Thought #10 — Trading by Fire
Some things can be learnt by studying them, but some must be learnt by action, by doing. I wonder how many people “really” learnt not to touch hot things… after touching hot things, and subsequently burning themselves. Humans are a silly bunch. It is almost like we do not believe what we have been told until we experience it for ourselves.
And we wonder why history repeats itself.
So what is going on here, besides short memories and groupthink?
My theory is that how we learn a particular subject matter will depend on how that subject matter can affect us psychologically, or in the case touching the hot stove, physiologically. Physiology is an extension of our psychology in that the hot stove created a physical feeling of pain, which created an emotional feeling of pain, which became a lesson we never forgot. Although they are the same, I like to mention both as many people forget that they are connected, it helps them remain aware of both while contemplating ideas.
The more a subject matter affects us psychologically or physiologically, the more the subject matter will require learning by action.
Citizenrod
This is because no amount of study can make you feel what needs to be felt in order to hot stamp that lesson into your brain.
There are many examples we can go into, obviously anything that needs to be learnt can be dissected, but for brevity sake (You can read my thoughts on short attention spans here), let me pick one that is of high interest to me at the moment…
Welcome to the world of stocks trading.
Now here is a subject which many believe can be learnt by reading books, studying charts, and having a strategy. Wrong!-ish Studying can only get you so far before you need to walk the hot coals in order to make any real progress.
Trading is a highly psychological subject. This is because it centers around the most basic of all human emotions…
FEAR!
Fear of missing out, fear of losing money, fear of making a mistake, fear of people thinking you are a gambling, fear of making money (yes, that one is real), fear of not making money, fear of getting out late, fear of getting in early, fear of being a sheep, fear of being a contrarian, fear of this, fear of that, it goes on and on.
You can thank your lizard brain for this. Otherwise known as the Reptilian Complex, this is the part of your brain that handles your primal instincts. Fight, flight, freeze, feed, fornicate, and our favourite, fear.
Now unless you are an emotionless robot, or somewhere on the spectrum, you may be considered lucky. Yeah I know, seems strange to use the term ‘lucky’, but it’s horses for courses. For the rest of us, those unfortunate enough to have “normal” emotions, trading is going to be a trial by fire learning experience…
…and you will get burnt… hell, you must get burnt!!
There is no other way to understand how you will feel and how you will react in a given trading situation until you experience it, for real, with real money. No amount of study or lectures from a seasoned trader will help you here. You may not realise it, but your DNA is preprogrammed to react a particular way, it is your blueprint, and your lizard brain only understands blueprints. And they are very simple blueprints too, not like an engineers blueprint. No, these are super simple survival blueprints. If danger, then run. If sexy, then… you know how it goes.
If you have no idea how you will react, then there is no possibility of 1. recognising your actions/reactions, and then 2. correcting your actions/reactions if they are unacceptable for the situation.
When learning to trade, people recommend ‘paper’ trading, the act of trading with fake money, to train yourself to react correctly. But paper trading only serves to train the functional actions in trading, not the emotional.
Yes, use it to learn your broker’s software.
Yes, use it to practice the process of trading.
Yes, use it to test a strategy (note, there are 3 parts to testing a strategy, more on this in another post).
Yes, use paper trading as part of your training.
But do not use paper trading to gain the (false) confidence that you are a trader. That only comes with… you guessed it, real trading, with real money, and the real feeling of fear, the real fear of potentially losing money.
Oh it can definitely be a deep burn, that is for sure, but it does not need to be. No, you only need to feel it enough to learn, but not so much that it kills you. Fortunately in trading, unlike Russian roulette, the amount of burn is completely in your control. You have the option to adjust the burn. You can get greedy and turn the heat up real high, which is why so many people blow up their accounts, greed (another topic for another day), or you can adjust your risk down to a level that will just sting you, but not scar you.
Keep walking, keep reading.
Subjects like trading, that require getting burned, unfortunately are just a fact of life. Our brains are wired in such a way that that is how we acquire certain skills. It it much easier to understand this point if we look at a physical subject, like tennis for example. Here it is easy to understand the actual physical burn one must endure to learn the skills of tennis. Training everyday, playing on weekends, competitions every other weekend, non stop until you make it, or fail. Physical we get, physical we know. But psychological?
Psychological burn? Why can’t we imagine that…
Why? Because it is too complex. It can affect so many things.
How would you feel if you lost a million dollars?
I use the term ‘burn’ because I am pretty sure most of us know the feeling. Whether it was the kettle, the stove, the exhaust pipe, the campfire, the soup, the beach sand, the vinyl seats, the sunburn, or something else, we all know ‘burn’. Burn equals pain. But ‘burn’ is the extreme, and we do not have to go to the extreme to learn a lesson, thankfully.
We all learn differently. You may simply need a poke in the ribs, others may need a whack with a big stick. Amazing things have happened when one is whacked with a big stick (check out Zen Master Linji Yixuan, maybe this is what you have been missing).
The point is, some things in life require the lessons of experience in order for you to become skilled in the craft. Depending on how you manage that experience will determine how painful or pain-free it is. Books and mentors do their best to minimise the pain… but you know humans, sometimes we need to be whacked.
My venture into trading has been an interesting one. Never did I imagine that it would be so connected to my interests in the behavioural sciences, psychology, sociology, and anthropology, as well as evolution, mindfulness, and philosophy. So far from money, yet so intertwined.
Behavioural economics is a super interesting subject, one that I highly recommend you look into if you have not already. We humans can be highly rational and irrational, but understanding why can help you in everything from finance to love.
