The past is history, the future is a mystery, but today is a gift: that’s why it’s called the “present” – Master Oogway, from Disney’s Kung Fu Panda
In this brief blog post, I’d like to briefly highlight a vicious mental cycle that tends to creep up on the best of us now & again, and illustrate the kind of damage it can do to your trading. Some may call it “regret”, some may miss the forest for the trees and call it “lack of knowledge”, but ultimately it’s connected to hindsight and to poor trading habits.
The Cycle Explained
I do not have a name for this vicious cycle, so let me illustrate how it takes hold in your mind.
Here is the event:
- You initiated a trade that ticked all the boxes on your pre-trade checklist. It was an “A-Quality” trade for example.
- The market progresses slowly and cautiously.
- At the end of the day, the market is stumbling around your entry point.
- You decide to play it safe and cut the trade because you have studied that similar situations are a 50-50 shot. You could roll the position over and find yourself in profit OR you could wake up and find yourself stopped out.
- Over the next two days, the market continues on it’s merry way and would have produced a good profit. However, logically at the moment in time when you made your decision, you could not have known this.
Now let’s see how the vicious cycle plays out:
- You give this past experience a negative connotation: “shoot, I could have had a great profit and instead I cut the trade for no reason!” when in reality, you made a logical decision. Hindsight is blinding you. The only way to analyze trading decisions (or any decision surrounded by uncertainty) is to follow solid principles that have been tested over & over.
- The past experience came with a lesson: you lacked peace of mind, so either you need to study similar situations better and derive some kind of plan for similar occurrances, or you need to simply mark it as a low probability situation where there was no clear answer – and be OK with that.
- You may even take the lesson on board, but still let the negative thought linger in your mind forevermore: “I should have been smarter/better equipped/more vigilant/etc. and now I’ve lost an opportunity”. This kind of thinking is very dangerous. It will steal your serenity, and it will impair you from making good trading decisions in the future. This kind of thinking will instill doubt and fear into your mind, for no reason at all. You need to guard yourself from these thoughts. Remind yourself that the markets are uncertain and you really cannot know what ‘s around the corner. If you truely made a mistake, learn the lesson and move on. But if there was no obvious mistake to make, move on – period!
- Ultimately, you are letting the past condition your current actions: it’s like driving whilst looking through the rear-view mirror. You see where you’ve been and keep dwelling on past mistakes (usually) without even noticing the amount of progress you’ve made. It may even seem like you’re always living the same experience over & over, making the same mistakes, and never progressing.
This vicious cycle tends to turn into a “pity-party“.
The Past is History
As humans, we interpret reality through the goggles of our past experiences. We do not really see reality for what it is. We tend to attribute a certain meaning to events. Know this: trading is not a natural phenomena. Trading produces great stress and it can truely lead you to a point of mental exhaustion from which it’s difficult to recover.
It is absolutely essential that you let go of the past. Learn the lesson, enhance your knowledge, become wiser than before. But forgive yourself for past mistakes, and move on. Do not hang onto past victories or defeats. Especially in trading, where each single trade has little importance in the big picture, you need to let go.
The past is history. History has been defined as a “handbook of solutions”. But once we have studied history and learned the lessons, we need to live in the present!
Guard Your Mind
Do not let your past trades affect your current self. Do not ponder upon negative thoughts or past mistakes. There’s no use in doing so, especially if we’re talking about the financial markets. The mind is a trader’s asset – so you need to guard it, defend it and keep it healthy!
There’s a reason why Sam & I have taken up the habits of many market wizards such as
- regular exercize
We know from experience that it’s too easy to get caught in these mental traps, and then not be able to see reality for what it is. In order to remain at peace with every decision made in an uncertain environment, you need to be aware of this and avoid falling into the trap.
Over to You
Learning how to trade is stressful, because you inevitably face a steep learning curve and receive an inordinate amount of “lessons” from the market in the form of losses. If you also put pressure on yourself, your mind will start to attach negative connotations to the whole “trading endeavour”. So how can we avoid this negative cycle?
- Initially, treat it like a game.
- Maintaining a positive mindset helps
- Create a pre-trade checklist
- Once a decision is made, accept it and avoid criticism in hindsight
- Pay attention, don’t overthink it.
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.