Ever feel like you're always too late or too early on your trades? Some psychologists are suggesting that it could be best for investors to look inside themselves for the answers to this problem.
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There are several important components in our mental and emotional makeup that must be in balance before our stock trading and investment efforts translate into consistent winning. One aspect in particular has a huge influence on how well we perform. It often causes us to take action when we should wait, and causes us to wait when we should take action. It's called our "ego."
Webster's dictionary defines the ego as "One of the three divisions of the psyche in psychoanalytic theory that serves as the organized conscious mediator between the person and reality, especially by functioning both in the perception of and adaptation to reality."
That's quite a mouthful. In simpler terms, the "ego" evaluates whatever is going on around us. There are two ways that our ego does this. It compares current events to the past, and it compares current events to our expectations of the future. Oddly, our ego regularly exhibits the amazing ability to ignore the most important time frame of all - the present! This is really important, since our ego has a big influence on the quality of our decisions.
Some behavioral biologists believe that this tendency is passed from one generation to the next. They propose that our ancestors survived by learning a very vital lesson; past events often occurred again.
Those who did not use the past to predict the future didn't survive long enough to reproduce. This leads to the conclusion that we are here today because our ancestors successfully used the past to predict the future. Most of us are wired to believe that this past-equals-future approach works just as well in artificial environments - like the stock market - as it does in our natural environment. Unfortunately this isn't necessarily the case.
While using the past to predict the future does have some beneficial application in the stock market, it isn't very effective when it comes at the cost of giving up a clear view of the present. Finding a balanced perspective requires that we take three time frames into account - the past, the present, and the future. They are all important. However, since the ego tends to undervalue the present - the only one of the three in which we can take action - it can have a huge effect on the outcome of our efforts.
So, what's the solution? Although discipline and patience are required, it is possible to train ourselves to accept the importance of the present reality - such as when price action tells us the time has come to enter or exit a trade. Through repetition we can learn to suppress the urge to predict what will happen in the future. This allows us to focus on what needs to be done today in order to manage our stock positions intelligently. If you find that you are hesitating or second-guessing your actions, just remember this; Use the past to plan for the future. When you get there, stay in the moment!
