How to Correct Aversive Conditioning


As a trading coach for over a decade, I’ve noticed that traders often start out with a streak of ‘beginner’s luck,’ but eventually the risks catch up with them. At some point, many traders experience what’s called the “Reverse Midas Touch,” when one simply can’t win.imgres

Many traders report that they were able to trade well when they first started, but the more experience they gained, the worse things got. Trading is perhaps the only business in which increased knowledge and experience can actually work against you.

Trading coach Mark Douglas points out that the initial naivete of traders makes us fearless. In that fearless state we actually trade much better than if we were afraid, even though we have less objective knowledge about the market and about what we are doing.

In the course of learning to trade, you will make errors and they will cause you pain.

imgresYou may not remember the details of those painful experiences, but a part of your brain does. That part of your brain (the amygdala) stores details about everything that ever hurt you and tries to avoid those things in the future. The amygdala is a pattern recognition device. It is the size of an almond, but it can recognize

20,000 faces….or chart patterns.

Losses have much more impact on the amygdala than wins. In fact, it does not register wins at all. It only registers things that hurt. The more you trade, the more times you will lose and the amygdala never forgets a loss and who/what caused it. Never.

Gradually, therefore, the amygdala adds emotional color to your trading experience in the form of fear. Gradually, you become subtly afraid of the setups you used to take even if you consciously decide that you still want to take them. Each time a setup occurs, you will either miss it entirely or think up a reason why you should not take it.

The good news is that this type of conditioning can be reversed. But first you have to know that the conditioning is there, running the show, filtering (distorting) all your perceptions of the market’s opportunity flow.

Bottom Line

Job #1 for traders is to correct aversive conditioning. Nothing is more important than becoming proactive about your mental-emotional state while trading. It could save you thousands!

Until Next time,

Kenneth Reid

Dr. Kenneth Reid holds a Ph.D. in Clinical Psychology. He is currently a trading coach and has published articles for Forbes, SmartMoney, and SFO Magazine. He has also appeared on CNBC and writes a column on The Trading Psychology for Trader Planet. Kenneth Specialized in trading stock and futures and is working on a futures trading book.