“Neither should a ship rely on one small anchor, nor should life rest on a single hope.” -Epictetus
Right down to our very DNA, human beings are “hardwired” to be optimistic in general. Social science and neuroscience both suggest that we as humans value optimism above realism.
Is one better than the other? Are both needed in the world of trading? To delve into this matter deeper, one must understand that there are not clear lines between realism and pessimism.
The Traders Evaluation of Trading Events: #
Every trader will have evaluated three events, subconsciously and consciously, after EVERY single trade. These events may indeed be inflicting psychological toxicity upon your mental health.
- The Internal and External Dimension: Whether or not we think the move of the trade was in our control.
- The Stable and Unstable Dimension: Whether or not we think similar trades in the future will provide the same result.
- The Specific and Global Dimension: Whether or not we relate this new result to previous trades, both winning and losing.
Dr. Martin Selegman, former president of the American Psychological Association who was legendary in the field of optimism, discovered that both optimism and pessimism can be found in the way you explain events that have happened to you.
Would you consider yourself an optimist? A realist? Or a pessimist?
If your mind has evaluated a trade as having an Internal, Stable, or Global cause, it will have a greater positive impact on your trading psychological health than if you feel your trade was to due to an External, Unstable, or Specific causes. In the next section, there is a traders’ guide to Optimism, Realism, and Pessimism, based on Dr. Selegman’s work.
Optimistic Traders Mindset #
- Winning Trades Reasoning: Internal, Stable and Global
- Losing Trades Reasoning: External, Unstable, and Specific
An optimist who just lost money may say:
- “I did the right thing, it just didn’t work this time!” (Internal)
- “I’ll do better next time.” (Stable)
- “The market flushed me out this time, but I will have better luck next time.” (Specific)
An optimist who scored a winning trade may say:
- “My hard work helped me find this trade.” (Internal)
- “I will capitalize on the next trade that sets up like this.” (Stable)
- “I remain confident in my trading prowess.” (Global)
Pessimistic Traders Mindset #
- Winning Trades Reasoning: External, Unstable, and Specific
- Losing Trades Reasoning: Internal, Stable, and Global
A pessimist who just scored a winning trade may say:
- “Anyone could have capitalized on that trade.” (External)
- “I just got lucky this time.” (Unstable)
- “That trade only works for me once in a blue moon. (Specific)
A pessimist who just locked in a losing trade may say:
- “I’m a complete idiot for taking this trade.” (Internal)
- “I’m going to lose on every trade in the future.” (Stable)
- “Those cursed signals blipped me out.” (Specific)
So where does the “Realist” come in? If you can generalize your trades with positive thinking and positive experiences, your brain will associate trading with winning, thereby fortifying your trading psychology in a way where you will seek those winning trades subconsciously. This will mean your generalizations will ultimately transform into a reality.