THIS is How You Make BETTER TRADING Decisions

If you're ever fortunate enough to visit an institutional trading firm using high frequency algorithms, you'll see an example of man and machine working in harmony. Not exactly a cyborg, but it's a good analogy. No algorithm is trusted to run unmonitored. There is always a highly skilled human watching for signals to step in and take control over the system. But equally that sane human knows when to step back and relinquish control to allow the system to do its thing. As traders, it makes sense that we understand our part of the relationship between us and our systems when we trade. Welcome back everyone. This is lesson five in the miniseries introducing some of the main concepts in high performance trading. This video and the next two are looking at our decision systems. How our brains form judgments and make decisions that impact our trading. And let's start with a bit of fun. I'm going to flash up some questions and words on the screen and I want you to try and answer them as quickly as you can. Ready? Two plus two is complete. The phrase have a nice. What's the next number in the sequence? 5, 10, 15. Complete the phrase Cat's AMD 27 times 17. And finally, what is 2 plus 3? What's the matter? Are you still stuck on question 5? What we've done there is demonstrate two different decision systems that you have with two different areas of your brain activated. You answered the first four questions easily, almost instantly, with no effort at all. That was your intuitive system. It's lightning fast, extremely accurate and extremely powerful. But then at question five, everything stopped. To answer that I you needed to do some work, apply some effort, and needed more time to deliberate in your calculation. That was your logical system. It's slow and much weaker than your intuitive system. Here's another question that can only be answered with your logical system. Give it a try and feel free to pause the video as you work this out. If today is Friday, what is the day which follows the day which comes after the day that precedes the day before yesterday? Most people find that too difficult to even remember the components of the question, to be able to answer it without a pen and paper and taking significant time and then often still get it wrong. The answer's Thursday, by the way. Regardless of whether you got the answer right or not, you'll notice this type of problem is hard work and finding the answer to takes time. There's no shortcut. Compare that to the speed and the accuracy of your intuitive system. With those earlier questions, your brain simply served up the right answer to those questions instantly without any effort on your part, it was as if someone else gave you the answer. And it isn't only simple problems that your intuitive system is capable of answering. It can answer more complex problems as well. The next question I read out will very quickly be answered by your intuitive system. Pay attention to what pops into your mind. A bat and ball cost $1.10. The bat costs $1 more than the ball. How much does the ball cost? Intuitively and almost instantly, most people think the answer is $0.10. It's the wrong answer. The correct answer is $0.05. And if you need time to think on that one again, pause the video. Some of you may have got that question right, but even if you did, it's almost certain that initially that wrong answer popped into your head before you slowed down and thought it through more logically. That is a question that requires your logical system, but which is answered by your intuitive system first before the logical side has a chance. And this demonstrates where amateur traders run into problems. That first intuitive answer of 10 cents despite being wrong, felt correct. And we tend to believe our feelings and go with them. I'm going to come back to this because it's important, but I quickly want to explain how your intuitive system is developed so you can understand the problem you have with trading. Take a look at this face. Think about how quickly you just formed a judgment. As soon as you saw that it elicited a response in you about what that person is thinking or feeling and what's happened there is a judgment shortcut. All the shortcut is, is something that has been pre learned to help you avoid excessive thinking. Your brain wants to make things easy for you. You are able to make a judgment about that person because you've seen that type of expression before. You may be wrong, but the more faces you see and the more people you meet, the more accurate you will be at interpreting expressions. And with experience, your intuition is being sharpened and becomes more reliable. It's a phenomenal tool, but you can probably see where this is going. In terms of trading with faces, you've been exposed to hundreds of thousands of them since the day you were born. So your intuition is highly experienced and super reliable and accurate. With trading, most people simply haven't been exposed to sufficient numbers of different market conditions. But the intuitive system is still trying to use shortcuts in an attempt to be more efficient. But the shortcuts are usually unreliable and wrong. I think driving a car is a great example to explain decision making as it relates to trading. Driving is complex, fast paced, multi leveled and requires finely tuned reactions. And just like trading, there is a high risk involved when you consider your driving at speed, sometimes inches from pedestrians or other cars. Most of your driving is automated. You make complex calculations and decisions such as braking, changing lanes, signaling, avoiding danger and overtaking instinctively. Just think about how complex and extraordinary this set of skills is and who or what is doing all of this. Most drivers will have experienced the strange feeling of arriving at your destination and having no recollection of actually driving along the roads to get there. It's almost as if your brain took over the driving for you while you got on with something else, like thinking about the day ahead or having the conversation. All of that is your intuitive system. It's incredible, but your logical system is still required. If you encounter something unusual, like a roadblock, an accident, traffic diversions, etc. Your logical system comes online and takes over to reevaluate the situation, come up with a new plan and direct your intuitive system to execute the new plan. Both systems work perfectly and be in harmony and you get the best results. Neither system is better or worse than the other. They're different, but equally essential. It's the same in trading. You need both systems. One of the best biggest myths in trading is you need to be disciplined and logical. Well, I want you to think back to learning to drive. You relied entirely on your logical system as a learner. There was no intuition. Every decision was deliberate and slow. Most beginner drivers spend their time completely maxed out of mental capacity. And you may remember walking away with a headache after your first few lessons. More than anything, you'll recall that you were a terrible driver. Is that really how you want to trade? Trading requires both types of thinking, intuitive and logical. Understanding those two decision systems is critical in forming accurate judgments and making effective decisions in markets. And professional traders have learned when to trust their intuitive and automatic mind and when to be more methodical and logical. But you do need to be aware that out of the box, your intuitive system doesn't work very well in financial markets. As I've said in previous videos, capitalism didn't exist when our brains were developing. And you've just seen for yourself with those questions that your intuitive system can be awesome with its speed and accuracy, but in other situations, it can give you the wrong answer, even though that answer immediately feels correct. One way to think of the two systems is like an ice beard. Above the surface, your logical system is slow and methodical. It's great for following simple trading rules and sticking to a system when not too Much risk is perceived. You rely almost entirely on this when you are demo trading. Below the waterline, however, is your risk management system. It is intuitive and defensive and it's much faster and far stronger. And critically, it comes into play when risk is involved. When you're demo trading, you use your logical system and you often do quite well as a dental trader. That's because without risk your intuitive system is fairly quiet. But when you switch to a line real money account, risk is now involved and your intuitive system comes online and as I said, enter the box. It's pretty bad at coming up with the correct solution for financial markets and as such it is a bit of a barrier to success, especially because it is so powerful. It completely takes over control and prevents your logical system from having a say it. I think that's why so many people believe it's a bad thing and it needs to be controlled. It doesn't. It needs to be trained just like you trained it when learning to drive. For professional traders, it is the mechanism that they rely on to see more complex patterns in the market and optimize their trading system for maximum profits in all conditions. It is the key to success. You will not trade profitably without your intuitive system, just as you wouldn't drive very well without it. But it does need to be trained and to train it, you need to understand it. So the next two lessons in this series will dive deeper into these systems so you can see exactly how they work, how and why they developed and how they can be better used for successful trading. I hope you've enjoyed this video. I'm trying to cover a very complex topic in a simple format and I hope it's helpful for you. If so, please like comment and share and and consider subscribing to the channel if you're not already. Thanks for watching and I'll see you next time.