Trader Mindset Toolkit: Playing chicken and winning

Trading is essentially about confidence. Confidence in your system and confidence in your ability to take the trade and follow it through. This confidence does not appear overnight but involves a bit of cultivation and perhaps a change in behaviour. Inevitably, lack of confidence stems from conflict within and outside. One of the best ways to manage conflict is using a well-known theory from Game theory called Chicken.

In game theory the game of chicken involves two seemingly rational people driving full speed towards each other in cars. The point of the game is to overcome fear and stay on course. The driver that gets scared and swerves away is the loser. The problem, of course, is that if both stay on course, then both will crash and die. The principle of the game is that while each driver prefers not to yield to the other, the worst possible outcome occurs when both drivers do not yield.

But, of course, it does not end there. True tacticians say the winner accepts the inevitable and throws his steering wheel out of the window right before the collision. This clearly states his intention and forces the other driver to yield.

The game of chicken is so dangerous that it would be nice if we could just avoid it. But an unfortunate reality is that we are faced with the same reasoning, every day we live and trade. In the uber competitive world of markets, one has to learn how to play the game of chicken. Here are a few strategies that can help you be the winner:

1. Dig in

In the game of chicken, your flexibility is a weakness. One of the best solutions is to prove that you will not change course. Limiting your options, and metaphorically becoming immovable like the steering wheel incident, can show the other side that you will not back down.

2. Pretend: Get a reputation for being tough

If you can’t credibly limit your actions, the next best option is to get a reputation for being tough so people don’t bother believe that you are serious.

3. Go for broke

Sometimes you cannot lock in your actions but instead have to fight head on. In this case it might be wise to show you are serious by going for broke.

The player that has nothing to lose is more dangerous and such threats will be taken more seriously.

4. Raise the risk to your actions (MAD)

Brinkmanship is a strategic move where you raise the risk of the game–bringing everyone closer to the brink–unless the other side relents. While you may prefer not to use these tactics  you have to be aware of  them as your opponents may employ them. MAD (Mutually Assured Destruction was a good example of this)

5. Withdraw from the game

Walk away, if you do a quick assessment and realise you are totally out numbered and out gunned then you retreat and regroup.

6. Get lucky: change the game

In some situations, you can avoid the game of chicken by being creative. Change the game and you can create incentives to cooperate rather than intimidate.

Trader Mindset Toolkit: Maintaining focus during a trading day

The human mind is constantly wandering and traders are no different. Trading regularly requires an abundance of concentration and there are times when the massive burden of information and pressure can lead to lost concentration and focus.  Before you start making trading decisions and blowing up your trade here are some suggestions to limit the damage.

The first step to improve your focus is to identify the mental breakdowns that cause you to lose focus.

For example, a trader with very high expectations for his performance is likely to become easily frustrated, lose control emotionally, when he believes that those expectations are not being met.

Below is a list of the top mental errors that can reduce your focus.

1. Perfectionism — When you don’t perform perfectly you lose composure because you become frustrated and then focus too much on your errors instead of the tasks needed to perform well. Remember that the market is perpetual and there will always be another trade. Don’t miss it fretting over the last one.

2. Social approval or worrying too much about what others think — Worrying too much or mind reading into how you think others may judge you distracts you from your performance. You lose composure because you are too concerned with how others may perceive your performance. This can be a problem in todays wired world where the insecure traders take pleasure in being critical of anyone trading successfully. It could also be friends or partners that have irrational views about trading and money.

3. Irrational Beliefs — Irrational beliefs cause you to stay stuck in old, ineffective patterns of behavior.  Some people believe having money or being rich is evil and as a result embark on extensive self sabotage in their trading performance.

4. Fear of Failure – Fear is based on your intense need to win and causes you to worry too much about losing or failing. This can lead to you play defensive and tentative instead of composed and free.

8. Dwelling on Errors — When you get too caught up in mistakes and dwell them, it becomes easier to get frustrated and lose emotional control, which will not help you stay composed after errors.

Here are some tricks for helping you re-gain composure during a trading day

To gain maximum composure you must accept that you are going to make mistake and experience setbacks.

Remember you are human and that you can’t be perfect. Learn to be more accepting of mistakes and encourage the ability to move forward and focus on the next trade.

When you do make a mistake have a strategy that helps you regain composure.
The 3 R’s for composure help maintain composure after a mistake or error.

The 3 R’s for composure stand for: Recognize–Regroup–Refocus.

The first step is to Recognize that you are dwelling on the mistake, which limits your ability focus on your trading.

The next task is to Regroup by interrupting the chain of thought. This requires you to battle your own emotions and dispute your irrational thinking. For example you may have a positive affirmation for this.

The last step and most crucial is to Refocus on the next play. Ask yourself what you need to focus on right now to do your best on the trade? The answer will help you refocus on the task-relevant cues for the next play.