The human trait of optimism is somewhat related to confidence but is not quite the same thing. Optimism relates more to how positive one feels about the outside world, while confidence is how positive you feel about yourself. Optimism is best accounted for on the E6 (positive emotions) facet of the NEO-AC.
People who are overly positive, or overly optimistic, tend to see the world through “rose-colored lenses.” They tend to overlook, filter out, or even flat out ignore negative information, all the while seeking out evidence that confirms their positive outlook. They see what they want to see.
Traders who are high in E6 may forget about certain losing trades (or the negative consequences, punishments, or lessons related to those trades) and retain strong (maybe even exaggerated or false) memories about their winning trades. Their minds filter out data, so they see the pros and not the cons of a situation or idea. The search for confirming data and the forgetting of unsupporting data are actually a form of a psychological defense.
The human mind can be very selective about the data it takes in. An experiment at Harvard in 1999 proves the point. If you do a web search for “The Invisible Gorilla,” you can learn more about, and even see with your own eyes, this experiment. In a nutshell, experiment subjects were instructed to watch a short video of a group of young people passing basketballs back and forth to each other. Half of the people in the video were dressed in white shirts; the other half were in black shirts.
Two groups of viewers watched the video. The task of one group of viewers was to count how many times the people in white shirts passed the basketball. The task of a second group of viewers was to just casually watch the video. Smack dab in the middle of the video a person dressed up in a gorilla suit and mask in plain sight walks and dances across the video screen. At one point the gorilla clearly turns and looks straight at the camera, and hence the viewers. There is no subtlety to the gorilla; he is right there staring directly at you! But it turns out that, while everyone who was asked to watch the video passively noticed the gorilla’s presence, only 56 percent of the viewers who were counting ball passes noticed it. The study shows how the human brain really does filter out data and sensory input all the time—and not just minor details!
For those traders who score very high in E6 (optimism, that is, feeling overly positive and sure about the expected outcome of an event) or are very high in C1 (you have great attention to detail, but are also prone to overconfidence), there is an incredibly big chance you are going to miss the elephant (or gorilla) in the room. The overly optimistic person, it turns out, has difficulty seeing or accepting something that may be plainly obvious to others.
Keep in mind that it’s not that the person is blind to the evidence or not smart enough to understand it. The gorilla is right in front of him, staring right at him. Rather, it’s usually the result of a need to believe something different—to perceive a different reality or an expected course of events and outcome. Once this “need” becomes incorporated into part of his analysis, his ego gets caught up in it. As traders say, they become “married to their opinions.” They have a tough time breaking away from their preconceived notions.
Some of us are more prone than others to trading the markets with this kind of bias, based on personality traits. It’s very easy for some of us to become entirely focused on and convinced of an idea in the markets (either bullish or bearish), especially if we have a built-in set of behaviors and beliefs that continually filter out the same sort of input over and over. We will tend to look for the same chart patterns or indicator readings, when really a good trader is always trying to broaden his horizon and see the markets from multiple as well as fresh perspectives.
The best traders, from our interviews with them, are able to recognize that they have a whole set of different brain filters. They learn to take one filter off and put another one on at their own will. This enables them to see and manipulate a wide variety of information garnered from different views of the market. You can also see how easy it is to fall into the same market traps and repeat the same mistakes over and over if you do not recognize how brains can sometimes filter information.
Here’s a simple example of using different brain filters. When evaluating a potential trade, you might need to apply two different timing templates: a longer time frame template for overall market direction analysis and a shorter time frame template to time trade entry or exit. A naive trader who looks at both charts simultaneously, both the long and short frame templates, could easily get confused. If what appears to be a prime buy opportunity on a monthly or yearly chart shows up as a clear sell signal on an intraday chart, the trader could, at the very least, freeze up and miss the move or potentially even make the wrong call and buy based on the daily chart. The key is to synchronize the two time frames and take both perspectives into account at the same time. If the weekly or monthly chart is screaming “buy,” but the daily chart is hollering “sell,” wait until the daily chart is giving you a clear entry into the market.
Trading the markets is nothing at all like counting ball passes in the gorilla video in one very important way. It is easy to intently focus your attention on the basketball, ignoring the rest of the images that occur on the screen, and accurately count the number of passes. But trading the markets requires focused attention on a vast amount of information, data, and trends—all simultaneously, of course. In trading you need to be aware of virtually all movements on your screen, as well as plenty more that are not on your screen. The amount of data that your mind has to process before executing a winning trade is no trivial thing.
Again, learn to train your mind to use different “filters”—one at a time. Then learn how to amalgamate the multiple streams of data into one cohesive model or plan. Obviously, this is much easier said than done. But this is what the giants in the world of trading do. This ability to examine the markets from different angles, using and applying multiple different filters—along with sheer determination—is truly what separates great traders from the rest of the pack. None of the successful traders we interviewed said that this comes easily or naturally to them. They all confirmed that it takes a tremendous amount of focus and dedication.
Optimism, as a trait, often attracts people to jobs in business and politics. These are people who have very positive attitudes. They believe things are either going well or are going to get better. This optimism can certainly attract others to their causes. Not many politicians or CEOs are going to attract a following by preaching doom and gloom! However, when it comes to trading the markets, which is a very analytical endeavor, overly optimistic people have a tendency to rely on a sort of superficial analysis. They may deny important negative evidence going on in the markets. If your E6 score is high, watch out for this! As an overly optimistic trader, you may not be aware of growing dangers in the markets, and you may not realize just how risky or precarious your current position is. You may find yourself overexposed.
If you are high in E6, be sure that you fully evaluate both the pros and cons to any trade, trading system, or trading idea. One helpful method was described in the previous chapter, on conscientiousness. That is, whenever confronted with a potential trade or new trading idea, make a list of the evidence for it and another list of the evidence against it. Force yourself to adequately weigh the pros and cons. Those high in E6 have a tendency to overlook or ignore the cons, so force yourself to pay attention to them.
Another helpful method for those who are high in E6 (actually, it’s a helpful tool for all traders, but is essential for those high in E6) is to rehearse different “what if” scenarios. For example, as you are eagerly anticipating a move in the market that you think is sure to happen, mentally rehearse and ask yourself various “what if” questions. “What if the opening price takes out yesterday’s low?” “What if I don’t get my order filled at price X?” By asking yourself such “what-if” scenarios (as many as you can think of), you will develop a healthy behavioral pattern of proactively preventing yourself from getting tied to fixed ideas and getting caught up in false assumptions.
If in conjunction with high E6 you are also high in the O5 facet (ideas), you are someone who may easily get swept into (and perhaps swept away by) passing fads and hype. If this is you, pay attention not to fall prey to a story or a sales pitch that is “too good to be true.” For instance, don’t plunk your money down for some biotech company’s penny stock just because it has a business idea that sounds super unique and timely. If the company is not financially and structurally sound, this is a very risky investment, and you may not easily see it that way looking through those rose-colored lenses (E6) you have on, in addition to your openness to new ideas (O5).
On the other hand, those market traders who score low in E6 have the potential makeup to be rather pessimistic about external circumstances and events. To them, things are perpetually seen through “gray-colored lenses.” The tendency here is to remain excessively grim and negativistic when a situation really does not call for it. This especially comes into play when things are starting to pick up. We all can easily identify an absolute disaster when it’s right in front of us. But those traders who are low in E6 are at risk of missing out on clues that there is now a reversal in the works, that the gray clouds are starting to part and the sun is coming out. They may not realize until it is too late that the market forces are now working in their favor.
If you are low in E6, be sure to maintain an objective and nonjudgmental awareness of your tendency to see things as being grim. That is, remind yourself that you tend to see the glass as being half empty. Realize that, as such, you may miss out on great trading opportunities due to your tendency to pay extra attention to negative details and attributes. One of the most effective things you can do as a pessimist is to keep a journal of your negative perceptions and relate them to how things really pan out. You may start to see patterns to how you misjudged things as being worse than they actually were. By monitoring and getting to know this trend, you can start to correct yourself in advance.
Besides seeing thing through either a rose- or a gray-colored lens, another pitfall common in one particular group of traders is seeing things through too small or narrow a lens. People who are low in O5, ideas, by definition have a tendency to be closed-minded or at least narrow-minded when it comes to thinking about things in new or different ways. We are all subject to what psychologists call “narrow framing,” which is when one considers specific decisions in remote isolation without giving much regard to the bigger picture. Investors or traders low in O5 are at particular risk of focusing in on trading decisions one at a time, without giving adequate consideration to the grander scheme of things. They may fail to see how a particular trade or investment fits into their overall trading portfolio, agrees with their particular trading philosophy, or what have you. They may even miss out on diversification opportunities with their investments because they are so closed-minded about what they are doing. For example, a long-term trader may refuse to consider short- to medium-term trading because he sees it as “too risky,” when, in fact, his mind was never open enough to even consider the advantages to adding some short-term trades to his portfolio.
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