How to behave badly and get away with it

If you managed to catch one of the places on the MRP trial this week, then congratulations. I genuinely think this is one of the most exciting and rewarding trading strategies I’ve ever come across.

If you haven’t yet signed up for a trial, there are still some places left – but it’s selling out fast. Click here to claim your risk-free trial.

Quite apart from the money it’s been making, since following this strategy, I’ve been forced to question many of the “trading rules” that I’d held dear.

It’s not a bad thing to be forced to question your beliefs every now and then.

But it can be unsettling.

The rules I’m talking about are to do with trading discipline.

Martin’s controversial theory is that trading and human nature are in direct competition. So, rather than spend our trading careers constantly battling with our psyches, instead he’s created a way of trading that allows us to surrender to our worse nature.

In short, it’s a way of trading that allows you to do many of the things that we as traders will have spent years telling ourselves were bad behaviour.

I’m talking about stuff like “not sticking to a timetable” … “not letting our winners run” … “not relying on our stop loss to save us” …

Trading with Martin’s strategy makes me feel like a screaming toddler, charging through a sweet shop filling my pockets with sweets!

And it feels fantastic!

To the disciplined trader …

If you think that you’re a naturally “well behaved” trader, to whom rational decisions are simple, then I suggest that you try this problem. It’s a classic psychological model that presents two questions. Answer them for yourself …

Problem 1:

You have just been given £1,000 and must choose between the following options:
A. A sure gain of £500, or
B. A 50% chance to gain £1,000 and a 50% chance to gain nothing.

Which do you choose?

Now go on to Problem 2:

This time, you have been given £2,000 and must choose between the following options:
A. A sure loss of £500, or
B. A 50% chance to lose £1,000 and a 50% chance to lose nothing.

Which did you choose this time?

Did you recognize in Problems 1 & 2 that the two outcomes are identical in terms of net cash? You either accept a certain £1,500 with Options A, or you gamble on a 50/50 bet of ending up with £1,000 or £2,000 with Options B.

The only difference is how the two questions are presented – one in the context of how much you can gain; the other in terms of how much you can lose.

The psychologists call this “framing theory” – i.e. it’s about the way the problem is framed. What the psychologists found in this experiment was that 84 per cent of subjects chose Option A for Problem 1, while 69 per cent chose Option B for Problem 2.

It’s not rational, but it’s the way our brains are wired – in general, people have a strong preference to avoid any amount of loss, even if it means taking a risk of losing twice as much; and that people prefer a certain gain over a random coin-flip gain of twice as much.

So, what effect does this psychological “glitch” have on our trading?

It means that if we’re in a losing trade, we won’t want to close that trade for a loss. We’d rather sit it out in the hope that it’ll come good, even if it means risking a bigger loss.

And if we’re in a winning trade, we have an overwhelming urge to close it for a profit rather than leave the money at risk in the market, even if the profit could run significantly further.

For years, it’s exactly this kind of bad behaviour in my trading that I’ve berated myself for … felt guilty about … and tried to “do better”.

While perhaps I’ve been looking at the problem in entirely the wrong light.

Instead of changing myself … I need to change the way I trade.

Earlier this year, I had some great feedback from a Bulletin reader posted on the website:

“I originally thought that good trading required following a system with absolute discipline and no emotion, but I discovered in the end that I couldn’t pretend to be a robot when I wasn’t able to sleep at night. So nowadays, if one of my systems is telling me to put on a position size which my gut doesn’t feel comfortable with, I’ll only do it at the size that it does. And if a system is telling me to close out a trade at a small loss and my emotions are begging me to hold out until it gets into profit, I can trick them by performing the close-out but recording it in my trading log as a new position in the opposite direction, instead of as a close-out of the original position. The result is that rather than accepting the pain of a losing trade, I now have two positions in opposite directions, and whichever way the market moves next, I’ll be able to close out one of them at a profit soon enough. Yes it is a ridiculous technique, but I have learned that such tricks enable me to keep my composure at the same time as adhering to the rules of my trading, which is actually a very valuable result.”

Yes, it does sound ridiculous – but I believe this reader has hit the nail on the head. We should trade in a way that’s comfortable to us, instead of how we’re told we “should” be doing it. And if that means doing some bonkers things … as long as they’re safe … why not?

How many of us have made out-and-out crazy decisions in our trading?

My hand is certainly raised for that one!

Unfortunately, crazy decisions aren’t usually factored into our trading plans, so they will often involve doing something risky. But if we factor our impulses into our plans – then we can follow them more safely.

I don’t know about you, but personally, I choose to trade because I want an easier life, not because I want to give myself a hard time.

So, here’s to giving ourselves a break!

Until next time,

Mark Rose

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