Forex Trading Distortions

Wow, I am so pumped this afternoon. Our Elite Trader Program started last week with Andres our Trading Director giving two fantastic foundational level sessions on Forex Trading. And this morning was my session, my first Elite Trader Psychology Session – Foundation Level – Step one Awareness. And I have got to say I thoroughly enjoyed myself and the feedback I received made me think our clients did too. Phew for that. One of my troubles as a trader was always my perfectionism, and although I have managed to iron it out of my trading. I obviously haven’t managed to stop it completely, as I was up late last night still tweaking my first Session. Even though it had been finished since November.

 

Distortion

Now I didn’t mention that just to brag and make you wonder what you were missing. No, seriously that wasn’t the reason at all. One of the topics I spoke about was the NLP model of Communication. Which shows how we generalize, delete and distort information so that we can be able to manage it. The reason for this is quite simple overload. An external event comprises of about 2 million bits of information, this is based on everything in our field of vision, everything we can hear, everything we can feel and of course any tastes or smells. It’s simply too much information to absorb so we internally generalize, delete and distort that information to suit our internal map.

Which is very much like Trading. There is simply too much information at any one time for us to be able to digest it all. So we generalize, delete and distort that information to suit our needs. If you trade the hourly chart you probably believe the candles to be of use to you. Even though that candle doesn’t really tell you exactly what happened in that hour. You have made the decision that for your needs, the information provided by that candle is sufficient. Doesn’t make you right or wrong, it’s just a useful belief for you to have.  But you have made a distortion, you are distorting all the other information  from the smaller time frames to fit your beliefs about the market. Again this is neither right or wrong. It just is, and you need to be aware of it.

 

How Distortion Affects Perception

Here are some examples of how we generalize, delete and distort our incoming information. When you very first looked at the elephant did it look normal to you? Does it still? Now do you see five feet? That are not attached to the legs?

Trading distortion elephant with five feet

When we first see that it is an elephant we have an internal map of how an elephant should look. So most people don’t even spot the difference until it is suggested. Because their internal filters just delete the information that doesn’t fit with their internal map.

What about this one?

Trading distortion. Old/young woman

When you first look at the picture did you see the old woman? Do you see her now? Maybe you see only the young lady or not. Again this is just how we distort the information coming into our brains. Now you know what we are looking for go and watch this video and see if you can answer the question. I would suggest not reading any further expand it to full screen and press play, otherwise you will miss the point. And please don’t leave any spoilers in the comments section. Not everyone has seen this yet.

 

Depending how you got on with the video, will determine how wide your eyes may have been opened. This will also help you understand why two people looking at the same chart can have two very different opinions on what they are seeing.

 

Trading Distortion

So hopefully now you understand that you have filters that make all the market information manageable. Because let’s face it, if you tried to make sense of all the market information out there. Your head would explode and you would never place another trade. What you do need to know however, is are your filters good for your trading? Or do you trade in alignment with your filters? Do you know what your filters are? Do you think maybe you should?

What are traders filters? And how are those distortions good for successful traders.

Let’s look at time frame correlation filters, because we never look at all the charts before placing a trade. So by definition we must be distorting that information to suit our needs. When you look at the charts you don’t look at every chart and only trade on those that are fully aligned across the board. as you would never place a trade. Because you could look at the monthly which is in a downtrend in phase two (retracement), so the weekly is in an uptrend at the possible start of phase one (extension) but the daily i still in a downtrend although in phase two (retracement). Now the 4hr is in an uptrend as is the 1hr but the 15min chart is in a downtrend.

At some point you have to distort or delete some of the information so that it is manageable and useable. For instance if you are placing trades on the 15 min chart does it really matter what is happening on the monthly chart. It’s good information to be aware of, however not essential to place a trade. Some traders will just use the 1hr and 4hr as direction confirmation and place their trades on the 15 min chart. Others will use the daily as well. None of which is right or wrong. It’s only useful for the trader that uses that information to place his trades.

 

The Long and Short of It.

As shown above some generalizations, deletions and distortions help us as traders. They make our experience easier and allow us the opportunity to make money. But they are not all good and some will actually hinder us as traders. The big one being predictions. When you have predicted a direction you can get attached to that prediction, so you delete or distort any information that doesn’t back up your prediction. This can lead to massive losses, missed opportunities in the opposite direction and a potential loss of face, if you shared your predictions.

One of the biggest game changers to my trading was to stop trying to predict what the market is going to do. Now I just let the market show me and I follow. No more missed opportunities and no more fighting the market.

 

To Your Consistently Profitable Trading

Callum

 

P.S. What did you think of this Lesson? Please share it with us in the comments below!


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Callum McLean

Co-Founder and Trading Psychologist at Special FX Academy
Trading Psychology Coach and Certified NLP Coach. It is my belief that trading is 99% Psychological. And it is by understanding and improving your psychology, that you can be a successful trader. Success is a formula that everyone can and should learn.
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Jacqueline Amable
Jacqueline Amable
4 years ago

I totally agree with this. So many times I have concentrated on one aspect only to miss the overall picture. Too busy predicting because after all, that is what we were taught to do. Once you get the hang of “going with the flow” .. “going with the information” .. following the market instead of chasing it becomes an easier task and more stress free.