10 New Trading Psychology Challenges from Autotrading

As automation continues to revolutionize financial markets, traders find themselves navigating uncharted psychological territory. From trusting bots and algorithms, coping with reduced decision-making control, and the novel complexities of autotrading that demand a new style of adaptation and resilience.

So, in this episode, I dive into the evolving mindset of options traders and shed some light on these new psychological challenges popping up for autotraders.

1. Obsessive-Compulsive Overriding (OCO)

The need to interfere and interject your manual changes, thinking it will always help. This often leads to autotrading bots not having enough time to run through the entire trading process, ultimately limiting their potential.
Managing trades automatically as opposed to manually requires a different way of thinking about trading. Instead of interjecting, let the bot do its work and place trust in the process. Remember, you had hands-on experience when creating the bot and defining its criteria, entry/exit parameters, and variable inputs.
Use the mistakes made by bots to identify gaps, analyze, and improve your overall system.

2. Strategy Straitjacketing

Constrained or restricted by a rigid or inflexible strategy, preventing you from adapting to changing circumstances or exploring alternative approaches.
Overengineering everything in an automated bot to such a degree that it kills the core concept. For example, having a bot check 9000 variables before opening a trade, with no added benefit to your overall system.
Strategy Straitjacketing causes you to trade less in the long run.

3. Current Events Fallacy

The idea that "in the moment" you know the context of the market better than a bot, leading you to interfere. This eventually leads to the erosion of an automated trading bot's performance and efficiency.
This is slightly different from OCO, because your interference is based on events unfolding in the market around you.
Instead, build a flexible strategy into your bot that can adapt to changing market conditions.

4. Sweeping Conclusion Anxiety

This addresses the idea that a low outcome count creates an expectation mismatch for future expectations. Of course, this bias does not only apply to autotrading, but trading in general.
Sweeping conclusions cause traders to make extreme decisions and react impulsively. For example, observing ten trades and projecting the results as if it were 1,000 trades.

5. Shiny Object Syndrome (SOS) Freeze

The success of other bots and templates is overwhelming and causes you to take no action and/or question your abilities.
Instead, start by running cloned templates in paper trading and allow changes to be incorporated. Use paper trading to test your hypotheses and ideas to build confidence in your overall strategy.
Take ownership of the tweaks and changes you have made.

6. Bot Scapegoating

This is the phenomenon of blaming a bot as opposed to yourself. Any “mistakes” the bot made are usually your mistakes.
Remember, a bot is a personified algorithm running on a computer, which means you are responsible for its actions and behavior. Bots are not independent beings that think for themselves; they follow a set of instructions dictated by you the trader.
Be aware of the words you use to describe a bot's performance. Avoid phrases such as “the bot.” Take ownership of the mistakes and adapt your strategy accordingly.

7. Feature Creep

The obsessive assumption that complication vs. simplicity is better, or the expectation that you’d be profitable if something else was made available. Feature creep destroys the ability of traders to move forward.
Keep it simple and make tweaks and changes while scaling and leveraging the power of compounding.
Do not wait for the “new thing” that helps you trade more effectively; use what you have today. Integrate new features, but build trading strategies based on the resources currently available.

8. Emotional Hedging

Rather than letting the trade play out, you manually hedge your own bot’s position to see all potential profits traded. While this may provide temporary emotional comfort, it inevitably kills your overall self-confidence, which can also manifest in physical trades.
Be fully committed to your strategy and the decisions you make to be a successful trader.

9. Version Control Disorder

This occurs when a single bot makes a losing trade because of special circumstances, and it is immediately updated.
Improving and updating existing bots is good, but it should not be taken to an extreme. However, updating the bot based on random events has no added benefit and will not cause it to trade more effectively.
It is better to let your bot trade across a range of different environments before updating, expect the unexpected, and do not let rare circumstances alter your strategy.
Suggestion: base updates on sound analysis and judgment of quality data every three to six months.

10. Identity Panic Disorder

The bot you created and named does not work and/or the bot you created for a particular outcome now needs to be changed, but you refuse to adjust it.
Avoid perfectionism and accept the possibility that your bot will not work as intended. Know what/when/why you should adjust your strategy.
Traders need to share their bot templates to learn from each other. The value of sharing and communicating is essential to build effective trading bots.