Do You Trade Like A Chimp Or Mr Spock? | Trading Psychology

Hello guys, and welcome to lesson one of the advanced psychology course for high performance trading. Profitable trading is all about you and your mindset. A good trader can make money with any positive expectancy system in any market. A bad trader will always lose, even if they have the holy grail of systems in their hands. And so in this course, I'm going to teach you exactly what it takes to succeed by teaching you how to make better trading decisions. I hope this will be the best trade in psychology course you'll ever see. There are 12 lessons in total, and each one is around about an hour long. So expect a lot of information, a lot of detail, and a lot of repetition to guide the points home. This is an extremely comprehensive course and I can promise you by the end of all 12 lessons, you will understand more about trading than 99% of people. This first lesson is covering decisions and judgment systems. Every other part of your trading depends on you understanding the information I show you in this lesson and the next one. So pay close attention as this is the foundation the rest of your trading relies on. Let's start with a really familiar optical illusion. When comparing these two lines, it looks as if A is longer. If you've seen something like this before, you'll know that in fact both lines are exactly the same length. But the interesting thing is that A still seems longer than B, even if you know it isn't. Even measuring it won't help. This is a simple demonstration of the two kinds of judgment systems you have. On the one hand, you know intellectually, logically that these lines are the same length. But on the other hand, your intuition is still suggesting that A is longer than B. In other words, knowing something intellectually doesn't alter how it feels intuitively. Here's another example where again, all the lines are the same length, yet the top right and the bottom left look much longer than the other two. Doesn't matter if you measure them or how many times you've seen this. Your intuitive assessment of these lengths remains incorrect. There's a conflict between what seems true and what you know to be true. And it's important to note how quickly intuitive perception works. The instant you saw the pictures, the lines looked unequal. Measuring them to determine the truth takes a lot longer. And there are lots of examples of these, like this one. Your intuitive and automatic system thinks the lines are zigzagging across the screen, but they're not. Pause the video if you want to double check with a ruler or a straight edge. The blue strips are parallel and the distances between Them are completely constant. But again, if even after you're convinced they are straight, your intuitive, automatic system refuses to update, and you experience a gap between what you know to be true and what feels true. And as we'll learn through this course, this is what happens in trading, where the rational, logical system thinks one thing, but your intuitive and automatic system, which is fast and powerful, thinks something else altogether. Now, what's your immediate reaction to a word like this? You can't choose how to react. Your brain simply sees the word and it makes meaning from it instantaneously and without any effort. It's the same system that's at work when we interpret people's facial expressions. It doesn't involve intellectual work or conscious recall or methodical calculation. As soon as you look at the face, you have an intuitive feel as to what they may be thinking or feeling. And the speed at which we interpret information like this is as good as instantaneous. And the feeling is always strong and convincing that it's correct. Now, in a moment, I'd like you to pause the video and grab a stopwatch or a timer on your phone. I'd like you to time yourself as you read out all the words in the columns on the screen from top to bottom. Don't rush it, but read the whole list as fast and as smoothly as you can, and restart the video once you've finished and you've got your Titan. Okay, so pause the video now, and assuming you've done that, how did you do? It's a reasonably simple task and a good example of an easy, effortless, intuitive task. The words and the colors are the same, so there's nothing really for you to work out. Let us try another example. This time I want you to call out the color of the word. Not what the word says, but the color of the font. So again, pause the video, time yourself, and then restart when you're ready. And assuming you've done that, how did you do. It's a lot harder, isn't it? This is a great example of how hard it can be to ignore your intuitive system, which in this case was reading the words. You have to slow yourself down to ignore the word and say the color of the font. And browsing, much more difficult task. Try answering this. Two fathers and two sons sat down to eat eggs for breakfast. There are exactly three eggs. Each person had an egg. How is this possible? Again, pause the video if you want to take some time to think about it. The answer is that there were three people. A grandfather, a father, and a son. Now, Whether or not you got the answer right. This is an example of a question that that cannot be answered intuitively or automatically. Being given questions like this feels like running into quicksand. We're forced to slow down and consider things methodically, which in turn requires effort and concentration. And because of that, it's more likely our intuitive system will want to give up and say it can't be done. Generally speaking, we much prefer questions that we can answer intuitively and without effort. Here's another Mary's father has five daughters. The first four are called Sante, Senti, Sinto, and Santo. What do you think a fifth daughter is called? Positively, if you need to work it out. Now, this question is deliberately trying to get you to suggest an intuitive answer. So if you answered something like son to you've been tricked. Your intuitive judgment system looks for patterns, and since it works quickly and effortlessly, it might spot that the pattern is in the second letter moving up in order of the vowels. Once you've got the first answer that seems to make sense, we usually stop and we just assume that we've solved it. In actual fact, the fifth daughter is called Mary, as it states in the first sentence. In that example, your fast and effortless intuitive thinking will was tricked into coming up with an answer, which is why you most likely didn't engage in more logical and methodical approach, which would have taken more time and effort. So you can see that you have two fundamental judgment systems, one which is fast, effortless, and intuitive, and another which is slow, requires effort, and is more logical and methodical. These two systems are the secret success or failure at trading As I mentioned in the short intro series of videos that I uploaded on this topic, there is no better common example of these two systems working side by side than when you're driving on a long straight road with minimal traffic or on routes that you're familiar with. It's possible to drive the car effortlessly and completely automatically. At times it can feel like the decision to maneuver, turn, slow down, speed up, they're all being done without you being involved, and you're free to think about other things or hold conversations or or listen to the radio. However, in an unfamiliar place or where there is increased traffic or some kind of unpredictability, you have to concentrate fully on the road and you engage your logical and methodical system. You might even turn the radio off or ask your passengers to stop talking as you switch to a different type of thinking. If the traffic then clears up or you find yourself in familiar territory again, you can go Back to a more automatic type of driving and you're mentally free once again. To drive effectively, you need both types of thinking. And as you'll discover, the same is true in trading. Now of course, these different types of thinking are all part of you. You move seamlessly between them. But where is it all taking place? Well, let's look at these judgment and decision systems in the brain. For the purposes of this course, we're going to start with a very simple three part model. The lower brain, the midbrain and the upper brain. This is obviously massively oversimplified, but it will be easier to understand and see how it applies to your trading. We'll start with the lower brain, which controls our most basic automatic bodily functions. Its processes are completely unconscious and they take care of all the critical functions and the behaviors needed to keep you alive, such as motivating you to eat, keeping vital organs working correctly, and most importantly for trading, spotting threats and risks. It's your built in risk to reward management system. And when trained properly, it ensures you don't take excessive risk and it tries to keep you from wiping out your account. But unfortunately, when untrained, it will over or under react to risk taking profit early for instance, or you find yourself holding on to losing trades. Then sitting above this is the midbring which houses much of our intuitive problem solving and spatial thinking. This is also where a lot of your long term memory sits. It's where professional traders draw on their total trading experience and spot much deeper patterns in the markets that are harder to teach or explain. The nigbering is also your powerful emotional center. It ensures that you look after your family, defend your property, look for and keep a reproductive mate, and come up with a workable response to immediate threats, physical threats, or even threats to your status or quality of life. It spends a lot of time analyzing what's happened to you in the past in order to learn from that experience. And for trading, it houses your developing intuition and it communicates that intuition to you via emotions and feelings. And this is a really important point. It does this whether your intuition is fully developed and accurate or not. But we'll come back to this. Lastly, there's the top bring. This is what gives us the unique ability to plan, self, reflect, think things through in a logical and methodical way and control our urges and desires. So you may feel as if you want to eat something or buy something, or get angry at somebody, but you don't always do it. Sometimes you hold back and you choose not to. That is your top Brain overriding, but it's not always able to do that. As we'll discover with all complex tasks like driving and trading, you require all of your brain. But at different times they all have different and important roles to play. And in trading, the top ring in particular is more critical than any other layer of the brain, as it allows us to override urges to trade impulsively or defensively. Going back to our driving example, when roads are clear and you know where you're going, your mid Boeing is doing most of the driving. It's automated most of the actions and decisions needed for driving. And the reason it can do this is that the driving controls within the car are in the same place as last time. You're on the same side of the road as last time, and the other cars around you behave roughly in the same way as the last time. So you're responding to predictable patterns and you're able to operate in a type of autopilot. And when somebody pulls out in front of you suddenly you break without thinking. You respond without any delay or effort. That is your lower brain responding and doing the thinking for you. It knows immediately that you're in danger and it's got a set of automatic responses to ensure that you survive. So you could say it's totally hijacked your decision making system and it's taken over all the controls. In other wor you act before you think. The lower brain is constantly on the lookout for things that might harm you in any way and it is prepared to react automatically to keep you from harm. Psychologists and neurologists call this your vigilance system. And it's active 24 hours a day, scanning the environment for threats. When it's activated, it has the power to take full control. It already controls all of your vital functions, but it also has veto over everything else. And yes, that goes for trading as well. So new traders who think they have full autonomous control over their trading decisions are completely kidding themselves. There is a powerful mechanism lurking beneath the surface that's just not ready to trade yet without specialist training. Now, in order to make the course valuable to you, I'm going to simplify everything. You don't need academic knowledge, you need practical knowledge that you can use when you trade. So from this point on going to combine the lower and the midbrain into a single system, leaving us with two distinct decision making systems, System 1 and System 2. System 1 includes your lower and your midbrain together, so it includes your defensive instincts and the automatic reactions in the lower brain and your Intuitive judgment and decision making and long term memory in your midbrain. System two is simply your top bring the part that allows us to plan, calculate, experiment, foresee, compare and all kinds of other complicated logical based thinking. Remember, we're aiming for a usable model of the brain that we can use in trading, not an anatomically specific or accurate one. And to aid learning even further, it might also be useful to characterize these two distinct judgment and decision making systems. System one acts instinctively, intuitively, defensively and very quickly. I'll characterize it as a chimp. Neurologists call this your default mode. In other words, it's the system that runs most of the time effortlessly. And it's particularly good at learning, memory recall and pattern spotting. In trading, System 1 stores all of your trading experience. It determines your attitudes to risk and informs many of your impulsive, defensive and intuitive decisions. The answer to these sequences can be easily answered by system 1, 2, 4, 6, 8, 10, 12. What's next? Exactly. A, B, C, D, E, F, G. What's next? You don't need to think about this or work it out, you just know it. It's intuitive, fast and it takes no effort whatsoever. System two, on the other hand, is logical, rational and deliberately calculates everything. And for this reason and their characterized. System two is Dr. Spock from Star Tre Trick. Hopefully that's a character that you're familiar with. If not, please go and Google him. Dr. Spot looked at all problems through the lens of cold, hard logic and reason. He was emotionless, robotic in character, and was never impulsively worked everything out methodically and logically. System 2 is useful for much harder problems that require deliberate or methodical working out. And in trading, it checks your decisions against your system rules or trading plans. It calculates position sizes, checks news measures charts, and it completes all other kinds of important calculations, planning and measurement tasks. But compared to system one, it requires much more effort and is a lot slower. For example, try this. Three people check into a hotel. They pay $30 to the manager and they go to their room. The manager suddenly remembers that the room rate is in fact $25 and gives $5 to the bellboy to return to the people. On the way to the room. The bellboy reasons that $5 would be difficult to share amongst the three people. So he pockets $2 and gives $1 to each person. Now each person has paid $10 and got $1 back. So they've paid $9 each totaling $27. The bellboy has $2 totaling $29. Where is the missing $1. Please pause the video and take as long as you need to try and work out. Now, you can't solve that type of problem fast and intuitively. You have to work it out deliberately and methodically. In fact, the answer demands logical thinking. Google the solution if you're curious now whether or not you got that right. You'll notice that this type of problem is comparatively hard work. And if you stuck at it, you probably have a feeling of being kind of maxed out. You have to slow down, rethink it methodically, and double check everything. System 2 or Spock may be logical and methodical, but he gets overloaded really easily. Now let's go back and look at another version of the line illusion. System one or the chin is quick to suggest that the lines are different lengths. It feels intuitively that the top line is slightly longer. System two or Spock wants to check, measure and be more precise. It works out that they are actually the same length. But the interesting thing to note is that illusions like this are really a demonstration of the conflict or the opposing views of your two judgment systems. It doesn't matter that system two has worked out that they are the same length. You will still experience system one telling you that the top line is longer. In trading, you may be able to recall plenty of scenarios where you've had that conflict between one, what you strongly feel you want to do and what you know to be a more logical and rational approach according to your system. Without good training and awareness, System one usually wins out, even if it's the wrong decision. This conflict, the battle between System one and System two, is responsible for almost all wrong decisions in trading. Part of the issue is that System one, your intuitive system, is extremely quick and the first thing that you become aware of spark. The logical and methodical system too, can take some time to kick in and formulate its view, and it requires more effort. For instance, when you meet someone for the first time, you can't help but make a quick assessment of that person and you may dislike them immediately. Something in the way that they dress, stand or walk may give you a powerful intuitive sense of who you think they are. And these first impressions can be very hard to shift. However, as you talk to them and you get to know them a bit more, you may begin to cross examine your initial assessment and you question if your first impressions were correct. And that is your System two cross examining and checking. So while system one's first impressions can be extremely accurate, it's important to always cross examine yourself and not trust it goingly. And this will become an important point when we come back to talking about trading in terms of cross examining your immediate impulsive impressions and instincts as to what you should do with a trade for Nango. The key is to understand the speed at which System one makes up its mind and the delay you experience in checking and cross examining things. Another common metaphor to understand our judgment and decision making process is the submerged iceberg. You're already aware that there's a lot happening below your level of consciousness. You have no awareness or control of how your brain manages many of your bodily functions, such as your heart rate, your temperature or your digestion, for instance. But when you're trying to solve a problem or weigh up a decision, you are well aware of the dialogue that's happening. It's above your level of consciousness, so you can hear yourself thinking. System one is mostly below your level of consciousness. System two is above that level of consciousness. That doesn't mean that they are completely separate though. They are all you and they are working together most of the time. And it's not as black and white as just consciousness and unconscious. System one ranges from barely conscious to completely unconscious. So the majority of your thinking is done below the waterline. But that doesn't mean that the decisions are made up for you and you've got no choice in those cases. System 2 has, or at least it should have the final say in what you go ahead with. Without that rational and logical quality control on your decision making, you'd be no more effective than a chimp. And it goes without saying chintz can't trade very well. So here's a quick summary slide for System one if you want to pause that and take some notes. And also there's one for System two. I'll quickly compare some of the characteristics though side by side. So System one tends to formulate its opinions and decisions very, very quickly. System two, on the other hand, is the counter or the control to that impulsive and intuitive thinking. You may have a sudden urge to eat ice cream, but System one may argue afterwards that it's the dinner time or you're counting your calories. This is your self control or your willpower, if you like. System one will deliver intuitive assessments of situations, but System two will take nothing for granted and it will double check that intuition, or at least it should. System one houses all your defensive and your survival mechanisms, and System two is guided more by a plan, rules and a documented process. But there's always a potential for conflict here and in trading, specifically when your Defense mechanisms that are trying to protect you against losses come into direct conflict with documented trading systems, rules and plans. To save time and effort and increase overall capacity, things that you do regularly become habitual or muscle memory. If you've responded in the same way a few times, why bother wondering what to do next time? Why not just do it now? Whilst that is Quite effective, System 2 should frequently check that that habit is still fit for purpose. System one makes judgments based on rules of thumb, mental shortcuts if you like. It generalizes about people, things and situations to be more efficient. And these rules of thumb are critical to operating in a complex world, but they're not always right. So system two is employed to make more methodical and individual calculations and assessments and help depart from those rules of thumb when needed. What I want to do now is give you more examples of these two judgment and decision making systems at work. Some normal life examples, and then some trading specific examples. The more examples you have, the more you'll develop a better sense of how they differ and when and how they're operating. Okay, so when you first learn to drive, you have no driving intuition or habits. We all start driving predominantly using System 2. It requires a lot of effort, total concentration and focus. We can't handle distractions, conversations or extra tasks. And of course it's uncomfortable. But as we get more experienced and system one takes over, it spots the patterns and the consistency and actions become habitualized and automated. Eventually we find we have spare capacity and drive and feels much easier and much more comfortable. That is until we have to do something complex like navigating an unfamiliar city, in which case it's all hands on deck and we're using both systems equally again. And in trading it is the same at the start. You use system two for absolutely everything and you make a lot of simple mistakes with the basics. And you literally can't handle anything more complex or advanced. But eventually System 1 takes over a lot of the simple tasks, like placing your orders, managing the orders on the chart, moving stops, even pattern recognition. So trading becomes easier and more habitual. And then when an unusual or less common event happens, like unexpected news, the experienced traders S2 kitchen. And it helps navigate that new problem more effectively. Both decision systems there are working harmoniously together. System one is where a lot of your immediate urges and impulses come from. System two, on the other hand, is your self control. For example, when you're walking past a donut shop, you may experience a sudden, impulsive and compelling urge to buy donut. You may stop in your tracks, begin actually walking back into the shop. That is just System one deciding it wants sugar and carbohydrates. In Most cases, system 2 is delayed, but it will catch up and it will begin to reason with you and provide a level of rational oversight. So it certainly has the ability to quickly talk you out of needing that donut. But sometimes you will still give in. In trading, the urge might be wanting to jump into a trade impulsively. There might be a burst of momentum in the price that catches your eye and you feel the urge to take a position. The system 2 self control is when you pause and you double check your trading plan, you ask yourself, is this condition a quality entry? According to my rules, that pausing and questioning is your System two providing rational oversight. Under good conditions, it will win. But if your system 2 is poorly trained or you're tired, stressed, even dehydrated, you are more likely to give in to that System one urge. System one tends to operate through feel. It's a very comfortable feeling and it seems to be coming from nowhere, and it's pretty effortless. System two, on the other hand, is much more methodical and systematic. For example, there are two ways of navigating in an unfamiliar city. In some cases, you may rely on System one and intuition. Maybe you visited the place a long time ago and you have an unconscious memory of the layout of the city. Or you may just have a feel about the direction of the city center based on traffic flows. In other cases, you may rely on a map or the satmap, in which case system 2 is more likely to be in charge of following the directions methodically. In most cases, you're going to be using a combination of both systems. And when your intuitive feel of direction and the map are in line, this is the most reassuring feeling. But that doesn't mean your intuitive gut feeling will be right. Gut feelings always feel right up until the point you're forced to realize you're wrong, which is always painful. In trading, having your S1 intuition and your system 2 rule following, both aligned and accurate. That's when the best trading happens. That is trading in the flow. But you're never going to be there right from the start. To begin with, you have to trade by method only, using your system 2. It's like driving in a new or foreign city for the first time, and you are dependent on on a map only. But system one will still be active and it will feel correct. Taking profit, for example, always feels right at the time, which is why you do it. But it is wrong. A well developed S1 intuition, but you can trust only comes from exposure to consistent information and good experiences over time. System one is where your intuitive decision making and complex problem solving happens. It can solve things that your rational mind would just never attain because System one has the benefit of accessing all your prior experience. System two, however, is much more methodical and sequential. So to be good at any strategic games, you need a mix of intuitive decision making and rational methodical decision making. Your intuitive decision making is extremely powerful, particularly when it's exposed to a lot of experience. It has a library of everything it's ever done and it's seeing, and it makes extremely fast suggestions as to what you should do next. On the other hand, System two wants to work things out methodically. Sometimes it agrees with System one, sometimes it disagrees. So good chess players, for example, have learned to combine those two decision making processes and realize that one is not better than the other. That's one of the most important things to remember in trading. Neither system is better or worse than the other. You need both in trading. System one has the ability to store and remember deep patterns in the market. It will give you a good or bad feeling about certain situations. System two should then try and assess that feeling against your strategy and rules. System 2 should also question if your intuition is reliable enough to trust. If you have too little experience or inadequate training, then System two really needs to fall back on a much more methodical process, following your system rules more accurately. As we've discussed, System one is a type of autopilot. But System two is a much more conscious manual control system. When you're driving in simple or familiar situations, driving can feel almost automatic, to the point where you can reach a destination with no clear memory of which route you took. But when something becomes unfamiliar, System 2 is required to take control back again. If you've ever driven on the other side of the road in a different country, you're going to know exactly what I mean. The first 50km can feel extremely hard as you pilot and plan every single maneuver and consciously override your habit of wanting to drive on the other side of the road. It's extremely mentally taxing and uncomfortable until system 1 is able to update itself and it takes over some of those automatic processes. System one is a kind of learning and thinking efficiency machine. It tries to automate and habitualize your behavior and skills so that it can free up the capacity of System 2 to focus on other higher value tasks. When you first start trading, you use System 2 for everything. Navigating around your trading platform, locating the instruments to trade, how to open or minimize charts, the zoom in the scroll functions, opening order windows, submitting the orders, just moving objects on the chart, and so on. Those are all low value tasks that are ideal for System one to handle with experience and repetition. All of those munding tasks will be managed by System one. And that frees up the capacity of System two for the more important high impact, high value decisions such as questioning. Is this actually a good trade? It's really about using each system to do the job that each one is best at. Automate what can be automated, and then retrain the manual control over the decisions that need manually control him. Now, Most importantly, System 1 is responsible for keeping you alive. If it thinks you're in danger, it will start to communicate with you using emotions and physical feelings. System one has the power in exceptional circumstances to completely take over control of your decision making processes and your physical actions. If you walk too close to the edge of a high building, it will cause you to freeze or walk back. And it's extremely effective at doing this. But in some circumstances, its survival mechanisms are either overreactive or over sensitive, or they do not realize that the danger has been removed. Take this example of people connected to the safety lines leaning out over the edge of this very high building. Assuming that you would even attempt this, you can imagine that System one and two would be saying completely different things. System one would be saying get away from the edge. This is in saying this is life or death. System two would then be providing some kind of reassurance by logically punting out that the harnesses of air, the ropes and all the other safety equipment. But regardless of that reassurance, System one would still be looking at that situation with a lot of distrust. It's the same with the roller coaster. There's a conflict between System one identifying the danger, and System two providing reassurance. And the thrill of a roller coaster is largely a result of that conflict. And of course, the huge amount of addictive hormones that are pushed out during those activities is what draws people to do them again and again. And a lot of traders are unknowingly addicted to the same kind of thrill from the system conflict. System one may be telling you to take profit early, and System two is, is assuring you that the best thing to do is let the winner run. When System one wins that conversation and you take profit early, you get the thrill of mating money, the thrill of winning, and you get a nice dump of chemicals and hormones as A reward. The emotional ups and downs that traders experience, be it from wins or losses, results in a cocktail of changing chemicals in the bloodstream. And many traders are inadvertently addicted to to those ups and downs. You really don't understand this conflict and the internal communication between you and those two systems, which you will as this course progresses. Now, in extreme, physically threatened situations like the one shown here, System two will give way completely. And System one will initiate a strong survival response, speeding up the heart rate, slowing down your digestion and diverting all your resources to prepare you to act and defend yourself. You may start running or fighting completely, automatically and without choice. System 1 survival mechanisms are extremely well developed and very powerful and will, if required, demand that System 2 works as its slave. Essentially, your conscious control is completely removed from you, and trading often triggers this, especially in losses, and especially if you're trading with money you really can't afford to lose. Maybe you've put $1,000 into your account and you're in a $200 loss, and maybe you need that thousand dollars to pay your mortgage or rent. Well, system two might be rationalizing and reassuring. That $200 loss isn't as bad as losing the full $1,000. Yeah, we might be arguing with your spouse, but it's easier to replace $200 than it is to replace the full 1000. So just stop now, take the smaller loss and walk away. System one doesn't feel that reassurance is very helpful and it completely takes over. So it starts taking massive risks to try and make that money back. You lose more money, then you take even more risks, and System one is now in full survival mode and System two is literally switched off. It's only when you've lost that full $1,000 and the risk is technically over, the System 2 comes back online and you sat wondering what on earth just happened. You've got very little recollection because none of it was conducted at the conscious level of System 2. And lastly, System 1 looks at probability intuitively and based on its experience of what it's seen, not through mathematics, statistics, or actual evidence. System two, however, has the ability to understand probability from a methodical and evidential perspective. Most of our calculations of risk and probability are done with System one. And they are simply estimates or intuitive assessments, not accurate calculations. In the vast majority of cases, it's impossible to give System 2 enough data and variables to calculate the actual probability. We can study statistics and data, but when it comes down to it, we generally rely on feeling and the experience of System one and that means we make a lot of errors, mainly because we rely on our own limited experiences or what other people have told us. For instance, many people will feel safer driving in a car than a plane. Their intuition tells them that flying must be unsafe. But the fact is flying is well over a thousand times safer than driving in a car. This inability to accurately assess risk and probability is the biggest underlying problem behind 90% of trading mistakes. Now, two whole lessons in this course video 7 and 8 are dedicated directly to this as it relates to trading and pattern recognition, win rates, expectancy, and so on. So I won't expand on that in this video. It's coming later in the course. Okay, so here's a quick summary slide of that last section if you want to pause the video again to make some notes. But now I want to go a little bit further. Let's imagine for a second that you could trade only using one of these two decision making systems. How would system one or system two trade by themselves? Well, let's start with system two. Spock, isn't this how most traders think they should be? This is what typical trading psychology suggests. Ditch your emotions and trade like a logical machine. Okay, well, let's examine that. Spock would stick to the trading system rules, absolutely no problem at all. So that's a good thing. However, he would go into a halt if he ever encountered a situation that wasn't specifically written down in his rules. He would cut all his losing trades quickly. He would let his winners run. He would be non emotional. He would always be rational, which is good for some situations. But other times, emotions initiated by System 1 are actually how would detect complex hidden risks. So Spock would be incapable of identifying hidden and sometimes catastrophic dangers in the market. He would check all decisions and assumptions against logic and fact, which is good. But he'd be unable to assess probability. Probabilities in trading cannot be precisely calculated rationally because there are too many variables. We have to rely on intuitive sense to give us more of a generalization with probabilities. But rational smart wouldn't be able to do that. He would max out his limited capacity trying to calculate the impossible calculation. And because he couldn't be exact, he'd end up not being willing to trade at all. Analysis paralysis, essentially. He would also have no experience or market knowledge. Remember, the system too has no long term memory and so he couldn't have any deep pattern recognition. And finally, he would also have no fear or protection mechanisms. He would just continue to execute the system no matter what, without any ability to build an intuitive sense of danger. And so he wouldn't recognize those rare black swan events that can end with catastrophic loss. So overall, he's got some good points. He's also got some bad points. Okay, so now what about system one? How would the chimp trade by itself without any assistance from system 2? What if we just followed our gut instincts? Or if System two was untrained or otherwise compromised? Well, unfortunately, this is how most people tend to trade. To start with, they would ditch their trading strategy all the time. They'd be jumping from one system to another, all always looking for something better. They would make no comparisons or calculations or do any checking. There would be no questioning, no critical thinking or research to establish the facts. They would be prone to revenge and competitive trading. That means trying to win their money back, trying to make up their losses, trying to prove that they're right, and really trying to soothe their ego rather than just trading for absolute profits. They would depend entirely on an intuitive assessment of probability and risk. They wouldn't be making a properly informed, accurate assessment. It would all be based on their own personal experiences and their own limited memory of how things appear or what feels right. They would confuse intuition, instinct and fear. And by that I mean they would assume that their gut feel is correct, but they would neglect to consider if they have actually trained their intuition correctly. So they would just go with whatever feels right and we already know. But things that are wrong can still feel right. They would cut their winning trades early. They would leave their losing trades open. They would double down on risky trades. They'd use things like Martingale betting strategies, betting too much of a percentage of their count on individual trades, averaging into losing trades and so on. They would blame tools and systems for their poor results. And this is a big one saying that indicator didn't work. This system is junk. That person I was learning from is a scammer. Basically. They would never accept responsibility for themselves or their results. They'd always find something or someone else to blame, which moves on to the next point, which is becoming paranoid or blaming others. And those others maybe nefarious shadow entities like the big boys, the market makers, banks, dodgy brokers, smart money doing stop hunts, etc. Maybe it's the Illuminati, basically any kind of conspiracy that you can think of, they will blame that and absolve themselves of any responsibility. They would also be prone to fight, flight and freeze responses. So they can either be over trading impulsively or under trading and hesitating to pull the trailer or even Freezing and being unable to take any action at all. And finally, impulsive and inconsistent decisions. They never do the same thing for more than two days in a row before they're then doing something completely different. Basically, they're all over the place. A trader relying only on system one is chaotic to say the least. And let's be honest, we've all been there, even experienced traders. If they're stressed, hungry, sleep deprived or going through some kind of personal or domestic challenge, it's a problem because system two is the first to get knocked out. And we need both systems to trade effectively. Remember that System 1 provides all the trade in knowledge, in experience. But system two provides the methodical check in and self control. When system two is not able to provide self control and oversight, we run into big problems. We start trading like the undisciplined impulsive chimp. There are various reasons why system 2 may not be available that you should be aware of. For instance, task overload. When we're overloaded and SystemQ is too busy worrying about something else, it may not be available to provide oversight over system one. If you think about when you're really busy and you're rushed off your feet, is it more likely that you're going to have less self control? Yeah, of course it is. The second is complexity and uncertainty. If there's too much data and too many unknowns, we tend to fall back on system one. Remember that neurologists call it the default system, which takes over when system two, for whatever reason, just couldn't come up with an answer. Thirdly, there's pain, noise, hunger and sleep. When there are strong signals coming from system one, such as pain and hunger, System two can easily get drowned out. When we're tired, System two is the first thing to suffer. That's why nutrition, hydration and sleep are so critical to trade in tiredness, hunger and dehydration will cause you to trade irrationally, impulsively and over defensively. And then there's the general stress and anxiety. Stress and anxiety are signals that system one is taking over control. These feelings are survival or defense responses preparing you to respond physically. In these states of mind, it's hard to think rationally and logically. First responders, military personnel, healthcare specialists, they all spend a lot of time training themselves to deploy logical and rational decision making despite the high levels of stress that they're going to be operating in. It's a slow process of desensitization, creating habits and well learned processes and responses. And it's the same process that Traders need to go through. And lastly, there's the perceived threat to your very survival. If System one feels that your survival is under threat, it will assume total control. Now whilst this may seem far fetched from a trading point of view, when trading with real money, where gains and losses may have an effect on your standard of living, your family, your long term prospects, it's absolutely possible that system one will see trading as a threat to your very survival. The best trade, in which I hope is obvious now, is when Spot and the Chin are both working together. Now the last thing I want to look at in this lesson is generalized memory functions in those two systems. Memory is critical to judgment and decision making in trading. So it's important that you know how both systems store memories. As you probably gathered, System one holds your long term memories, so in a sense it's your entire trading experience. It collects all the trades you've ever taken and it files them away. And it prioritizes the recall of trades that have feelings associated with them at the time, such as big wins or big losses. Strong emotions are encoded into memory so that it can try and help you avoid those painful situations in the short term, but also motivate you to find more pleasurable or comfortable situations in the short term. If you ate a new type of fruit, for instance, and you became ill, it would store that memory very easily for retrieval. The sight of that same fruit even years later will bring back a strong memory of your reaction and you would avoid eating it. I've got exactly the same thing with whiskey. Similarly, if you buy a stock in an unfamiliar company and it brings you a big loss, your memory might encode that company as being dangerous. The same is true the other way around. If you find a stock that brings you unusual gains, you might encode that into your memory as a good thing. And of course this is most likely to be unhelpful as past performance has got nothing to do with future performance in trading. Now, the key to understanding system one's memory or your long term memory is it's only as good as as the variety and consistency of the exposure that it's had. The longer you've been trading consistently and the more memories of trades that you have to draw on, the predictions and the inference from system one are more likely to be accurate, assuming that you follow your system accurately, of course. But we'll come back to that. System 2's memories are far simpler, but they're more fragile. System 2 is your short term or your working memory. If you're a computer Buff then System two is a bit like ram. It's used to hold small bits of information while you do calculations, comparisons or you transfer information from one place to another, getting codes very quickly, but it's very limited and it fades very quickly. Now, when System two is compromised by stress, hunger, dehydration, lack of glucose or oxygen, pain, noise, or is just busy attending to other things, its ability to store short term information is compromised and therefore it can't store information that's needed to do the checks and the calculations and the comparisons. When System two is compromised, we tend to fall back on System one recall and we will lose oversight over System one. And of course it goes without saying that losing oversight over System 1 will be catastrophic for your trading account on all fronts. So to round up memory, here's a similar slide if you want to pause the video. Again, just to take some notes, I did warn you this figure would be longer than the introduction series that I posted a while back and there's going to be a lot of repetition and examples in these. I am trying to be sure that everyone, regardless of the trading experience and prior knowledge, starts with a common foundation that we're going to build on as the rest of this course develops. What we've covered so far today is really very simple. We've learned that we've got two distinct judgment and decision systems. System one is fast, impulsive, automatic, intuitive and completely effortless. It's the oldest, most robust, most powerful part of our decision making system. It's mostly, but not entirely unconscious and in perceived high threat or high risk situations it has the power to take full control. System two is slow, deliberate, logical and is responsible for regulating System 1, but only when it's available. There are many situations that is either knocked out, compromised, restricted, or gives way completely to System one. Both systems form judgment and decisions in very different ways and we need to get to know these two systems well to understand how they contribute to or hinder trading success. And lastly, when trading with real money, awareness of how these systems operate is absolutely crucial. In demo and micro accounts there is no risk. So System one hijacking, or at least the consequences of an Unavailable System 2 are limited. The next thing we need to learn is how our decision making systems evolved and developed and the real reason why trading is so hard for us, why we don't always behave the way we want to when we're trading, and why our trading actions are not always financially in our best interest. It's got nothing to do with personality traits or your intelligence. If you want to know the real reason and get the answers, then look out for the second lesson in this course. Your mind and your psychology is not working against you. It just means a little bit of retraining, which is exactly what this course will help you do. So I'll see you in the next video.