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Here is another, fascinating aspect of cognitive dissonance. If you change a person’s behavior, his thoughts and feeling will change, in order to minimize the dissonance. Can you think of an obvious application of this statement?
Right! Army Boot Camp! Or, indeed, any process of indoctrination in which the new recruit, be it in the military, on a college campus, a new hire in a company, or a new religious convert is placed in a structured environment in which certain behaviors are permitted and others are not. The underlying, if not fully understood premise is that rapidly enforcing the new behavior pattern to the exclusion of older behavior patterns will create the kind of conflict that will be resolved by the adoption of the new code, the new belief, the new behavior. How can we, as traders, make use of this principle? Think about it for a while.
Go back to the previous post where I talked about the “If it ain’t broke, don’t fix it” philosophy. How do we change that belief? How about by trying something new? Instead of accepting the status quo, why not do some reading and seeing if a new strategy, a new approach, a new methodology, or switching to a different time frame for trading might bring better results?
But don’t just plunge into it. Remember that inexperience and trial-and-error learning is likely to LTP bad trading patterns into your psyche. Instead, immerse yourself in the study of the new technique. Observe others use it and watch for the results. Then, when you have observed and understand how the new methodology is applied, set aside some funds that will be dedicated to the newer technique.
That is what I did when, earlier this
year, Mplay, of Woodie’s CCI Club started an experiment in using
options on stocks as a day-trading vehicle. His results can be
found at Woodie’s website.
http://woodiescciclub.com/forum/viewtopic.php?t=2100
It was an eye-opening experience. Previously, my only approach had
been the old buy an out-of-the-money option with 30 to 90 days to
go until expiration and hope for a home run; a gain of 100% or
better.
Now, the new technique involved finding a moderately high beta stock and an option with a 90% delta, in order to capture a quick $0.30 to $2 move. Frequently, the move is over within an hour of the open. To allay risk, Mplay balances calls with an equal number of puts, and tries not to concentrate his options into too narrow a stock category or industry.
I was somewhat skeptical, at first. And my old option strategy, while not perfect (there were a lot of misses) seemed to be adequate, if not great. Up till that time, the conventional wisdom was that you only needed to be right about 35% of the time. But if those were “home runs,” they would be enough to overcome the many small losses that this strategy would generate.
But by trying this new strategy (after watching it for about four months) and seeing how it worked, the “new behavior,” the new strategy forced a re-thinking of my current trading style and a recognition that this new strategy was, indeed, effective. This is something I would never have come to if I had not been willing to spend the time observing, and then trying, this new strategy.