It is human nature to desire to be correct although the answer that we're wrong is presented right in front of us. Trading the stock market has many of these instances where you are wrong, yet it's easy to mentally deny.
Last week, I was sitting in a hotel lobby arguing with a wise man about how this human trait can affect the quality of trades. We were on the topic of stop losses, and it transferred over to my explanation of how this nature will promote traders to remove stop losses as the stock price is falling.
As humans, with the day-to-day conversation, we all discuss, and we have a transfer of knowledge and facts or opinions. When we have a thought and stick to it, typically it takes hard evidence to change our minds, whether it's facts or evidence, or perception. The interesting thing about humans is when an opinion is established, usually, it's difficult to alter their mind regardless of what is presented. This is very common in the political realm.
Why do we humans have such a desire to be correct? We have this trait because of self-appreciation, it makes us feel a sense of power. There is a small percentage of minds that tend to agree with themselves that they're wrong.
A famous stoic writer Epictetus once said, "We have two ears and one mouth so that we can listen twice as much as we speak." Epictetus is implying if we observe more than what we say, we have the chance to inherit more knowledge to better formulate our thoughts.
How does this whole concept correlate to day trading?
Before a trade, we typically present the charts with our predictions and observations. This paints a picture in the head of a certain direction the price of the stock will go. As the position is entered, you desire to be correct. In a hypothetical sense, let's say the stock increases by 3% and dips to -3%. From the 3% marker, it continues to decline in a consistent trend. Throughout the dipping, the trader thinks to themselves, "this should come back", "this still has potential", and "it's an RSI reset". The mind creates excuses attempting to refuse the fact that it was wrong. The whole prediction and the time spent were wrong. Why did the trader not exit the position when it hit the stop loss or the whole theory is proven to be wrong? The desire to be correct.
Traders tend to be stuck to losing trades because of the desire to be correct. It is a core psychological reaction that is natural for all humans to have. This issue is typically in beginner traders because market fluctuations and psychology aren't directly linked together yet.
The accumulation of data for day traders new to the market is crucial, multiple topics will find correlation because of the experience gathered. Consider this article to be a head start to catch yourself in this situation, where your mind is on autopilot and the conscious fails to override it.
For people to have the desire to be correct in multiple things throughout life is forever stationed in our nature. It is up to us as individuals to understand that we have the potential to be incorrect, we have the potential to listen, and observe to change for the better. Whether that’s in politics, trading, personal life, perception, the list goes on. Human psychology is some of the most complex features of the human due to its correlation to the human brain. This is why it’s extremely crucial to journal every single trade and write down your notes. These notes will be correlated to either your emotion during the time or thoughts you had but were brushed off. You generally want to write notes that will help you understand yourself better. These notes will expose your weaknesses throughout time when you look back and summarize them. Throughout trades, differentiating the winners and losers, you will see a common pattern throughout both sides. You will start to understand what setups you're strong with, what you need to better improve on, and mentally improve on to pull the correct decision trades.
To wrap everything up, understanding your psychology is some of the most crucial and most beneficial factors in gathering data about yourself and your trading habits. This will help you build consistency over time and allow you to learn how to adapt with the market.