The Limits of Positive Thinking

An industry of not inconsiderable size has grown around the exhortation in its various guises of the need to be positive: positive thinking, positive outlook, positive action. I could go on.

It’s a simple basic idea which seems intuitively attractive: if you start on any course of action with a positive outlook then you are already ahead when compared to the alternative.

However, it’s all too easy and too common that a basic requirement if you are to with this positive outlook and meaningful aspirations is omitted. This is the need to plan.

By planning you discover what advantages you have in your favour, what objectives are achievable within reasonable assumptions, what obstacles you may meet, what contingency plans are required, and so on.

Crucially, appropriate planning also enables you to set out the actions that are required to reach your objectives and how you propose to undertake these actions.

The Dangers of Being Positive

The ‘be positive’ industry has been subject to increasing criticism in recent years, much of it well deserved.

First, there are arguments that there is actually little objective data to back up many of the claims that are made. This criticism has not been answered adequately and the greater the claims about the importance of positivity the further from a good basis the claims will become.

Second, it may actually be that an emphasis on being positive can mean that this state of mind becomes an objective in itself. But being positive is not your objective. It is just a tool, at best.

Third, some people may actually be open to criticism or feelings of inadequacy if they cannot summon the strength to take a positive outlook when faced with extreme adversity. This would have exactly the opposite effect to what is claimed.

Fourth, and probably the main criticism, is that developing a positive attitude is no alternative to hard-nosed objective and realistic planning. However, the more emphasis that is placed on being positive, the less is placed on the role of adequate good planning.

The ‘be positive’ industry is actually also guilty of promoting an idea – which is actually a rehash of an old, long discarded notion – that thinking positively can be a substitute for action.

I won’t bother going into any detailed analysis of the nonsensical notion that thinking about something will somehow ‘attract’ that desirable objective into your life.

The only attraction that is clearly at work is the attraction of royalty fees into the bank accounts of the authors of these bestsellers.

What has this got to do with trading?

The first parallel is obvious. When trading, it is important to be positive in the sense of going about the work, being decisive in reaching conclusions and taking actions accordingly.

If you are not positive in this sense, then you will find yourself doubting your analysis and your trading plan.  If this happens the great danger is that you will start acting on emotions such as fear or hope.

Perhaps confidence is a better word to use here?.

Of course, you always hope that a trade will be successful, but this can only come into your mind after the decision is made and must never be a part of the decision process. There is no place for hope, or for belief, in trading.

The second issue is the need to ensure that your positive mindset and attitudes do not blind you to the need for planning and the need to be realistic in your objectives.

Your objectives, which should be simply the result of your performance, will almost inevitably feed back into your planning if they are unrealistic. This will usually be a negative impact if you set unrealistic objectives that you fail to achieve.

For example, if you have an objective of 100% per month return or a 95% trading success rate then you will never be content with your plan and will start to take dangerous risks.

Instead, achieving an objective of a 60% success rate would be both achievable and profitable.

If you were to achieve this then you must consider yourself a successful trader, whatever your rate of return. You can then set about improving this success rate and your rate of return will improve accordingly.

The third issue is a bit less obvious and the requirement is in direct contradiction of the basic tenets of the more exploitative aspects of the ‘be positive’ industry. It is something that economists have studied for many years, but it has no place in trading.

Economic analysis can be divided into two sets of questions. These are described as normative questions and positive questions.

Normative issues are subjective and are important in economics. They concern ideas of what ‘should be’. For example, it might be claimed that healthcare should be affordable and available to everyone.

It is a point of view, but says little about how this might be achieved – does this mean we should therefore pay very low wages to healthcare professionals so as to keep costs down – or what the implications of this might be for other aspects of the economy.

Positive economics is concerned with dealing with things as they are. For example, a statement that world class healthcare is beyond the reach of everyone unless it is subsidized is a positive statement. It deals with facts and, from these observations, identifies cause and effect relationships.

Normative thinking has no place in trading.

Normative thinking would be along the lines that an indicator says traders are bullish and so the market should rise. Traders must always be on their guard against it.

The movement of an indicator is simply an indication that something is happening in the market that slightly increases the probability of one thing happening next relative to the probability of a clear and possible alternative.

Every trader must approach the markets with positive questions: What is happening to prices? What are the indicators showing? Is there important data imminent? etc.

The danger is that a trader sees a signal, for example, a bullish moving average cross-over, and concludes that, therefore, the price should rise.

If this is a trigger signal included as part of the rules of a proven set-up then it is fine to reach this conclusion and buy the security.

But price action does not depend in any way on what a particular indicator, or even a set of indicators in a well constructed system, are doing. The cause and effect is totally from price to indicator, never the reverse.

What is legitimate is to conclude that, based on observation, when price causes an indicator to behave in a particular way there is an acceptable level of probability that price will subsequently act in a particular manner.

In the case of the moving average crossover above, it is unlikely to be a good trade if the bullish crossover has happened and price has fallen sharply the very next day. If prices are falling then buying is dangerous.

Noting the bullish crossover is a positive action. Concluding that prices should therefore rise is not.

So, how do you deal with this?

The Binary Options industry seems to be particularly prone to dealing with normative thoughts.

The way to get around this is to approach the market with positive questions and have a set of rules or criteria that must be satisfied to enter any trade. By doing so there is no normative aspect to your analysis.

You first ask what are the market the price or the indicators doing, and then ask are the criteria for a trade satisfied? Do this according to a proven plan such as the 4x4BOSS.

This is positive analysis.

So, it is important to be positive in trading. But positivity must only exist because of good planning and the plan and its execution must be totally based on a positive analytical approach.

Otherwise, your objectives will remain just wishful thinking, your trading decisions will be based on emotions, and your actions will be based on subjective ascertains that have replaced objective analysis and acceptance of the facts.

When this happens your trading plan with begin to look rather like the ‘be positive’ industry – except that you are unlikely to make any money from adopting this type of positive thinking.

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