The Magic Of Analogs In Trading

Written by Ivan Delgado, Market Insights/Mentor at Global Prime.

I’d like to share a story about what René, a student of my mentor room, came up with to work on some of his weaknesses as it relates to front-running breakout trades that are yet to meet the criteria around the strategy I teach.

We know is far too common to fall victim of what’s called FOMO in (Fear Of Missing Out) by getting ahead of oneself entering a trade prematurely. René is not exception. This is the story on how a student of my mentor room came up with an innovative approach to address his internal battles (pun intended).

A Problem Is Recognized & A Solution Born

Find below the text Rene shared in the mentor room:

“A while ago I was trying to make sense of front running BO (breakout) trades. It seemed a recurring temptation to more of us, not just to me. Thinking in analogies* helps me to have a more objective view of things I may be struggling with to figure out. I put my thoughts to paper, which I may as well share here with you all. These are just my thoughts, I do not consider these to be fully accurate and a lot could still be added, but that’s not really the point. I just try to keep these in mind whenever I feel tempted to prematurely jump into a trade. Using this analogy has however for the most part been helpful to me, so it may as well be to some of you too, or may inspire you to find helpful analogies of your own.”

*Read René’s analogy in the next section.

Right after René shared the above message, I read and re-read the analogy he’d written and couldn’t help but feel this mystic angle to be ingenious with the potential to be effective in addressing his mental struggles. This personal hack was done with purpose and intention in helping him along his journey to become more consistent in his approach to ultimately become a career trader.

Turning certain temptations we face as traders such as overtrading, into analogies, can be such an interesting mental hack with nothing but upside. I find creating stories and analogies to be great in capturing a trader’s attention and get you to see things from a different perspective. When used correctly, they can be highly useful tools for you to perform the right actions. They can help you understand what you’re saying by drawing your own conclusions.

We can re-phrase through stories a foreign target concept (breakout trades if xyz occurs) or internal mental struggle (overtrading) so that we turn it into a more familiar source. That’s the magic of an analog. It converts the foreign concept or struggle into familiar language by identifying similarities in structure and relationships. This then engage us into a cognitive process whereby information from one concept is transferred to the more familiar one. Interestingly, it enhances the standards in the right action/application as it relates to the foreign target concept or internal struggle at hand.

Now, without further ado, find the analogy written by René.

Mercenaries In The King’s Army

(Trying to make sense of whether or not to give in on the temptation of front-running breakout trades)

Imagine a world where constant battles are being fought by two armies in an everlasting war between the Kingdoms of King Bull and King Bear.

Both Kings consistently keep believing that ‘losing a battle does not mean losing the war’ and thus, after many battles, wins and losses on both sides, this war has been ongoing for over a decade, leaving traces of both minor and major battles fought in the past. Traces of previous battlegrounds.

Despite King Bull having gained a massive 65.000 km2 territory since the start of the war, King

Bear recently regained more than half of that in a matter of just months.

Both Kings have consistent, loyal troops fighting for them known within in their armies as Perma- Bulls and Perma-Bears, by both their Kings lovingly referred to as ‘their Perms’. Reliable forces moving in one direction only.

Both armies however also have mercenaries fighting amongst them. Mercenaries loyal only to

their own cause and able to choose to fight with the King’s army they, at any given time, believe is the most powerful. The army of the King which is most likely to provide them with a pay-off from the next battle.

Though all of them fight for money, there are different types of mercenaries, differently motivated, with different strategies.

There are those who simply can’t resist the thrill of the battle and will fight for whatever potential pay-off or odds. Others are in it to get maximum pay-offsin the short term and soon live like kings themselves. There is also the type of mercenary who considers this to be their profession and aim to have a long lasting career before comfortably retiring.

Let’s break ’em down:

The thrill mercenary

• In it for the action.
• Addicted to the thrill.
• Will switch sides in a heartbeat, seemingly randomly.
• Will take on any fight and participate in any battle.
• Most comfortable at the front line.
• Battles won vs lost 35–45%.
• Long term survival rate: low.

The ‘get rich quick’ mercenary

• Chooses which side to fight with more carefully:
• Aware of the which army has lately been best structured and has the momentum;
• Pretty much aware of previous battlegrounds.
• Is aware of the importance of knowing when not (yet) to participate in a battle.
• Hates (fears) missing out on a potential pay-off though.
• Often times tempted to join in at the front line for a potential higher pay-off.
• Battles won vs lost: 45–55%.
• Long term survival rate: mediocre.

The career mercenary

• First priority is to not die in battle or from battle wounds.
• Having a long term outlook, the career mercenary is fully comfortable missing out on potential
• Pay-offs in the short term, if this means not having to risk injury from battles of which the odds are not favorable enough in accordance with his pre-determined standards.
• Chooses sides and battles carefully:

Fully situationally aware;

Aware of previous battlegrounds and which significance these areas may still hold if once again encountered with resistance from the opposing forces.

• Will ‘allow’ the thrill- and the ‘get rich quick’ mercenaries to clear enemies’ lines of resistance before participating in battle1.
• Battles won vs lost: 55–65 %.
• Long term survival rate: good to excellent.

Which brings me to the following questions I now will need to answer truthfully:

• What motivates me to want to take part in this particular war (this market; any market)?
• What motivates me to want to take part in (which?) selected battles?
• What kind of mercenary would I like to be?
• What kind of mercenary have I been so far? What has that brought me?
• What kind of mercenary am I currently? What has that brought me so far?
• How can I become the kind of mercenary I would like to be?
• How can I stay the kind of mercenary I want to be?

Final Note

I have to recognize that I’ve always edged towards more conventional angles to address struggles by wisely hustling my way out through the identification of repeatable patterns that can then be isolated and tackled.

I personally found the power of meditation as a vehicle that has helped me to rewire my brain for success, build emotional IQ, develop improved pattern recognition skills, retention of memory, and other essential elements.

That said, René’s analogies make complete sense to the point that they have inspired me to share them with you all through this article. You never know if this sparkles your curiosity and also assist you by using analogous techniques. At the end of the day, there is no right or wrong way but what resonates with your persona. René’s analogies work for him and that’s what matters.