STOP Making Irrational Decisions | Trading Psychology

Hello and welcome back to lesson three of the advanced psychology course for high performance trading. This video is on judgment and decisions in economics, which is to say how we should make financial decisions for optimal returns versus what we actually do when we're under pressure. You're going to be surprised when you see what's really going on. Modern economic theory that is still taught in universities and even used by central banks and governments, or was developed before we really understood the human brain. They assumed that we are all rational and sensible and will always make wise and well informed decisions that are in our best financial interest. That's even what most trading psychology is based on. But you should know by now from watching the first two videos in this course that system one is far from rational or logical. So this lesson is going to look at this from a more realistic perspective to help you understand why you seem to repeat repeatedly make bad trading decisions and what you can do to improve from now on. I'm going to start by going back and unpicking how our attitudes to money and finance have unfolded over time. In Adam Smith's revolutionary book, the wealth of nations, he proposed that nations became wealthy when they allowed markets to operate freely without intervention from governments or other groups. He he was one of the first to suggest that supplying demand can and should be completely self regulating, arguing that prices of commodities changed as supplying demand increased and decreased. If there's an oversupply and less demand of a commodity, the price falls and when there's an under supply and a high demand, the price rises. He saw economics as a self regulating system that needed to be left alone to work most efficiently. And crucially, he was one of the first people to propose that humans were always rational and act in their own best interest. He suggested that we calculate the usefulness and satisfaction accurately on any given product. For instance, let's say you're at a market and you want to buy an apple. If the price is too high, the usefulness or the satisfaction we get from eating the apple will not be enough to justify that high price and we won't buy it and and the price would have to fall. Obviously the price we're willing to pay will differ slightly for each person depending on whether you're hungry or even if you like apples. But the final market price will be managed by our group attitudes collectively. And so we have the first two assumptions that are built into the foundation of traditional economics for the past 300 years. Firstly, that people are rational decision makers. We consider whether to buy things methodically and logically based on how useful the item is and whether the cost is proportional to its usefulness. In other words, we make decisions only using system 2. The second assumption is that we were always trying maximize our satisfaction when making decisions. The assumption is that you can accurately predict how much satisfaction or usefulness or even happiness a product or service will bring you. Those two assumptions have led to one of the longest standing principles in traditional economics. It's what economists call rational choice theory. Rational choice theory states that individuals always make prudent and logical decisions which provide us with the greatest benefit of satisfaction and always in our highest self interest. As I said, essentially saying that we make decisions only using system 2, the slow logical part of our brain. And this theory has become deeply embedded into financial markets. The dominant train of thought in academic circles is that financial markets are self regulating and efficient because investors as a group always make prudent and logical decisions and acted for their own self interest. In a way, the assumption is that we only do things that will make us happier both now and in the long term. And this theory is the backbone of pretty much all trading advice and education. System designers and even traders themselves assume that a trader will make prudent logical decisions. The assumption is if we have a clearly defined set of rules that provide a positive expectancy, the trader will follow them and act in their best interest logically and methodically. It should be self evident to anyone with eyes to see that that isn't true. If it was, you wouldn't be watching my videos trying to improve your trading. So the assumptions are that investors are rational and consider all the information to accurately assess the meaning. It does admit that some individuals act irrationally but in such small numbers that they are irrelevant. It states that markets quickly incorporate all known information and that they represent the true value of securities. The so the price of any given commodity or asset is the true sum total of all the individual rational assessments. It claims that markets are difficult to beat in the long term because of this efficiency and that prices stated are always correct. So traditional economics has made some pretty bold assumptions about how people make judgments and decisions. It assumes that people's preferences are are stable and won't change. That people only make decisions that maximize their satisfaction and happiness as if we only do things in life that make us happy. It assumes that we are efficient and accurate calculators. That we can accurately calculate the variables between 30 dishwashers that are all at different prices. For example, that we always plan for our long term interests and that we all save for the future and we don't give in to short term desires, it's assumed that we're all selfish and completely self interested and that we only buy things to make ourselves happy and that we all have plenty of willpower and control. In other words, we wouldn't be influenced by anybody else who doesn't have our best interests at heart, nor buy anything that could cause us harm because we crave it. Like fast food and sugar for instance. We would never do that. And most importantly, traditional economics has assumed that people only act on full and relevant information and that they will not make a decision until they have all the facts. That people are not impulsive, are good at research and patient enough to wait for all the facts before making a balanced choice. I think you can already tell that this is utterly ridiculous and yet this still influences worldwide economic policies. But then again, whoever said that governments were sensible? But anyway, let's go with it for a second. Imagine someone who conforms to traditional economic assumptions and just makes decisions using System 2. Imagine Dr. Spock going shopping in a supermarket. How would he make decisions on what to buy? Well, for starters, Spock would always buy the same things because his preferences would never change. He would only buy things that would ultimately bring him true happiness in the long run. So no to cigarettes, alcohol, sugary or fatty foods. He'd be on some kind of evidence based diet that was proven to give him the best health benefits in the long term. And to do this, he would methodically check and read every single label and refer to a database of ingredients to ensure that the recommended daily intake was not exceeded and is compliant with his ultimate diet. This would obviously take hours. He wouldn't be swayed by two for one deals or clever pricing offers. Instead, he calculate the exact price per kg of each item to ensure that he was getting the best deal. He'd know exactly how much he was likely to consume and he would buy the exact amount and ensure zero waste. And of course advertising tempting offers and brands would all have no effect at all. As he's not swayed by the prime in or of sub selves emotional or visual persuasion. And even if he was hungry when gwent shopping, the smells of freshly baked goods would have no effect on him. As he has infinite willpower and control. He's not impulsive in terms of trading. We looked at this in lesson one of the course. In the short term, with just the basics, Spock would do quite well as long as the market never deviated from its expected behavior and and did something that his trading system hadn't accounted for. So Spock would consider all the available markets and strategies and he'd pick the most suitable system with the most realistic edge for that market. And he'd be thinking in probabilistic terms from the very start. He'd follow a system to the latter, never breaking any rules. When the price went against his position, he would cut his losses. When the price went his way, he would let the winners run to maximize the returns. He would never feel any anxiety or emotions, and every decision would be double checked for accuracy in conforming to his system. But he would also have some serious downsides. He wouldn't be able to calculate probability and risk because it's too complex to do that with just system two. System one has to be involved in that. And he wouldn't be able to build or develop any intuition or market knowledge or long term experience. And as such, he wouldn't be able to recognize hidden patterns. So definitely not the perfect trader. He probably wouldn't blow up his account, but he'd be unlikely to make much money either. Of course, in the real world, even if trading like Spot was desirable, it just isn't possible. Let me show you how easily irrationality creeps into our decision making in reality. In this famous experiment, subjects were asked which beer they prefer, A or B. Those who said they preferred beer A over B were given a new beer, and they were asked which beer they preferred, B or C. Those who preferred B over C were then asked if they prefer A over C. Now, if you prefer A over B and B over C, then the rational answer would be that you preferred A over C. But time after time, this experiment shows that we are seemingly irrational when it comes to even a simple trace like this. Many people say they prefer BSC over A, and that effect is called transitivity. And it demonstrates that our preferences are unstable and seemingly irrational, which contravenes quite a few of those assumptions that we just talked about in rational economics. I've got another slightly more complex example here. Consider this scenario. Let's say you're looking to buy a pen. You find the pen you want at a local store for $20. But after phoning around, you find that the same pen is for sale at another store across town for $10. It's a 15 minute drive. What do you do? Well, experiments have shown that most people would take that 15 minute drive to save $10. Okay, so that sounds logical. Now imagine you're looking for a suit, and you find the suit that you want at a local store for $455. But after phoning around you find the same suit is on sale at another store across town for 445. Again, it's a 15 minute drive. What do you do? In this example, the experiment showed that the same people who were willing to drive 15 minutes to save $10 on a pen would not to drive 15 minutes to save $10 on a suit. Now is that rational? If Spock were in these scenarios, he would behave exactly the same way. The saving is $10. In both cases, the utility is identical and therefore the decision should be identical. Real humans like you and I, on the other hand, seemingly act irrationally. We are willing to drive 50 minutes to make a 50% saving on the pen, but not for a 2% saving on the suit. Even though the dollar amount is identical. It seems that humans do not consider the price or sacrifice to acquire things rationally, but just the relative reduction. It's not that you or I are stupid, far from it. It's because System 1 is involved in these calculations and it does things differently from System 2. And the idea that our judgment and decisions are always executed in our own best interests is a false one. We know that. We know that humans have poor self control and that we make decisions based on the here and now, not what will necessarily be best for us in the long term. This is as true for food, drink and exercise as it is for managing and prioritizing our time and relationships. We know that the assumptions made in traditional economics are largely false. As soon as the choices become too complex to calculate, or they're about substances which play on our addictions or impulses, or we have to compare things, then we're not rational. Humans are of course, not rational decision makers. The reason traditional economics is so off the mark is because it was constructed way before we understood how the brain really worked. But like lots of things, rational economics are stuck around regardless of being false. The problem with it is it fails to recognize that system one, the fastest and most powerful force in our decision making, does not behave in a spark like manner. When we go shopping, there's a chin palm board in our basket and it exerts a lot of pressure on our decisions and choices. Our preferences change from day to day. Acting impulsively, we're guided by a complex mix of sub self priorities that can easily be primed and persuaded. Like we talked about in the last lesson, we find it difficult to calculate prices accurately. And we certainly don't make shopping decisions that are in our long term interests. Instead, we're focused more on the here and now, the short term and Self control is often an illusion. So now I want to introduce you to a pivotal character in the development of economic theory, in case you haven't heard of him already. In the early 1970s, Daniel Kahneman, an American psychologist, started to challenge many of the assumptions made by traditional economists. He was really the first to point out that economists had been describing what human beings should be doing from the rational perspective, but that psychologists were in the business of studying what people actually do. And together with Amos Zversverski, they studied the irrationality of decision making, particularly when making choices around money. And this gave rise to what many people feel has been the biggest revolution in thinking around economics. They call this collision of economics and psychology behavioral economics. In simple terms, behavioral economics is just the study of actual behavior in and around money. Here's a more detailed definition if you want to pause the video and note that down. After countless experiments, they've concluded that human beings are irrational and fundamentally flawed when it comes to making financial decisions. And that goes for trading as well. So let's look at a couple of examples of their findings. Let's say that you are offered the chance to play this game. We flip a coin, and if it's heads, you win $120, and if it's tails, you lose nothing. Would you want to play? Of course you do. There's no risk. You can only gain. But what if the rules changed this time? If it's heads, you win $120, but if it's tails, you lose 100. Now, what would you do? Do you still want to play? Barely. Mind. We can play this game. A game and a game. Well, Daniel Kahneman discovered that most people are unwilling to play a game like this. Now, at first, this doesn't seem to make much sense. Surely the potential gains are still bigger than the potential losses. So the decision is simple. Spock would definitely play. But this finding, that's one of their biggest theories, prospect theory. Prospect theory is absolutely crucial for all traders to be aware of. It describes our attitudes to gains and losses, not theoretically, like in traditional economics, but what we do in. In the real world. Okay, so on a graph, plotting gains and losses against the pain and the satisfaction you get from gains and losses, you'd expect, rationally, at least, that pain and losses have an equal but opposite effect. In other words, if you lost $10 through holding your pocket, the pain caused would be equal to the satisfaction gained by finding $10 in the street. In other words, the $10 worth of loss is equal but opposite to $10 worth of gain Spark would certainly agree with that. So let's look at this through the eyes of our conflict gang. You are asked whether you wanted to flip a coin. If it's heads, you win 120. If it's tails, you lose 100. Traditional economics suggests that the satisfaction of gains and losses are equally proportional. Meaning if there is an equal chance to gain more than you lose, you take the bet. Why? Well, because the satisfaction of gaining the $120 should be bigger than the pain of losing only $100. Spock would always take that bet that humans are typically unwilling to. Why? Well, as it turns out, System one does not perceive gains and losses as equal and opposite. In fact, they discovered that the graph looks more like this. And it's this line which has become one of the cornerstones of behavioral economics or prospect theory. In simple terms, they discovered that the bigger the gain, the less the satisfaction that you get, and that losses are initially much more painful than should be rational. So the potential pain of losing $100 is far higher than the satisfaction you might get from winning 120, even though it's more. This is thought to explain why people buy more and more things to try and chase the ever decreasing amount of satisfaction they get from acquiring new things. Are billionaires a thousand times more satisfied and happier than millionaires? Of course they're not. Further gains have less and less effect. Less utility, less bang for the buck, as it were. This graph supports what we discussed in the last lesson about our strong preference for avoiding losses over trying to gain more. It supports what we know about our willingness to take bigger risks when we're behind. Even a little bit of loss exerts a relatively large amount of pain, which we want to remove as soon as possible. So as a strategy, we take huge risks to try and get back on top and remove that pain. Daniel Kahneman called it loss aversion and he labeled it irrational. But it isn't really, is it? The previous lesson in this course explained how our ancestors that did not have an unbalanced approach to losses versus gains just didn't survive. The impact of losses like losing food, tools and territory, has historically had a much bigger consequence on our survival rates than the impact of acquiring even more. Our ancestors did prioritize avoiding loss over making gains in it's not irrational, but it is maladaptive for when we trade financial markets. Prospect theory explains why win rate is so important to traders. If we win more often, we lose less often, so we experience less pain. It also explains why people prefer to have wider stops or not use stops at all, which is another way of saying avoiding taking losses, avoiding pain. It explains why people scale into losers to average their price and get themselves out of a losing position more quickly without having to wait for the price to move. So far, it also explains taking profit early, which includes scaling out of winners. Both strategies make our profits smaller than they could be. Why do we do it? In terms of prospect theory, the satisfaction we get from a small gain is not much different than to what we get from a bigger gain, so we may as well just get that satisfaction sooner. None of these things mean that we are idiots. It just means that a lot of these mechanisms are maladaptive for trading. Now let's look at another finding in behavioral economics that is crucial for trading awareness, which behavioral economists call the Endowment effect. The first academic observation of this effect was made by Richard Thaler at the University of Rochester. He divided the students into two groups. Students in group A were given university mugs. Students in group B were given nothing. Then students in group A were asked how much they would be willing to sell the mug for. Students in group B were asked what price they would be willing to pay for one. So what do you think happened? Do you think that A, the students with mugs priced them higher, B, the students with no mugs price them higher, Or C, both sets of students price them about the same. Pause the video if you want to think about that for a moment. Well, if humans were rational, as traditional economics clings, then you'd expect both groups to price the mug. The sing. The usefulness of the mug and its value should be calculated equally by everyone. That's what Spock would argue. But you've probably guessed that's not what actually happens. The students with mugs in group A priced them higher, in fact, twice the price. Group A, on average, were only willing to sell their mugs $4.50. But Group B were only willing to buy the Moogs, on average at $2. 25. So why is this such a difference? Well, it turns out that we place a higher value on things that we own over those that we don't. And this is what behavioral economists call the Endowment effect. In simple terms, ownership itself creates some kind of satisfaction and value. But this contravenes one of the key assumptions in traditional economic theory. Traditional economists have assumed that the value we place on objects is governed purely by its market value and the usefulness it brings. But in reality, it doesn't work like that. Humans place even more value on an object once it becomes theirs. For instance, children repeatedly demonstrate their strong preference and value for something that they own over something that they don't. And any parent will tell you that. Try swapping your child's scruffy dirty teddy for a brand new one at 10 times the value. You're not going to have much luck. The endowment effect is an emotional bond that goes way beyond market value and usefulness. Every time I sell my car, I never get what I think it's worth. And you can probably relate. Ownership creates satisfaction in its own right, which results in us overvaluing an item, which often leads to a general unwillingness or hesitation to sell. An important point to bear in mind for trading. When we buy stocks, currency or contracts and they go down in value, we know we're selling it for less than we paid for it. But the endowment effect exaggerates this difference and makes it feel even worse for us. And. And it's this exaggerated difference that can lead to holding positions far longer. For instance, it's not uncommon for house owners who have overvalued their house to hold onto it in a downward market in exactly the same way, unwilling to have the overvaluation confirmed, whilst the price difference between their valuation and true market value gets bigger and bigger. The endowment effect also explains the explosion of the multibillion dollar industry. In storage units, people keep things they know they're never going to use, but they just can't let go of them at the market price. Again, this is not irrational behavior. There are good evolutionary reasons to form bonds to the things that we own. Firstly, you're more familiar with the object that you own. You know it and you trust it. Even if you swapped it light for light, you couldn't be sure the replacement was as reliable as your version. Secondly, objects become extensions of our own memory system. They can remind us of all kinds of things. Keeping an old game may remind you of being a child. Keeping an old cinema ticket may remind you of your first date or a lost loved one. We'll explore the environment effect more specifically as to how it impacts trading in the next few videos. But for now, let's move on to another important finding in behavioral economics. Mental accounting. Traditional economics argues that money is fungible, meaning that it is interchangeable and has the same value no matter where it came from. In other words, a dollar fanged in the street has the same value as a dollar earned in exchange for work. And that certainly sounds logical, but you can get where we're going with this if that was true. Once you've put money from your salary? Profit from trading birthday gifts, savings or interest earned into your bank account. Every dollar would have the same value. The source of the money should not affect its value to us or how we use it. But is that true? Consider this scenario. Let's say you get an unexpected tax refund of $1,000. What's the likelihood you'll spend it on something exotic, a luxury item, or even a holiday? Even though the money is ours, burned from our hard work, and the taxman is simply returning it after taking too much, we are much more likely to see it in a different mental account. Refunds have been shown to feel more like disposable or bonus income. What about cash that you might receive for your birthday from a family member? Would you go and lend that cash to a friend, give it a charity, or pay a fine or household bill with it? Probably not. It seems that money is not as fungible as the traditional economists would have us believe. We actually keep tabs on where the money has come from, and we treat it differently depending on which mental account it is in. This is a crucial concept to be aware of when trading. As you will soon discover, in fact, it can be catastrophic if you're not aware of this. As with the endowment effect, we'll look at mental accounting in a trading context in the next few classes. But let's just highlight a couple of points for now in this figure. First, keeping mental accounts of where the money comes from is an entirely effortless system, one process that makes it a hugely unconscious mechanism. And because it's unconscious and effortless, judgment and decisions driven by mental accounting are highly convincing. System 1 decisions always feel right. So without awareness or oversight, we have a tendency to just go along with it. And when we do, the knock on effect is it will skew other plans that you've made. If you've been keeping mental accounts of wins and losses for a particular week, it can prevent you following your system when the next trade opportunity comes along, or the way you manage existing open trades. More examples of how humans act, apparently irrationally with money, but we'll come back to this as the course progresses. Next, I want to talk about self control. Traditional economics assumes that we only buy what we need and that we only act in our own best interests. However, in a very famous experiment that's repeated time and time again, researchers offer children the chance to eat one marshmallow now or have two in 10 minutes. Children are left alone with the marshmallows, and if they can resist for the full time they are given one More. Now, of course, many children struggle, particularly when they are left alone unsupervised. They're torn between making the logical decision to wait and get a bigger, better reward, and the urge to eat that single marshmallow immediately for instant gratification. They've also tested the effects of increasing the wait time and the size of the reward. So, one marshmallow immediately or wait 60 minutes for 30, 10 marshmallows. And what they find is, as the rewards are increased in line with the time that needed to be waited, the task gets harder. More and more children choose to go for the single marshmallow. Now, in the short term, the longer we have to wait for the payoff, the more unlikely we're going to be motivated by it. When temptation is right in front of us and the payoffs for restraint are far in the future, self control is at its weakest. And this isn't just limited to children by any means. At a party recently, a friend asked me to remove a bowl of cashews because he was liable to eat them all. Now, is that rational? If you wanted the bowl removed, then we've got to infer that he doesn't want to eat them. But if he doesn't want to eat them, then why does he need the bowl removed? Spock would certainly take issue with that kind of logic. But of course, what I was hearing was a direct conflict between system one and system two. That urge to eat now versus the rational voice for the future payoff of not becoming overweight. Remember, it's system two that sees into the future and calculates future payoffs. And system one is concerned mostly with the here and now. Psychologists call this emphasis on the here and now, the present bias. We may decide logically and rationally that it's in our best interest not to eat ice cream. But when it's right there in front of us, it's a different matter. The future payoff of not eating ice cream is so far away in distance that it becomes meaningless. Of course, it's not just food that this relates to. It's the reason so many people struggle to save money. It's also the reason why buy now, pay later schemes are so successful. With some offers, you get to enjoy a widescreen television or a new couch for a whole year before you have to start paying for it. The benefit or reward of the new item is immediate, but the pain of paying seems so much less because it's so far in the future. As far as system one is concerned, it's basically free. So counter to the assumptions made by traditional economics. The reality is that people rarely act in their best long term interest. They are pressurized heavily by system one to enjoy things or avoid paying in the short term, even if that means losing out in the long term. Long term planning, which is a System 2 process, simply doesn't have the same emotional weight when we're weighing up choices, so they are much more likely to be ignored. And even if you are able to act with willpower and self control, system 2 is a limited resource. Some neurologists argue that there is a daily processing limit for system two that runs out and is only reset after deep sleep, meaning if you are bombarded continuously exercising willpower against temptation, eventually you will run out and giving this is a great argument for trading early in the day rather than later in the evening. And of course trading is fundamentally a long term gain, meaning that short term urges to avoid paying and seek pleasure will work against the need to think probabilistically in the long term. Now this is just another example of what behavioral economists have labeled as irrational. In fact, over the last 30 years, behavioral economists have contributed to your view that humans are somehow fundamentally flawed, that we can't be trusted to make good choices and decisions, and we're actually kind of idiots, at least when it comes to money. And Amazon is now stuffed full of books ready to point out all of our flaws. And these books and dozens more like them are actually really interesting. I recommend reading them if you can, but I feel that they are not altogether helpful. Without further explanation for trading, seeing humans as fundamentally flawed, irrational, or just as a bunch of idiots roaming the planet can't be entirely true. Let's go back to our ancestors. Are we really saying that humans have become the most successful species on earth, at least from a survival point of view, despite being a bunch of idiots? Of course not. As I described in the last video, the human brain has evolved in an incredibly tough environment. We've learned to prioritize what really counts towards our survival and protecting ourselves and what we have, looking after our families and managing risk incredibly well. System one, the most powerful and oldest part of our psychology, didn't simply wither away. When our environment became safer and more predictable and we began working in offices, it is still completely intact. To see these incredibly sophisticated judgment and decision systems as irrational, idiotic or broken is, in my view, unhelpful. For trading in particular, you can't get oversight over System one whilst thinking it's idiotic or faulty. At the end of the day, it's far more powerful than System two and therefore must be handled with respect, understanding and care. Take something as simple as loss aversion, for instance. It can certainly cause a lot of problems in trading, but without it, you wouldn't last long. Not feeling loss would mean you'd wipe out your account within minutes or days. But it is true that our brains and even our bodies haven't kept up with the speed of our changing environment. Take our love for sugary high calorie foods. For 99% of our existence, these substances were like gold dust. If you were malnourished and you just needed to get through another day, would you prefer a salad or a Big Mac? Sugar and fat are what counts when trying to survive. In the short term, at least your body has developed an incredible system to store energy ready for the next food drought. So are people grow overweight idiots? No, they're just executing their incredibly well developed and intelligent survival mechanisms. Our craving for sugar and fat is simply maladaptive to the current world food situation. But with understanding and retraining and better oversight, with system 2, it can adapt to that new environment. But needing to adapt doesn't mean it's currently broken or or stupid. Are people who crave status, social media, lights, followers and fame idiots? Yeah, of course they are. I'm joking. They're not. It's unlikely that it will make them happy. But they're not idiots. They're just executing highly sophisticated judgment and decision mechanisms for belonging to a tribe and having a strong position within that tribe, but without the increased oversight that the modern world demands. You could accuse them of sleepwalking or being on autopilot, but they are not idiots. Nearly all of these things that traders suffer from are simply maladaptive behaviors that need better oversight and retraining, not ridiculing, ignoring, or simply fixing with this elusive discipline or focus that people always talk about. Okay, now let's go back to our supermarket and look at System one and two in context. With our newfound respect for System one earlier in the video, we wondered what would happen if a chimp or System one and Spark or System two went shopping by themselves. That's something that obviously could never happen. System 1 and 2 are not completely separate and never operate on their own. They are highly integrated systems. So a trip to the supermarket unavoidably involves both. System two is used to make a list of things that would serve our best interests in the long term. But when we get there, you're bombarded with complex offers and temptations. You might even be hungry when you get there and the smell of fresh bread might trigger an urge to buy something that is not on your list. So the judgments and decisions that you make are a balance between your pre prepared shopping list, the temptations and urges while shopping, and of course the self control and oversight that you exert whilst you walk around the aisles. And it's too simplistic to think that System two just needs to override urges at every turn. That's not true. With each urge you have a choice. Follow it or recognize it, but override it. What if you see something that's not on your list but is genuinely helpful? A new washing powder which washes more clothes for less cost. Just because it's not on your list doesn't mean that you should ignore the urge to buy it. But you have to be able to understand the urge and weigh it up in the moment. It's exactly the same process in trading. The idea that you can trade without emotion or system one is wrong. And the idea that you can trade just on gut feelings and hunches or without System two is wrong. To be a good trader, you must use both systems. S2 creates your system rules and your long term plan and it should cover most eventualities. But System one, when it's trained correctly, may point out an opportunity or a risk that is not written in your system rules. If S1 is pointing out a genuine opportunity, S2 should listen and follow that advice. If system one is pointing out a genuine risk, again, system two should listen and follow the advice, regardless of whether or not it's on the plan or in the written rules. One of the hallmarks of being a good trader is is knowing when to break the rules. The key here is knowing when to trust the System one urge and when to override it. The biggest myth in trading psychology is you need to get rid of emotions. That is complete nonsense. You cannot Switch off system 1 whether you wanted to or not. It is always there. And System two doesn't have the strength or the capacity to override it for very long one way or the other. Emotions are here to stay and are very much a part of trading. Good traders, far from trying to get rid of emotions, embrace them. Emotional intelligence is the key to great trading. Having the intelligence to recognize your emotions, know where they come from, why they are there, and crucially, when they should be listened to and when they can be ignored. That's the balance I'm going to try and teach you in this course now. This diagram is going to become quite familiar to you in the next few lessons. I'm going to use it to point out what you should be looking for in your trading behavior. For each video topic, it's a graphical representation to help you improve your awareness of what is being pushed up from System one. For beginners, it's just a soup of feelings that all feel right, as if it should all be acted upon. But actually when you break it down, it's a mix of feelings and thoughts, intuition, fear, automatic mental shortcuts, urges from sub selves, and all of your memories and experiences. As you go through the course, you'll get a better idea of what these all are and be able to tell them apart. And then overseeing all of this is System two, the less powerful, sometimes fragile, but rational, logical and long term planner. This should balance System one with greater reflection, awareness and oversight. This is what will turn you into a consistent professional trader, assuming you have a system with a positive expectancy. Looking at that, you can probably now understand why most people who do have a good trading system still never make it. There's just way more to trading than the system. So now I'll quickly put up a slide that summarizes what we've covered today. Pause the video now if you want to take some notes from that summary. The next topic is all about letting winners run. Not letting winners run or taking profit early has got to be one of the biggest and most common problems all traders experience. So click through to that video as soon as you get the chance and I'll explain it in much greater depth so you completely understand what I why you make that mistake and how you can correct it to make bigger profits. From now on. I'll see you there.