarding yourself based on when the trade was a winner or a loser, you’re in all of a sudden now going to fall victim to the cycle of doom or at least very likely to and give up on your strategy and try to find something better or try to modify the one you’re using. When you spent all this time on backtesting and so forth and that is really the way it works.
The Neuroscience behind it is simply getting a hit of dopamine and that simply increases the chances that you will do that same behavior again. So, this goes all the way back to the ‘50’s and the ‘60’s in the Behaviorism School of Psychology. Which is, if you want someone or some animal to do something, you just reward them. So that’s really what it’s all about.
I know it seems kind of weird to reward yourself after a losing trade and you have to remember that you’re just moving the focus to what’s important which is the execution. The wins and losses, distribution of wins and losses doesn’t matter. What really matters here is whether or not you’re executing as you should and that’s why you are getting rewarded.
Hugh: Could you give us some idea like rewards that might work for some people?
Walter: Sure. So, for my wife and I, what we do is we take a little Aussie holidays. Some people would be going to the movies, go to their favorite nice dinner. Maybe like Benihana’s or the local steak house or the local vegan restaurant. Recently we’re on a trip and I went to this vegan restaurant. It was like the best food I’ve ever had. It’s amazing. It’s really cool actually.
So, what we’ll do or this is what I do. I’d go, “Okay, if I get a certain number of points” it usually happens within 4 to 5 weeks till I can achieve it. “We’ll go to a show at the Opera House in Sydney” or we’ll go on a little mini holiday in Australia.
Like we’ll go to the wine country or we’ll go to Tasmania. Tasmania has amazing seafood and it’s just like there’s this great clam or oysters all that stuff. If you’re into that, it’s a great place. You can do hiking down there. You can do boat trips and stuff so, Tasmania is another one.
I just kind of look for these little mini holidays or we’ll go to the mountains. Australia has mountains. People don’t know that, they think it’s all outback or whatever. There are actually mountains too. The kids like to go to the mountains. We get to see snow occasionally, the winter. That’s kind of amazing. Those were little mini trips.
Some people will just do like, a nice night at the movies. I don’t know, do they have in the US, do they have like, they have it here in Australia like gold class movies. It’s kind of like, first class in the airplane but it’s for the movies. Do you guys have that over there?
Hugh: No, I don’t think so.
Walter: Okay, maybe it’s just a thing over here. So they’ll have these, it costs more but you have the best seat like there’s these really nice seats, kind of like in an airplane. Then they’ll have people to wait on you and bring you whatever you want like hamburgers or pizzas or wine and stuff. It’s kind of like that so that’s one reward that I like to do. My wife and I we’ll go out to the gold movies.
I know it sounds crazy. It’s like okaw, whatever. But it’s fun. It’s fun to spend a 150 bucks at the movies. Trust me, you can easily do that. It’s not hard at all. That’s kind of like what I want to do. I’ve talked to other traders who use the same thing. They might go out and buy something nice that they like.
Maybe they like a remote control cars or they’ll go buy one of those after a certain amount of time. Or some new shoes if you like to collect. I don’t think if Air Jordan is still a thing, Air Lebron or whatever, I don’t know about Lebron shoes. If you like that kind of thing or surfboards, whatever you like.
For example, what you might do is your first immediate one would be just like a gold class movie and then after that, if you keep pushing through you might get the 3-month one or around 3, 4 months you get the little mini trip, the little mini holiday. It could be just a weekend to unwind someplace.
Then after that, if it goes even further you might be able to get the really expensive surfboard like there’s a surfboard made out of wood. They’re like $5,000 or whatever, that could be another thing. It depends. It could be a bike, maybe you like to ride bike so you get a really nice road bike. Road bikes can cost you 6, 7 grand or more.
hat could be like the more, the annual one that push that out further. I don’t know if that helps. It all depends on what you like to do. What’s interesting to you. What’s fun for you.
Hugh: That totally helps. Thanks, Walter.