How To Develop More Self-Control And Make More Profits

How To Develop More Self-Control And Make More Profits

Self-control is more accurate than IQ at predicting trading success and there is a perfectly logical explanation for it: Research has shown that certain areas of the brain are responsible for high vs poor self-control individuals, there are two brain systems competing to control your behaviour! The pre-frontal cortex is more active for high self-control whilst the ventral striatum is more active in people who show low self-control.

The prefrontal cortex appears to play a major role in cognitive reasoning and planning – highly active in people with good self-control. In contrast, the ventral striatum is part of the brain’s reward system and its over-activity has been found in people who suffer from addiction.  I am not an expert but I think a lot of traders show unhealthy addictive behaviour when it comes to their trading. High striatal activity is generally seen in those with low self-control.

Self-control means that you are inhibiting an automatic response driven by urges and temptation with an intentional controlled response driven by logically assessing probability of future outcomes based on current behaviour. So this is a classical case where emotions override logical thinking.

There are many terms that are used to describe self-control: will-power, inhibitory control, self-regulation, self-discipline, ego strength, executive control etc. They all describe the fundamental control process of the brain: you have a predisposed or default tendency to carry out a certain behaviour that at first is rewarding, but you are able to prevent that behaviour from happening and instead do something else in a more controlled manner because you know the reward would be short lived.

What is Self-Control and why is it so challenging?

Self-control is often described as being a conflict between instant potentially damaging urges and temptations and healthier long-term goals. This conflict is caused because the automatic response is triggered by the promise of short term instantaneous rewards but usually has unwanted long term consequences.

Eating lots of fatty and sugary foods is an obvious example – it tastes good now, but the cholestorol can kill later. Another example would be shouting at someone who annoyed you; it might make you feel better in the moment, but probably will threaten the quality of your relationship in the long term.

And self-control or rather the lack thereof is also to be found when letting losing trades run into the ouch spot rather than cutting them sharply and swiftly and then moving on to the next trade. When things get tough the default tendency is to give into the urge (easier to give up, harder to persevere), whilst the controlled response should have been to push through the temporary discomfort of pressing that mouse button – in the knowledge of the benefits of a more pleasant future outcome.

So in the context of our losing trade paradoxically it seems to feel better to let the losing trade run. There is always an element of uncertainty about what will happen and that uncertainty is a breeding ground for hope that it will turn around in your favour. Hope is also very short sighted, seeing the bigger picture would mean doing what ‘feels’ uncomfortable, setting an end to hope and actually pressing that mouse button to close out the trade, collecting your thoughts, re-building your focus and your energy to then freshly move on to the next opportunity. But it feels worse after the account has been blown up and the goose that lays golden eggs (aka your capital) is now road kill.

We all have a ‘moral’ compass to guide the more useful behaviour. We all have a sense of what behaviour is more beneficial in the long term yet there is a conflict between the short term reward system in the brain and the long term cognitive control system. So the trick is to learn to distinguish between both and to then learn how to apply either one with volition.

The Really Good News

Now that we know the causes of high versus poor self-control, it means that you are in control of which one will drive your choices in life. You can train and develop self-control and become increasingly better at it through practice. Or to say it in more scientific terms: You can improve the cognitive control abilities of your prefrontal cortex and in so doing enhance your ability to manage your self-destructive urges and temptations.

So, the good news is it can be learnt. But you have to keep working at it. Aim for small wins over time. Every time you are successful at controlling an impulse then you become stronger for the next time. And as you become better at self-control, then you are developing a better future for yourself and those around you.

Taking Control: Will Power versus Brain Training

So how do you go about developing your self-control?

Most traders try to do it the hard way: They try to gain control, by trying to defy their default tendencies of ‘wanting to do what feels good in the moment (=urge)’ with willpower. They keep telling themselves that they must try harder to be disciplined.

You don’t know how often I hear traders say, “I just have to be more disciplined” but discipline is simply an outcome of logical thinking that override those emotionally based urges and temptations. We all know that discipline is a fickle beast it cannot be tamed with willpower. That is why most traders often stay stuck in unprofitable trading behaviour for many years.

Also, the ability to control ourselves with willpower fluctuates tremendously during the day. Will-power is like a muscle: it needs developing through practice, and it requires energy to function. It also gets tired and fails. And it is a lot of hard work

There Is An Easy Way.. 

There is a much easier way: work on your brain’s executive control by controlling the way you are thinking. This is a more sustainable surefire and proven way to consistent profits.

So what usually happens you have set up a ‘pre-commitment’ strategy (for example putting in your stop loss order) that allows the executive system to make the decisions ahead of time, so that the lazy temptation system in your ventral striatum can’t hijack your good intentions later. But then the urge from your ventral striatum  hijacks your pre-commitment strategy. You either take your orders out of the system just shortly before your trade would have reached that price or you re-enter straight away after your trade has been taken out overriding any logical and technical approach.

So, in a nutshell the trick is to create new ‘healthy’ habits and thought processes, simple techniques that help to develop new defaults and override the old automatic almost paralysing behaviour.

You can prepare a way of directive self-talk called affirmations. Interestingly enough whenever I start working with a trader on their affirmations the majority would word it as:

“I never take my losses even though my trade set up has clearly failed. I am going to be more    disciplined and try to close out losing trades quicker from now on”

However, this is not the language the brain speaks. If you want your brain to understand what you want from it, then, whenever you feel the urge to try and recover a losing trade that clearly should clearly have been closed out, then:

a) first become aware of your thought processes and overriding emotions (best to write them down, you will be surprised what you to see what you are thinking!)

and b) tell yourself what you will be doing instead in a positive constructive and explicit way that will help to manage those unhelpful behaviours. You essentially write a new script for your brain and make that the new automatic thought process. 

So, for example, replace the thought: “Oh no, I don’t want to give all those profits back. A loss is only a loss when it is realised. Maybe I can recover it or at least get out at a better price when it retraces.” with “I want to conserve my capital which is my golden goose and enables me to continue trading. I will simply wait for the next great trade setup”.

Be more aware of when you get self-control system failure. Analyse what happens in the moment (thoughts, feelings, behaviours), actually become aware of the stories you are telling yourself and be honest enough with yourself to admit that it is counterproductive and uncomfortable but also know that once you learned how to use your brain differently you can actually create long lasting change and with that consistent profits.

I hope that was interesting and useful for you too and maybe I see you on Friday for the Live Trading Night.

With a toast to your trading profits


Mandi Pour Rafsendjani