Did you know that making your bed everyday can predict your income?
In this episode of Truth About FX, Walter unravels the psychology and neuroscience behind making decisions. He talks about the tools you can use to be more conscious and make rational decisions. And is market feedback really that reliable? You will also learn the biggest difference between introverts and extroverts and why this is important to you as traders.
Download (Duration: 9:40 / 23.2 MB)
In This Episode:
00:32 – heart rate
01:17 – reptilian brain
03:15 – super boring
05:35 – market biofeedback
07:12 – high on the go
08:00 – high conscientiousness
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. What do you think about this idea of real-time biofeedback for traders? That is you can see whatever your heart rate or whatever is on the charts and compare that to your performance. What do you think of that? Does it have any benefit or do you think that the benefit is limited or maybe there is no benefit?
Walter: This is kind of one of those things which I think the answer is it depends. You have to know, first of all, what your body is doing when it is making the wrong decisions. For example, when you are scalping, we know what happens to your brain. It’s really clear.
This much we know in neuroscience. It is the same thing that happens when you do cocaine or any sort of addictive process. We know what that is in the brain. Basically, it activates your reptilian brain and it’s not, you’re not in a good spot to make rational decisions.
If you are going to use something like these tools like biofeedback and these sorts of things, really what you need is a base line. What you need to know is when am I making the wrong decisions? When am I off? If you know that then it can be very useful but if you have no idea what that is and I believe that it is different for different people.
For example, there is a classic study in Psychology where they took introverts and extroverts. They asked them to circle the 8’s in a phonebook. It was a totally boring task and they gave some of them coffee. What they found was amazing because the people who are introverts, they’re already at a pretty — if you think about it, it makes sense.
What happens when you take an introvert and drop him off at a party? They’d go in a corner, they’re overstimulated so introverts are already operating at a pretty good level of stimulation. When you give them coffee, it can kind of knocks them. They’re a little bit overstimulated.
Whereas extroverts, what do they do? They get energy from the crowd. They love being around people. They feed off that. They don’t want to sit at home on the couch. They want to go out to the party. That’s a totally different baseline and that’s exactly what the study found. They found obviously that the extroverts, when given the coffee, were better at the boring task of circling the 8’s. I don’t know what number it was but they’re going through a phonebook, underlining things. It’s just a totally boring task.
Whereas the introverts, once they were given the coffee, boom! They start doing the worse like they’re unable to do this. If you think about it, the actual active trading is very simple.
You put in the entry, you put in stop. You take exit or whatever, put a trailing exit on or whatever you do, it’s a super, super boring stuff. It’s not like writing a fiction novel, that’s way more exciting and creative than actual processing trades.
It’s a vigilance task basically like that task, that they used in that study. The question really becomes, when you’re sitting down and you’re taking these trades, are you one of those people that’s really hyped up? And so you’re kind of, you’re going to get pushed over the edge.
What I mean by that is, you’re pushed over the edge that your execution suffers. If you’re kind of like, the introvert on coffee sort of thing. If you’re really nervous and not really confident and really concerned about your abilities as a trader, sitting down and trading the one-minute charts, that’s going to spike.
Your brain is going to be like, it’s the same as like dropping somebody off in the middle of the freeway. You’re going to be like, “Holy crap! How do I survive this? Watch out for these cars.” Whereas, if you’re somebody who’s a little bit better off when you’re at a heightened state of arousal, you might actually be sort of peak performing at that level when you’re sitting there watching the one-minute chart.
It really depends on that. I think that is the key here. I don’t think that you can say that everybody is going to perform well if their response is in this range. I don’t think that’s the case at all. I think it depends on what kind of trading you’re doing.
Like, if I take a trade on the weekly chart, I can really easily put that trade in and walk away knowing that it’s probably going to be a month before I know exactly what is going to happen here with this trade. It could be a week but it’s probably going to be several weeks before I even think about living to breakeven or whatever.
Whereas, that’s totally different if you are trading the one-minute or five-minute chart. It’s a completely different ball game. I really think that the answer is it depends and I know it’s probably not the answer one is looking for.
I think more importantly also, is that you have to realize that you get feedback from the market too. That’s a big mistake I think people make. It’s easy to overdo this obviously but like you’re in a trade. Let’s say, Hugh, that you’re in a trade and you go long the Euros. You’re long Euro/USD and then you get two more candles. Those two more candles are giving you some feedback about your position, what do you do with that information?
I talked about this idea of market biofeedback which is the market — I wrote about it in the Naked Forex, infact. This idea that the market gives you information and then what you do with that information because it’s really difficult when you’re in a trade to be totally and completely take no side.
If you’re long the Euro, it’s hard for you to look at those candles and interpret them correctly but I think that is important to know. Like, if I was flat and I look at the market now that it’s giving me two more candles will I still be long? That sort of thing.
I think the answer is it depends. It can definitely be useful if you know where you want to be in terms of your physiological response. If you know where you want to be and there’s a certain range that you want to be in, but I don’t think that you can make a blanket thing and say, “Yeah, everyone needs to be here”. I don’t think that’s true because I think it depends on the person. I think it depends on the system.
It’s totally different. Like if I put a trade on the weekly or the daily chart and you’re putting a trade on a five-minute chart what we need in terms of the execution of the trading system is completely different. What I have to do and what you have to do. That’s a totally different skill set. So yeah, I think it depends.
Hugh: It makes a lot of sense. Just out of curiosity, do you find that successful day traders or scalpers are generally more extroverts?
Walter: I think and this is probably going to be, I don’t want to make anyone mad. I think that typically those traders and again this is not a blanket thing. I’m not saying everyone is like this. I don’t want to get in trouble but I think those people are what socio-biologist would call high on the go system.
These people are drawn to things like base jumping or drugs. It’s that kind of person. It’s more like, what comes first the rock and roll band or the drugs? Or certain types of people drawn to rock and roll, they want to be musicians.
I think that kind of trading, you have to be really careful. I’m not saying everyone is like this but if you have a history of substance abuse or like everyone looks at you and goes, “Dude, you’re crazy”. If you hear that a lot, I’m not sure that trading the lower time frame is for you.
If you’re like one of those people where people look at you and go, “Oh my god! You are the most disciplined person I know.” If you are like that, what we call conscientiousness in Psychology, if you’re high on conscientiousness, very deliberate, very regimented, maybe have a military background or an athletic background then you can fit the mold as a scalper.
It’s typically that type of person that does well but unfortunately, I think most of the people that get drawn to lower time frame trading, they’re basically like addicts/gamblers. You have to be careful.
I’m not everyone is like that. I’m just saying just know yourself. Are you on the side of the, are you the good soldier and you make your bed everyday? By the way, did you know that making your bed everyday, that can predict your income?
Walter: People who make their beds are like 280% more likely to bag a couple of million over their lifetime than people who don’t make their bed. I thought that was interesting. So, it’s conscientiousness is basically what I’m talking about. That can make for a good profile for a scalper but if you’re not able to get into that point, if you’re all over the map, if you have a long history of substance abuse and just doing crazy things like surfing big waves, jumping out of airplanes all that kind of stuff, if you’re that kind of guy, I would be aware. That’s all I’m saying.
Hugh: Something to keep in mind. Thanks, Walter.