The Illusion of Control: Understanding Random Reinforcement in Forex Trading

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I. Random Reinforcement in Forex Trading

Random reinforcement is a theme that humanity consistently overlooks. Have you ever watched a film on a similar theme called “The Murder Matrix”? It reflects the human predicament when faced with random reinforcement.

In our scientific education, almost all answers to questions are examples of consistent reinforcement. This is not necessarily the case with liberal arts education, especially with essay questions, where answers are often inconsistent. Therefore, it is easier to make rapid progress in science subjects, while it is not so easy to achieve a “quick rise” in liberal arts. The questions and answers in liberal arts resemble random reinforcement, while those in science resemble consistent reinforcement.

Of course, there are many differences between financial trading and liberal arts questions and answers, but this does not prevent us from understanding some characteristics of the former through the latter. We often fail to know this when we first enter the field of financial trading like forex.

Before entering the trading world, we vaguely regarded trading as doing high school math problems, seemingly just needing to follow certain fixed knowledge points and solve secrets to get the right answer that harmed us and all forex traders.

Every driving behaviour signals the ideal action when we learn to drive, but this does not match the situation of learning to trade. Driving faces an unchanging Newtonian physical world, while trading involves a chaotic world. Therefore, you may truly hit the road after one day of driving lessons, but you may never “get on the road” in a lifetime of forex trading.

If we focus our attention on the last few trades or the most recent trend, we step into a trap of random reinforcement. When your recent trades make money, you think the trading strategy you are using is correct, and you even think you are smart, but the subsequent performance will surely shatter your cognition and confidence. When you feel good about the most recent trend, your feelings will become quite bad in the next trend, which is what stock investors will experience in a bull market.

The forex market’s short-term random reinforcement characteristics use our causality concepts to keep us wandering outside the door of effective trading methods. If B follows A, we tend to think A is the cause of B. When a trading result B follows an action A, we tend to believe that trading result B is caused by the trading action A. In reality, the true causal relationship is not so simple.

Trading performance is determined by both the forex market and trading behaviour. The market is beyond our influence, especially in the highly liquid forex market. Therefore, we can only adapt to the market’s trends and characteristics while adjusting our trading behaviour. Since trading behaviour is influenced by trading attitudes and trading attitudes are influenced by trading concepts, whether trading behaviour can adapt to the market and thus produce a high level of trading performance ultimately depends on trading concepts.

Trading concepts are not as abstract as everyone thinks because concepts inevitably manifest as certain processes and steps. Psychological biases interfere with the improvement of trading performance through trading behaviour. Market random reinforcement uses psychological biases to interfere with the improvement of trading performance, causing forex traders’ ideas of adapting to forex market trends to lead to actions that go against market trends.

II. Strategies for Overcoming Psychological Biases in Forex Trading

Our enemy is ourselves! But if you carefully consider it, you will find that the truth is not necessarily so. If forex traders do not have psychological biases, the forex market’s random reinforcement characteristics cannot play a role on their own, that is, external factors work through internal factors. However, before improving internal factors, we must recognize the characteristics of the forex market. Because these characteristics precisely tell us how to adjust ourselves to adapt to the forex market, what aspects of ourselves should be adjusted to adapt to which features of the forex market.

You may have been trading stocks for ten years, or perhaps you have been trading forex for almost a year, but do you really understand what level your trading is at now? Do you know what the market is all about? How does the forex market use you to deceive and mislead you? If you are unclear about the answers to these questions, then your trading performance can only be poor.

Generally, the shorter the trading, the more likely it is to be misled by psychological biases and random reinforcement because the more frequently forex traders come into contact with prices, the more likely they are to be emotional, and the more serious the psychological biases are. The shorter the trading framework, the more likely it is to be disturbed by market random reinforcement. Therefore, extending the trading framework can simultaneously overcome the negative impacts of psychological biases and random reinforcement.
One of the simplest methods to counteract the interference of psychological biases and random reinforcement is to extend your trading timeframe, and the most effective method is to trade based on principles, with the best principle undoubtedly being a perfect trading process and trading plan.

If we adapt to the market’s short-term changes, it is easy to step onto the fast track of continuous losses. What remains unchanged are principles and processes, not specific strategies and plans. What changes are forex market trends, as well as our strategies and plans to adapt to market trends based on unchanging principles and processes.

The forex market reinforces randomly, and we willingly become exploited by the forex market due to our psychological biases. To fundamentally overcome this situation, we must possess an overall concept, while adopting the principles and processes of systematic trading.

III. Summary

The whole is unity and integrity. Medicine places great importance on the unity and integrity of the human body itself and its relationship with the natural world, considering the human body as an organic whole. The various components that make up the human body are indivisible in structure, coordinate and complement each other in function, and affect each other in pathology. Moreover, the human body is inseparable from the natural world, with changes in the natural world affecting the human body at all times, and humans maintain normal life activities in the process of actively adapting to and transforming nature.

This idea of the body’s wholeness and the unity of the internal environment is the concept of the whole. Humans are a complex system, and the forex market is also a complex system. The concept of the whole is a powerful tool for dealing with complex systems. For example, cross-referencing oscillation indicators with trend indicators, cross-referencing prices with indicators, cross-referencing fundamentals with technical analysis, and so on.

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