Trading Mental ModelsPosted: January 19, 2014
A person’s mental model (MM) is an explanation of the thought process about how something works in the real world. Lets look at trader MMs
MM #1: As soon as I buy a stock, it will go down and I will lose money.
MM#2: As soon as I buy a stock, it will go up and I will make money.
So which is the correct mental model to have? Well the answer is MM #1. Why? Because when you expect to lose on a position (ofcouse risk management in place) your mind gets accustomed to loss and as a result no adverse reaction would occur such as averaging down or having hopes of a turnaround in your position. When you expect loss you accept loss. BUT when you expect profit and you receive loss, it hurts your emotions and your mind chatter starts to take over with things like (i will never make money, i am a loser, i need special advice from $500/year newsletters, i need to attend a $5,000 trading workshop..etc).
Focus on the process and ignore the outcome. Refine the process. Try putting on mental model #1 and document your results and emotions.
Now go plan for your next losing trade!