The Psychological DANGER of Counter-Trend Trading

14 Apr 2021

I see many traders consistently trying to fade the trend, but be careful.

In this post, I will explain the psychological problem that can arise from it.

Every time you get something that you want in life or that is pleasurable, you get positive reinforcement,
and your brain says "I want more of that stuff"
and then the brain says: "Keep doing what you are doing" ---> Behavior is learned. (Your neurons in your brain got linked together).

Once the behavior is learned, and the neurons linked, it is very hard (near impossible according to behavioral science) to extinguish this learned behavior! Old habits die hard. [there is a solution, relax and keep reading]

Thus, the trader keeps doing the behavior that over the long run will generate losses. WHY? because reversal points are momentary while trends are prolonged and if the trader is trying to constantly make money out of the market, he continues to do the learned behavior, hoping that "NOW there must be a big correction", even though a correction can be many months in the future.

So now you are probably asking: "ok Mr. Ph.D. in psychology, what is your solution? I already learned the wrong behavior, am I doomed?"

According to science, there is hope, instead of trying to extinguish the behavior, you need to re-write it with the new behavior (replace it with a new behavior).

What does it mean in a trading context?

That means that if you are in the past got burned from counter-trend trading, it is recommended to join the trend --> you will generate profits ---> positive reinforcement ---> newly learned behavior ---> ah-ha moment