Mind Over Markets Part 1: Asymmetric Payoffs
Mind Over Markets Part 1: Asymmetric Payoffs
Welcome to "Mind Over Markets," a three-part miniseries designed to give you some practical tips to help you deal with the psychological stresses of trading.
In this first instalment, we explore the concept of "asymmetric payoffs" within the realm of trading psychology – a notion that suggests making small, positive changes to your routine can yield disproportionately large benefits.
The Art and Science of the Asymmetric Payoff
Imagine discovering a trade with virtually zero downside and the potential for limitless gains – it would undoubtedly grab your attention.
As traders, our perpetual quest is to identify opportunities where the risk is minimal, and the reward holds significant potential; we actively seek out what we term as asymmetric payoffs.
When trading in the world’s most liquid markets, these asymmetric payoffs are marginal – and the benefit of these small asymmetric payoffs reflect an edge which only gets to show itself after applying your edge consistently.
But in the world of trading psychology, there are a vast number of huge asymmetrical payoffs. Activities and routines that have a tiny downside and potentially limitless upside.
Let’s explore three activities that you can implement into your daily routine that take up very little time, have next to no downside, but if practiced regularly have the potential to offer an array of benefits:
1. Pre-Trade: Box Breathing
Box breathing, is a deep-breathing technique employed by U.S. Navy SEALs, to manage stress and maintain composure in high-pressure situations.
The Box Breathing Technique typically follows a pattern like this:
Repeating this cycle creates a rhythmic and controlled breathing pattern, promoting relaxation and improving mental clarity.
In the context of trading, where decision-making is paramount and stress can be high, employing box breathing before engaging with the markets potentially represent a huge asymmetrical payoff.
Potential Downside: 6 minutes out of your day.
Potential Upside: Reduced stress, enhanced focus, emotional regulation, improved decision making.
2. In-Trade: Journaling
In-trade journaling is a practice where traders document their thoughts, emotions, and observations while a trade is still active. Unlike traditional post-trade analysis, in-trade journaling provides real-time insights into the trader's mindset, decision-making process, and emotional state during the live execution of a trade.
The process involves recording:
Potential Downside: A few minutes during trades.
Potential Upside: Real-time awareness, hindsight bias mitigation, continuous improvement, emotional regulation.
3. Post-Trade: Walk
Don't underestimate the power of a post-trade walk; it's more than just a whimsical idea. After a winning trade, your brain experiences a dopamine spike, tempting you to trade again and potentially compromise on quality setups just for the thrill.
On the flip side, a loss triggers a cortisol spike, the stress hormone, impairing decision-making. Nothing poses a greater threat to a trading account than a trader seeking to recover losses hastily.
The post-trade walk is not a mere breather; it's a strategic move rooted in psychological principles reminiscent of therapeutic practices like Eye Movement Desensitisation and Reprocessing (EMDR), designed to alleviate distress and enhance mental well-being.
In an EMDR session, individuals move their eyes from left to right to address distressing memories. Similarly, a post-trade walk applies this principle to trading, offering lateral eye movement and a change in focus after intense market events, reducing the trading experience's emotional intensity.
Potential Downside: Time investment, temporary disconnection from the market.
Potential Upside: Stress reduction, emotional reset, improved decision making, enhanced focus, reduced impulsivity.
Food for Thought
In this exploration of asymmetric payoffs, we've highlighted just three activities, but the realm is vast. Implementing even one asymmetric activity into your routine can initiate a cascade of benefits. Disciplined integration of these practices has the potential to transform your trading psychology and overall well-being. It's a journey worth taking for every trader.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Welcome to "Mind Over Markets," a three-part miniseries designed to give you some practical tips to help you deal with the psychological stresses of trading.
In this first instalment, we explore the concept of "asymmetric payoffs" within the realm of trading psychology – a notion that suggests making small, positive changes to your routine can yield disproportionately large benefits.
The Art and Science of the Asymmetric Payoff
Imagine discovering a trade with virtually zero downside and the potential for limitless gains – it would undoubtedly grab your attention.
As traders, our perpetual quest is to identify opportunities where the risk is minimal, and the reward holds significant potential; we actively seek out what we term as asymmetric payoffs.
When trading in the world’s most liquid markets, these asymmetric payoffs are marginal – and the benefit of these small asymmetric payoffs reflect an edge which only gets to show itself after applying your edge consistently.
But in the world of trading psychology, there are a vast number of huge asymmetrical payoffs. Activities and routines that have a tiny downside and potentially limitless upside.
Let’s explore three activities that you can implement into your daily routine that take up very little time, have next to no downside, but if practiced regularly have the potential to offer an array of benefits:
1. Pre-Trade: Box Breathing
Box breathing, is a deep-breathing technique employed by U.S. Navy SEALs, to manage stress and maintain composure in high-pressure situations.
The Box Breathing Technique typically follows a pattern like this:
- Inhale (4 seconds): Breathe in deeply through your nose for a count of four seconds, focusing on filling your lungs with air.
- Hold (4 seconds): After inhaling, hold your breath for a count of four seconds. Maintain a calm and controlled state during this pause.
- Exhale (4 seconds): Slowly exhale through your mouth for another four seconds, ensuring a complete release of air from your lungs.
- Hold (4 seconds): Once you've exhaled, pause and hold your breath again for four seconds before beginning the next inhalation.
Repeating this cycle creates a rhythmic and controlled breathing pattern, promoting relaxation and improving mental clarity.
In the context of trading, where decision-making is paramount and stress can be high, employing box breathing before engaging with the markets potentially represent a huge asymmetrical payoff.
Potential Downside: 6 minutes out of your day.
Potential Upside: Reduced stress, enhanced focus, emotional regulation, improved decision making.
2. In-Trade: Journaling
In-trade journaling is a practice where traders document their thoughts, emotions, and observations while a trade is still active. Unlike traditional post-trade analysis, in-trade journaling provides real-time insights into the trader's mindset, decision-making process, and emotional state during the live execution of a trade.
The process involves recording:
- Entry Rationale: Why did you decide to enter the trade? What factors or indicators influenced your decision?
- Emotions: Document your emotional state during the trade. Are you feeling confident, anxious, or hesitant? Acknowledge and record these emotions as they occur.
- Market Conditions: Note any changes or unexpected developments in the market that may impact the trade.
- Decision Points: Document key decisions made during the trade, such as adjusting stop-loss levels, scaling in or out, or any other strategic moves.
- Exit Criteria: Define the conditions under which you would exit the trade, both in terms of profit targets and risk management.
Potential Downside: A few minutes during trades.
Potential Upside: Real-time awareness, hindsight bias mitigation, continuous improvement, emotional regulation.
3. Post-Trade: Walk
Don't underestimate the power of a post-trade walk; it's more than just a whimsical idea. After a winning trade, your brain experiences a dopamine spike, tempting you to trade again and potentially compromise on quality setups just for the thrill.
On the flip side, a loss triggers a cortisol spike, the stress hormone, impairing decision-making. Nothing poses a greater threat to a trading account than a trader seeking to recover losses hastily.
The post-trade walk is not a mere breather; it's a strategic move rooted in psychological principles reminiscent of therapeutic practices like Eye Movement Desensitisation and Reprocessing (EMDR), designed to alleviate distress and enhance mental well-being.
In an EMDR session, individuals move their eyes from left to right to address distressing memories. Similarly, a post-trade walk applies this principle to trading, offering lateral eye movement and a change in focus after intense market events, reducing the trading experience's emotional intensity.
Potential Downside: Time investment, temporary disconnection from the market.
Potential Upside: Stress reduction, emotional reset, improved decision making, enhanced focus, reduced impulsivity.
Food for Thought
In this exploration of asymmetric payoffs, we've highlighted just three activities, but the realm is vast. Implementing even one asymmetric activity into your routine can initiate a cascade of benefits. Disciplined integration of these practices has the potential to transform your trading psychology and overall well-being. It's a journey worth taking for every trader.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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