Understanding our natural and developed human tendencies can help improve trading performance

One of the most common mistakes we all make as traders and investors is to think that we really have 'free-will'. There is a saying which is often quoted by traders - 'You pays your money, you takes your choice'. - The underlying message being that we are totally in charge of our own choices. Having been a trader for 25 years, and now as a trading coach, I believe that is a dangerous illusion which derails many if not most traders and investors. At the core of this is my belief that traders and investors are affected by a wide range of psychological, philosophical, physiological and sociological affects which affects and limits their ability to think and act rationally when it comes to making their trading decisions.

All people suffer from natural and learned biases, traits and habits, which for the sake of this article I collectively term as tendencies. Many of these tendencies have evolved over millions of years, they are part of our natural make-up and have aided our survival and have helped us thrive in the natural environment. - A few thousand years of domestication versus millions of years of evolution have not been enough for us to lose these natural tendencies which are really our basic instincts. We also pick-up many tendencies as we grow and develop, these are shaped by our environment, our education, our upbringing, social factors, culture and belief systems, and help to instill certain ways of thinking.

These tendencies are either part of our natural make-up or have been influenced and shaped as we have grown and developed. They enable us to make decisions quickly and reasonably, they have helped us to learn and develop, and to fit in and adapt. As a result of these we are able to filter information quickly, to learn rapidly, and to move forward in the complex world we live in. However as a result we also do not truly receive and recall information in an objective sense, but colour it in any number of ways in order to match our preferences. Thus often we 'see what we want to see' and 'hear what we want to hear', we make decisions which are comfortable for us, that help to reduce anxiety and keeping us feeling safe and secure.

In the natural world we evolved in over millions of years, and in the social world we grow up into, these tendencies are often perfectly rational and beneficial. However in the somewhat unnatural world of the financial markets, these same tendencies can sway people's (traders and investors) decisions, choices, and behaviours in unfavourable directions. As a consequence traders and investors often display limits to their rationality, lack the necessary self-control required, and will become heavily influenced by social factors and their environment.

In the world of trading and investing there tendencies often lead traders and investors astray, sending them on false paths, and exposing them to 'decision traps'. I believe that increasing knowledge and understanding of these behavioural tendencies could make an invaluable contribution towards improving traders and investors’ self-awareness and increasing their knowledge base of themselves, others, and markets in general. Elimination of these tendencies is not a realistic goal; one cannot fight basic human nature and expect to win. However, by deepening one's understanding of who they are and how they work, one can provide important information which can help them modify their behaviours and strategies, in order to pursue a more optimal approach towards trading. 

Many of the world’s most successful traders incorporate strategies into their trading and their approach to trading, which have helped them, overcome these natural tendencies. By following these successful strategies they get closer to exercising free-will in their trading, free-will to choose a trade, free-will to execute entry and exit, free-will to correctly exercise appropriate risk and money management, free-will in being able to objectively analyze data, news and information.