Desensitisation, confidence and the crash

We are human. There is that sense of victory over difficult circumstances – and a sense of improved performance or skill. However, many a new trader will have experienced a run of losses shortly after that run of winning trades. Doubt then begins to set in. If losses grow worse, then the original ‘I can do this’ becomes ‘I wonder if I can do this?’

Desensitisation is a psychological concept but you don’t need to be a psychologist to appreciate it. It’s this simple: It is a reduction of emotional awareness, fear or anxiety, or other inhibition that follows repeated exposure to risky situations. A visible tangible triumph over the real or perceived risk makes this phenomenon more powerful.

Confidence is  a feeling of capacity that comes from a sound appraisal of one’s self, abilities, skill or performance.  The word ‘confident’ is often applied in social contexts e.g. when people say “he is a confident speaker” – or – “he shows much confidence.” Confidence in trading is a bit of that but it is more about a sound appraisal of one’s competence. Of course, in the world of psychology there is bound to be a blur between concepts. So I do not argue that confidence is separate and distinct from any other similar concept.

It is important for new traders to self-appraise whether they are simply feeling desensitised or genuinely confident. I think it should be obvious to most that the desensitisation that follows a winning streak is not to be confused with genuine confidence.

Desensitisation can lead traders to take on larger and larger risks about which they do not have the capacity to manage. Lemme break it down by way of an analogy. An average competent driver wins the Euromillions Jackpot of £25 Million. He dumps his very average Skoda for a Nissan GTR. He’s happy. He drives around the GTR for a couple weeks and realises it’s power – and that ‘I can control this thing’.  He’s taken some fast corners and realises that the GTR just sticks to the road. So over the next few weeks his speed creeps up on the motorways and around corners as well.  He could expect that the car would still stick to the road at high speed. He goes, “Whoahh – this thing is amazing!!” His risks are increasing imperceptibly and he is becoming less sensitive to those risks from his experience. Sadly a few weeks later, the unexpected (to him) happens. The car slides violently around a similar corner he has done 10 times before and crashes into a ditch.  He survives unscathed physically but is psychologically in a mess. Well – I’ve played out the story, so it’s not surprising to you who reads this that a crash was coming. Our filthy rich driver has confused desensitisation with genuine confidence. Keep in mind that confidence – the real kind – comes from long experience and hard evidence of competence in a wide variety of situations.

So in trading terms, a run of winning trades and huge profits made, may give a new trader a feeling of competence, capacity or confidence – but that feeling is not true confidence. It is simply desensitisation to risk misinterpreted as confidence.

The world of trading is filled with traps. Almost all the important ones are in the psychological domain.

Take away points (optional):

1. Explore the domain of psychology in general.
2. Get very close to your own individual psychology.
3. Understand your own patterns of behaviour and thinking.
4. Know how you differ from other people.
5. Evaluate your strengths, weaknesses, opportunities and risks involved in any situation you may take on.
6. Appreciate that psychological traps are probably bigger than those that exist in the markets.
7. After a winning streak take a long break and re-evaluate overall performance before jumping back in.
8. Have an on-going sound method of evaluating your performance over a long time and over many different situations.
9. Manage the enemies.

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The information provided herein is opinion only. Under no circumstances do any statements here represent a recommendation to buy or sell securities or make any kind of investment. You are responsible for your own due diligence. To summarise, we do not provide investment advice, nor do we make any claims or promises that any information here will lead to a profit, loss, or any other result. All materials are for educational purposes only. We are clear in our SYP.