Why Can’t You Pull the Trigger?
A common problem among novice and experienced traders alike is at some point they fail to implement their trading plans. They may spend countless hours developing a trading plan, but for some reason, when the time comes for executing that plan, they lose sight of the goal and let the trading opportunities presented pass them by without reaping any of the benefits.
For example, suppose as an investor that you have been researching a particular technology stock and decide to buy the stock when it goes down to a certain price level. A few days later, you notice that the stock has dropped to the level you were planning to buy. Everything is going according to plan. You researched the stock, you set your buy target, and now the stock has met your criteria to buy. However, for some reason, you are now looking for additional confirmation to make you feel comfortable with buying the stock. A few more days pass by, and you are still undecided. However, you now realize that your stock has pulled back to your entry target, turned, and is headed back up above your target price. At this point, you feel a bit happy, because your plan was a successful one and your strategy worked. At the same time, you are also sad and angry because you did not follow your plan and had missed the trade. You are trying to figure out why you didn’t buy.
This type of behavior has the potential to happen many times during the intra-day market activity of a day trader. This type of trader needs to make decisions at a rapid pace and sometimes at the spur of the moment. As a day trader, you may see that the market is approaching your price level to buy but then fail to pull the trigger at the critical time. As the market is moving up, you feel compelled to act, and yet you do not. You feel angry and begin beating yourself up psychologically. You keep asking yourself why you didn’t take the necessary action. To get a better understanding of this behavior, we will now look at some examples from everyday life.
Failing to follow your plan or pull the trigger is not limited to the world of trading. This type of behavior occurs in other areas of life. Think about your New Year’s resolutions. You were determined to follow through with all your goals like losing weight, eating more nutritious food, working out, and establishing financial goals. It didn’t take many of life’s daily activities to distract you from your goals, and you forgot all about your resolutions.
Have you noticed that when you participate in a motivational seminar or read or listen to self-help books and tapes that you feel very pumped and enthusiastic? However, a few days later, all the things in your life go back to their “normal patterns.” So what happened? Despite your enthusiasm and high level of motivation, why were you unable to implement your new plan? In the case of trading, why didn’t you properly execute your trading strategy after putting so many hours of hard work into backtesting and refining it? Why didn’t you do what you know is in your best interest and will help you achieve your financial goals? These questions provide the main focus of this chapter. Here you will learn about the different elements that influence your behavior and ultimately your actions.
Behavior is the resulting confluence of two factors: internal dynamics and external forces. A dynamic system is any type of system that exhibits a behavioral change over time. A dynamic system, be it a stock market or a human being, moves and interacts on the basis of factors mentioned above. For example, every day you go through various changes and effectively become someone new. Because the psychological changes that you undergo regarding your behavior and beliefs are a function of time, you are therefore considered to be a dynamic system.
To understand the behavioral component of a dynamic system, we need to focus our attention on internal dynamics and external forces. In psychological terms, these two factors have also been called personal causation and external environment. When you arrived at your office this morning, you used a means of transportation (an external factor) to meet your immediate objective (your want and desire, which is a result of internal dynamics) to get to the office.
When you place an order with your broker to purchase a stock, your behavior is composed of two main parts. You make use of things that help you to place your order, such as a phone line, a computer with an Internet connection, and your brokerage account and the equity in that account; these are the external forces. To actually place the order, you also need to have an idea of what stock to buy, the price a which you are willing to buy, and your physical and psychological states—your internal dynamics.
For maximum results, these factors must be in alignment. For example, if you would like to go to your office but you lack any means of transportation, the effort would be futile. This is also true if you have the transportation but no desire to go anywhere; the result again would be a lack of action. One of the reasons that individuals working with support groups get better results is primarily due to the creation of a better environment through a support system. The group plays the role of the external factors. For the same reason, a professional trader with the support of his or her spouse and family is more readily capable of reaching his or her trading goals and in a faster and much more enjoyable way.
To clearly identify the primary reasons that you cannot pull the trigger, you need to distinguish between personal causation and your external environment, because these are the two major factors involved in this process. Was the reason you did not pull the trigger because of your personal causation or internal dynamics, or could it be due to your external environment or other external factors?
Suppose that when you went to place your order your data stopped and you couldn’t see the market, so you didn’t pull the trigger. Then, when your data was restored, you noticed that the market had moved up from your price. Your behavior with regard to this lack of action was primarily due to the external factor of data stoppage. Maybe you couldn’t pull the trigger due to the distraction when your phone rang or someone was talking to you, so you missed your trade. However, if there were no external factors of any major influence coming from your environment, the lack of action is caused by your own personal cause or internal dynamics. You could have been afraid of a possible loss, or because your last trade was a losing one, you decided not to take the next one.
Internal Dynamics
In addition to external factors, your own internal dynamics or personal causation can have a dramatic impact on your behavior. According to David McClelland, a psychologist who has researched human motivation for about 40 years, three variables interact in complex ways and cause an individual to elicit certain behaviors:
- cognition, schemas, your beliefs and understanding, and your knowledge;
- skills and adaptive traits, abilities and personality traits, and habits; and
- personal motives, the desire or reason for performing certain behaviors, and emotional states.
Hence, if you did not pull the trigger because of the influence of internal dynamics, some of the reasons could be the following:
- You did not have a trading system or the proper knowledge to trade confidently.
- You were not able to follow or implement your trading system because of your personality traits and habits.
- You did not place your order due to a lack of motivation and desire.
In short, your understanding, your psychological and emotional states, and your motivation collectively had a major impact, so you did not place your orders.
To place a trade, you go through a set of complex interactions of three major variables: having a system and knowing how to trade, following your system and your trading plan, and your motivation for trading. These three factors act on each other to create the crucial and necessary framework that shapes your behavior. Your internal dynamics then, in conjunction with external factors, stimulate and create your behavior. To understand the internal dynamics behind why you did not act, you need to analyze each of these three components. Once you realize the main causation for your action or lack of action, you will be able to resolve any conflicts in your trading behavior. As always, understanding the problem is only half of the solution; your primary focus in solving the problem of “not pulling the trigger” should be on its causation.
This is an excerpt from Chapter 14, How to Become a Succesful Trader
https://www.amazon.com/How-Become-Successful-Trader-Personality/dp/1483468844/ref=sr_1_5?ie=UTF8&qid=1519337082&sr=8-5&keywords=gandevani