Gaining psychological insight into the nature of the trading environment.
Have you ever seen the market as a place of unlimited potential for profit and loss? And have you ever thought about the psychological implications of that reality?
Unlike gambling, where there is a predefined risk and reward for playtime, the market operates in a different manner, one that captures the “unlimitedness” of this environment.
The market is a place where you can lose all your equity in a matter of seconds or make so much profit that it beats your wildest imagination in a relatively short period of time. In a given trade, you never really know how far price can go in your favor or against your position.
The Illusion
A belief that the market has limitless potential to fulfill your wildest dreams can lead you to believe that there is no limit to how much you can make in any given trade. This illusion prevents you from seeing an exhausting move, keeping you in the trade until all of your profits are returned to the market.
Even if there exists the possibility of a trade fulfilling your wildest dreams, the possibility of having that reality play out in any given trade is a bone of contention—how do you know the exact trade with the potential to turn your dreams into reality?
If you set your mind to believing that a single trade has the potential to give you unlimited profit, your mind then has the tendency to look for only factors that confirm that bias while ignoring any other relevant clue that could suggest that the opposite direction is in fact in your best interest.
In most cases, when this psychological effect is in motion, you could hold a losing position unnecessarily for a long time, with the hope that price will return back in your favor instead of confronting the possibility of a continued move against your position.
Most times, you can hold on to this thought pattern until your loss becomes so overwhelming that it overrides your expectation of price reversal. You may end up closing out your position in very large losses and wondering how you took such reckless action.
Thinking Right
To accurately define market direction without bias, you have to free your mind from the notion that a single trade has the potential to fulfill all your dreams. This illusion has the potential to interfere with your ability to objectively perceive price direction.
When trading, objectivity should be the goal and not money-making. The market indeed has the potential for unlimited profit, but this should not be the basis for your trading. When this thought pattern is prevalent in your mind, you are living in an illusion and heading toward a forced awareness.
