I’ve created yet another perfect trading plan. I’ve back tested it and fine tuned it. I’m ready to trade!
I made a commitment to follow my trading plan, this time. And yes, I know I’ve said this before but this time it’s different. This time I am going to follow my plan.
I put on the trade and….. The plan goes out the window and it all goes to hell.
Why can’t I follow my trading plan?
The reason that many of us have trouble following a trading plan is the same reason we have trouble doing a lot of the things that we know we should do, yet we often don’t. Things like exercising instead of eating chocolate cake when we’re trying to lose weight or getting our work done instead of watching TV.
To explain this I would like you to think of yourself as having two minds.
Your first mind I want you to think of as your “logical” mind, the one that tells you things like I need to lose weight, I need to get my work done or I need to follow my trading plan. This is the mind that you’re thinking with right now to evaluate this little story I made up.
Your second mind I want you to think of as your chimp. A chimp doesn’t think logically, a chimp takes whatever actions are needed to get pleasure or to avoid pain. Your chimp mind is the one who wants the pleasure of eating that chocolate cake instead of the hunger of dieting and the one who wants the pleasure of watching TV instead of the perceived pain of doing your work.
The first thing you have to realize about how your minds work together is this:
1. Your logical mind is very smart but it can only do one thing at a time and therefore it trains the chimp to do most of its work and make most of its decisions.
2. Your chimp mind can do many things and make many decisions at the same time. However, with the lack of logic, the chimp makes decisions based solely on avoiding pain and gaining pleasure.
In essence your logical mind trains your chimp and your chimp controls your actions based on what you trained it to attach pain and pleasure to.
So the reason that you are not following your trading plan is because you’ve trained your chimp that following the plan will create more pain than not following the plan. And this is how you did it.
1. You followed your trading plan and lost, or didn’t do as well as you want to, and you beat yourself up for it. Message to chimp: “following plan equals pain”
2. You didn’t follow your plan; you took on too much risk, had a win and you rewarded yourself. Message to chimp: “not following plan equals pleasure”
3. You didn’t follow your plan, lost and blamed it on your plan anyway. And then proceeded to beat yourself up. Message to chimp: “following plan equals pain”
4. During the trade you focused on the pain of losing money instead of focusing on the pleasure of following your plan. Message to chimp: “forget about the plan and take action avoid pain”
5. And how about this one, you follow your plan; you hit your profit target and then you proceed to punish yourself by thinking you should’ve done better. Message to chimp: “ Doing what you planned equals pain”
And there are probably 100 other examples of things that we do to train our inner chimp that following our trading plan is painful. No wonder we don’t follow our trading plans.
It’s time to retrain your chimp.
1. When you follow your plan, reward yourself whether you win or lose.
2. When you don’t follow your plan, create pain for yourself whether you win or lose.
3. Be honest with yourself on whether you followed your plan or not. If you did follow your plan, give yourself a reward regardless of results.
4. Focus on the long-term success you will achieve by following a well designed trading plan and forget about the short-term pain of taking a loss.
5. Always reward yourself for doing the right things and making the best effort you could with the information you had.
In general, realize that you cannot reliably predict what the market will do nor do you have any control over what the market does. Therefore whether you win or lose does not mean that you did anything right nor does it mean you did anything wrong. Hence you should not punish or reward yourself based on the results. The thing you do have control over is whether or not you followed your plan. If you followed your plan, you did what you said you were going to do and you should be rewarded for that.
Whether or not your plan is any good, well that’s a story for another day.
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Live with passion!
John Locke
Posted for Scott: John, Thank you. After reading many books and posts about this issue, my biggest problem, yours is the first one to have some solid actionable ideas to try, thank you Ashvin for asking the question. Just one question, how important is the immediacy of dispensing punishment in re-training my inner Chimp? I trade the London Open from the US East Coast then I go to my job so I am not home until late in the day so I could not dispense any punishment until well after I have committed the offense. Thanks again, Scott
If your dog chews up the couch and you punish him 8 hours later there is no way the dog is going to connect the punishment with the behavior, it’s the same way with the Chimp.
How well does healthy eating work when you “enjoy” eating a piece of cake and then punish yourself later? Not very well, the chimp will get stressed out from mixed signals and make it more likely to go after reward it got from the behavior of eating the cake in the first place creating a vicious circle or what is also known as a crazy 8.
As soon as you notice that you are off track, the best thing to do is say, “That’s not like me. I’m a great trader and I always follow my plans.” Then correct the situation immediately (reverse out of the unplanned trade or close the trade). This sends the message “this will not be tolerated” and whenever it happens, it is reversed immediately or trading stops immediately, and realize the action of breaking the plan resulted in lost money or lost opportunity (this is your punishment). Then remember to reward yourself for noticing you were off track AND taking corrective action. Reflect on the event and feel happy that you did the right thing because you know long term, it “means” you will improve and reach your goals. You will get the message. (note: This is not for “honest mistakes”. When mistakes are make do not punish yourself, just correct it, do something to remember the lesson and move on)
Hi,
Can you tell some practical activity or thinking for below two cases of retrain your chimp.
1. When you follow your plan, reward yourself whether you win or lose.
2. When you don’t follow your plan, create pain for yourself whether you win or lose.
Thanks,
Ashvin, Thanks for the great question!
The best thing to do is to create some motivation. You can do this by setting up a reward and punishment system for your trading.
For rewards, if you follow your plan and the trade wins that’s usually enough to make you feel good. However, if the trade loses then you’ll have to do something else to reward yourself. Make a list of things you would like to do but you wouldn’t normally do. Some ideas might include complementing yourself, buying something you’ve been putting off, going out with friends, creating a certificate and hanging it on the wall or anything that would make you feel good, will make you laugh and is memorable. And then when you follow your plan and lose give yourself one of those rewards for doing the right thing.
As far as punishments, it is going to depend on the severity of the problem. If you only need a little deterrence just make a list of things you really don’t want to do and if you don’t follow your plan commit to doing one of those things on the list immediately.
For those who need a little more motivation, if you do not follow your plan and you happen to win, you are to take two times and your winnings out of your trading account and put it aside in a savings account. The savings account is specifically for the purpose of refunding their trading account. And then write down that you need to do this because if you keep trading this way you are definitely going to need the money.
If you don’t follow your plan and lose, you should take an amount equal to your losses out of the trading account and put it in the savings account. And this has the benefit of forcing you to trade with less money because you’re not trading responsibly.
For those of who need a major deterrent, I suggest making a commitment to someone to do something that you would never normally do and is also somewhat embarrassing. A suggestion might be to make a commitment to someone you don’t particularly like that you will go over his house and clean the bathroom with a toothbrush if you don’t follow your plan. Believe me your chimp is not going to want to do this.
If you do NOT follow your plan and win you want to make sure the chore you choose is bad enough to offset any good feelings you might get from actually winning the trade.
If you make these commitments and follow through, you will definitely train your chimp to follow your plan because it is much more pleasurable to follow a trading plan than to clean your mother-in-law’s toilet with a toothbrush. I had a great coach and I know this from personal experience.
Thank you very much for detail explanation.
Ashvin
Thanks John, a timely reminder.
As usual John, great words of advice, hits home squarely for me. I will be retraining my chimp.