Beware of random incentive traps and emotional trading

Emotional phenomenon in Futures Trading

Have you ever encountered the following situation in futures trading:

1. indulging in manual short selling and high frequency trading;
2. becoming psychologically overstressed as the original capital increases leading to day trading, and nervously reading the tape all the time, eventually bringing loss because of emotional trading.
3. due to the fear of missing out, blindly following the trend to buy stocks when other traders are confident, which eventually causes losses. Why does the above phenomenon occur and how can it be avoided? Let’s analyze the deeper reasons for this phenomenon and learn about the underlying psychological logic. Firstly, we need to understand what a “Random Incentive Trap” is.

What is the “Random Incentive Trap”?

“Random Incentive Trap” refers to a motivation for traders to pursue random incentives which leaves them addicted to trading. Skinner’s Box Experiment can help to illustrate this concept better. Skinner Box, developed by behavioral psychologist B.F. Skinner, is an experimental chamber used in behavioral psychology on rats.

There is a lever on one side of the box’s wall that can be pressed, a small cup that holds the food against a small hole is designed next to the lever, and outside the small hole is a food dispenser for storing pellet-shaped food. Once the rat activates the lever, a pellet of food will fall from the small hole into the box.

The phenomenon of random incentive addiction was seen after multiple sets of experiments. When the rat in the box pressed the food lever, instead of releasing a pellet of food, as usual, the food was released irregularly and randomly, and the interval between food releases and the number of pellets was also uncertain. Eventually, the rat, motivated by the random food, pressed the lever frantically and continued for several hours until exhaustion.

This experiment explains the addiction behaviors including “gambling, short selling, and lucky draw”. The principle and results of this experiment tell all traders they should overcome their psychological weaknesses and should not be controlled by their emotions like these rats.

What is FOMO?

FOMO refers to the phrase “Fear of Missing Out”. The desire for more, the fear of missing out, the tendency to compare against others, the influence of others, and the dream of the sure thing, these factors are near universal. Thus they have a profound collective impact on most investors and most markets. This results in mistakes, and those mistakes are frequent, widespread and recurring.

• Howard Marks: The Most Important Thing

IHow to avoid FOMO and random incentive traps in Futures Trading?

1. Make a trading plan Strictly follow the trading plan to ensure that each trade is supported by logic and strategy.
2. Maintain a stable trading psychology Control your trading emotions and avoid the fear of missing out.
3. Conduct risk management Conduct moderate trading and do good position management, set Stop Loss and Take Profit to ensure strategic and logical trading.
4. Establish a trading system and be honest with yourself Maintain a continuous learning mindset, form your trading logic, and continue to improve the established trading system through every trading practice.

Summary

Emotion and mindset serve as important factors in trading, especially in highly leveraged and heavily positioned Futures Trading. Therefore, a good trader not only requires the right investment philosophy, efficient tools, and validated trading systems, but also needs to constantly adjust his mentality to real practices.

As great achievements are to be accomplished step by step, adjust your mentality through every trade.

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Disclaimer:
This is for your reference only. The information provided by Gate above is not investment advice and is not responsible for any investment you may make. The information regarding technical analysis, market judgments, trading tips, and trader sharing may involve potential risks, investment variables, and uncertainties, and this issue does not provide or imply any opportunity for guaranteed returns.