Why People Chase Prices
Many times, you know that you should not be chasing after runaway prices, you know that you are far away from a logical stop, you know that the further price has run the worst the risk/reward, and you logically know from experience that you tend to enter at the worst time just when the price was about to turn, yet you still do it. Why?
Simply put, the “fear of losing out / being left behind” is stronger than the “fear of loss / pleasure from not chasing”.
When you are doing intraday trading, your actions are predominantly controlled by your limbic system (subconscious mind), not your prefrontal cortex (conscious mind). Logically knowing what to do and what not to do doesn’t cut it when your prefrontal cortex is not able to get itself heard.
Working on the Limbic System
To address this issue, one way is to work on the limbic system. To make the comparison more competitive, we need to boost the signal strength of the “fear of loss” and the strength of the “pleasure from not chasing”. The key is to associate significant emotional distress with the thought of ‘chasing’, and associate extreme happiness with the thought of ‘not chasing’. Visualization is a good tool to use here.
To increase the fear of loss from chasing, visualize yourself watching a trade move away from you, it keeps moving up and up, and finally you can’t take it anymore, you enter at the market, then before you have time to place your stop, price suddenly crashes through multiple levels in an instant, wiping out all your gains, blasting through your day loss limit and more. Feel the shock and the pain as if you were in that position. Embrace it. You might have experienced this scenario before, but I certainly have. For a more ‘intimate’ scenario, feel free to relive a scenario that you have experienced where chasing after the market led to disastrous results. If you never had such an experience and have successfully chased after prices all the time, then please drop me a note because I would definitely like to learn from you.
On the flip side, we need to amplify the feelings of happiness and relief you experience when you managed to control yourself to not chase a market, and the market suddenly plunged, saving you from a tremendous disaster right in the nick of time! Think back to such a scenario that you have experienced, relive it, really revel in those feelings of happiness and relief again.
By training our limbic system with the above visualizations, we associate feelings of distress with chasing after the market, and feelings of pleasure with not chasing the market. So the next time your mind makes the instantaneous decision to chase or not to chase, the right decision gets a better fighting chance to pull through.
Reward Is Better Than Pain
One point to note is that, of the two visualizations above, I think amplifying the elation (i.e. reward) is more effective than increasing the fear of loss.
The main reason being that unless you have experienced really intense negative emotions from such a loss, the “normal loss” would not cut it. When you consider the action of “chasing after the price”, there will be random positive reinforcement that you get when you chase price and price trends further and further in your direction. This is further compounded thereafter by the regret (i.e. pain) felt for not chasing after the price if you had maintained your trading discipline. Without being able to remove the random positive reinforcement, increasing pain can be much less effective in deterring the action of “chasing the price”.
Whereas if you consider the action of “not chasing after the price”, your visualized reward is contending with random regret, which should be easier on the basis that random negative reinforcement is weaker than random positive reinforcement.
Positive Reinforcement: Give what individuals like when they have performed the desired behavior.
Negative Reinforcement: Remove what individuals do not like when they have performed the desired behavior.
Link here for more information on reinforcement theory.