When it comes to cognitive issues, many people feel that such things are both elusive and useless, and would rather be told directly about your trading techniques, such as how to identify patterns, where to enter, and what kind of profit-loss ratio to make, which is more practical.
I have found that no matter in any industry, the pursuit of quick success and instant benefit is a common problem. Everyone wants to make quick money, yet no one seems to be able to make money.
This is because making money is a multifaceted issue, not something that can be easily achieved by simply knowing a certain point. Just like in our trading, there are many variables. When the trend changes, a pattern might be effective with the trend but less so against it. One cannot just rush into it without thinking; one must observe the market and make more advantageous choices.
In trading, we ourselves are also a variable. Our psychological state is complex. Sometimes we are shortsighted, sometimes we follow the crowd, and sometimes we make wrong decisions due to our cognitive biases, etc.
It's like driving out with the wrong navigation from the start; you will never reach your destination.
So I believe that in trading, we should first discard those complex theories and the pursuit of trading techniques, and adjust our trading navigation. Today, I will share five cognitions that I think are most important in trading to help you find your own direction.
Let me say a few words first.
Our human cognition is inherently flawed because we are fundamentally irrational and emotional, so our human nature is fragile, and we will definitely make mistakes, many of which are uncontrollable.
So in trading, if you make a mistake, don't feel extremely painful, blame yourself, or feel that fate is unfair to you, because everyone might be making the same mistakes. It's about who can be more aware and stop these mistakes.Additionally, our cognition may not always be correct. We must always have the courage and the initiative to adjust our cognition. The process of adjustment is certainly painful and difficult because it involves struggling against our own nature.
However, it is precisely because this task is challenging and most people cannot achieve it that the advantages of a few individuals can be highlighted, allowing a small number of people to earn the majority of the money. I hope you all can understand these principles.
Cognition One: You can't have the sweet ends of the sugarcane. You always have to keep one end and give up the other.
A trader chatted with me, and the conversation was roughly as follows:
She asked: "If I enter based on a 5-minute chart, I can't capture the profits of a larger time frame. Can I enter and exit on a 1-hour chart?"
I replied: "Theoretically, this method is viable. You can review historical data to see the statistics."
She further asked: "If I enter and exit on a 1-hour chart, will I give back a lot of profits?"
I said: "There likely will be some, but our trading techniques are certainly not omnipotent. There must be trade-offs. We choose this method to secure the 1-hour profits, so don't get caught up in the issue of profit giving back."
In fact, this phenomenon is very common in trading. Everyone understands the principle that "you can't have the sweet ends of the sugarcane," but when it comes time to make a choice, they start to hesitate and worry, fearing that they might miss the opportunity to enjoy the sweetness at both ends.
If you think this way, your trading will always be in a state of "wanting both" pain.The principle of mutual damage in trading technology is akin to what we discussed earlier: short cycles cannot hold onto large profits, while long cycles may result in the giving back of profits. Choosing between large and small stop losses, as well as between breaking and pulling back entries, almost all technical criteria have their corresponding advantages and disadvantages. Opting for one means accepting its opposite.
This is the reason I place this realization first: most of life's suffering stems from the desire for "both and." The first lesson in trading must be to learn to let go; otherwise, it leads to endless losses and pain.
Cognition two: Trends will inevitably repeat, and we must have confidence and patience in our own technical methods. The longer you engage in trading, the more you will realize that historical trends have always been repeating. This is a fundamental law of financial markets.
Although times are constantly progressing and the world is undergoing earth-shaking changes, human nature remains eternal, and trends are always a reflection of human nature and emotions, which is also the source from which we capture patterns.
The three segments above are all 1-hour K-line charts of gold, with very similar patterns. They all start with consolidation, followed by a downward fake-out, and then a rapid upward reversal. The first two occurred in 2012, and the last one in 2024. They have some minor differences in detail, but the overall pattern is almost identical, and the moving average patterns are also fundamentally similar.
It is impossible to find two completely identical leaves in the world, but we can find ones with a very high degree of similarity, and the same applies to market trends. Therefore, our goal should not be to find completely identical leaves, but to find similar ones, which is enough for us to make a fortune.
Our technical methods are designed to capture similar patterns in the ever-repeating market trends, coupled with the advantages of success rate and reward-to-risk ratio, to ultimately generate profits.The common issue people face is not about establishing technical standards, but rather "how to wait," because everyone fears that they might not get the opportunity, fears the unknown future. However, patience is often the beam that distinguishes profit-makers from losers.
Thus, we must understand the significance of reviewing past trades. One reason is to test our technical strategies, and the other is to understand the patterns of historical market trends. When you realize that the historical trends over decades have been repeating, you won't have as many concerns about future trends, and trading will naturally be more confident.
Cognition three: We must have a cost concept.
I particularly like a saying: Everything we get in life is obtained by giving up something else, even a thief who steals without effort is taking the risk of being caught and beaten.
Just as if we want to own something, we have to spend money to buy it, and the money spent is our cost.
If we want to harvest a relationship, we pay the cost of time and money, which is also a kind of equivalent exchange.
Our growth on our own life path is also built up with countless pains and failures, which is also a form of exchange.
We all understand the principle, but it changes completely in trading. We always want to get something for nothing, always want to gamble with a small stake for a big win, always want to gain great profits without any cost, and such trading cannot help but go awry.
Every trade we make, first and foremost, is to consider the loss we can bear, and then to consider the profit we might exchange for, which is the risk awareness in trading, and we must also have this cost concept.
It's not just about the cost of money. If we want to gain trading cognition and trading skills beyond others, we also have to pay the corresponding cost, such as investing a lot of time and energy in learning, doing a lot of reviews, and spending a lot of time thinking, etc.So, in most cases, the greater the achievements we aspire to, the more economic, time, and emotional costs we have to pay, and so on.
Once you truly learn to bear the costs, you will find that many things are not as complicated or as difficult as you imagined, and your room for improvement will be elevated to a higher level.
Cognition Four: Group Polarization and Conformity Effect.
I have found that humans are a species that spend their entire lives seeking a sense of belonging and recognition. It seems that gaining the approval of others can make oneself more joyful and at ease.
This was true for me in the early days of trading as well. I enjoyed joining various groups, listening to others' opinions, showing off my profits, and feeling envious of others' achievements.
Sometimes, receiving recognition and praise from others in these groups made me happier than making a profit in my own trades because it satisfied my own vanity and sense of being acknowledged.
However, groups are often irrational, especially when a viewpoint is agreed upon by many people, it is silently assumed to be correct, which is a terrifying thing in trading.
For example, you originally expected gold to be bullish, but everyone in the group was discussing bearish views, with many expressing very certain opinions and presenting a lot of evidence. At this point, you might start to doubt your own judgment and develop a strange "extreme certainty," thinking that gold must be bearish.
Then, in actual trading, when gold shifts from bearish to bullish, which clearly meets your original expectation, you still firmly believe in its bearish trend because the majority's opinion has given you this confidence. As a result, you might not even set a stop loss, and in the end, you could end up losing a lot.
So, many times when we are in a group, we tend to believe more in the viewpoints agreed upon by the vast majority and may even change our own viewpoints to appear "conforming."Just like an experienced elder brother I once knew in a group, he was very experienced in trading. At that time, when I was trading, he took the opposite direction from me. He immediately came to persuade me to change my position quickly, and many people in the group were also persuading me. Later, I couldn't resist the face and made a reverse order, but the market went against me and I lost a lot.
At this time, you still can't blame others because the decision was made by yourself, and you can't fight against the group with your own strength, so you have to accept the loss with a tail between your legs.
That's why I say if you want to do a good job in trading, it's best not to join some groups, because there are many distractions. Everyone, in order to eliminate their own fear of the future market, chooses to be lazy in thinking and believes in others' judgments, which completely loses the space for independent thinking. Even if you lose, you can only swallow the loss.
Cognition Five: Emotional Bias.
As humans, we definitely have emotions, especially when making judgments and decisions. Once emotions take the lead, they will affect our rational judgment.
For example, we are very averse to loss in trading. Below is a picture of a trade a friend told me about last week.
The picture is a 5-minute K-line chart of gold.
After the U.S. CPI data came out on Thursday, gold was in a clear bull market. On Friday, he chose to go long in the 5-minute intraday. In the evening, after the trend line broke and the moving average crossed, he made a long position at 2401.5 and set the profit target at the pressure of the previous platform on the hourly chart at 2416.
At 8:30 in the evening, the U.S. announced the PPI data, and gold plunged by 10 dollars. He started to panic and was afraid. What if he lost money?
So he started to watch the market all the time to see if it could reverse, and adjusted the profit target to the opening price. At that time, he had only one thought in his mind, "As long as he doesn't lose money, he will run back to the original price, and he doesn't want to make a profit."Afterward, the market indeed reversed. He closed his position near the entry price, and then the market continued to rise, reaching his original target of 2416.
This is a very typical manifestation of loss aversion. Because of the fear of losing money or the fear of losing existing profits, one follows subjective emotions to set profit targets and stop losses, leading to greater losses or smaller gains.
There are many such examples, such as overconfidence in one's own trading, a preference for instant gratification, and recency bias, all of which are emotional biases in trading.
These issues are so widespread, is there any way to reduce our mistakes? Based on my experience, there are several points below:
(1) Keep a trading journal and statistics to see if you have made wrong trades influenced by emotions in the past period, and how frequently it occurs.
(2) Based on your statistical results, establish corresponding trading discipline. For example, what should you do to avoid closing positions prematurely when you are emotional? Reducing the time spent watching the market, setting alerts, and engaging in other activities to relax and relieve stress are all viable options.
(3) Manage risk well. If the psychological pressure is too great and the impact of emotions on oneself is too significant, reduce the position size or set a stop loss that causes less psychological stress. Only with limited losses can one avoid excessive worry and fear, maintain emotional stability, and perform well in trading.
