Sure, you’ve heard of game theory. And sure, trading is like a game: you devise a strategy, learn the rules, and try to beat everyone else to the punch, finding trends before anyone else does. You’ve even heard that letting your emotions get the best of you is a terrible trading strategy. You already agree. But we all still trade with our feelings, not our brains. It’s almost impossible not to. To start to undermine our own self-destructive habits, it helps to understand how the game is geared toward those who figure out the game behind the game: how to play to win by controlling the emotions that lead us to bad decisions.

Game Theory

Game theory can be applied to human trading because the object of a trade is to “win” a profit. In order to succeed, rational traders follow the rules in hopes of attaining the desired outcome: a successful and profitable career. This makes traders averse to loss. They act in self-interest, attempting not just to win, but to avoid losing. Plenty of valuable assets are at stake if they lose: money, but also credibility, reputation, and face.

What does that mean? That emotional approaches and not rational ones are likely.

Applying game theory well can be a useful frame to apply to trading in order to keep feelings out of the game and increase the odds of success. It helps make the decisions you make rational and keep them statistically more profitable.

First, game theory is about making decisions in a world where your decisions affect other players, and their decisions impact yours. It’s a game, just like the market is a game. It’s an environment where your decisions hinge on the decisions of the other “players.”

However, in a competitive game like trading, where the must be some losers and some winners, game theory suggests that players use data to determine the conditions where they will be better off — no matter what the other players choose to do. It’s about minimizing how much you think about other players’ moves and finding the moves that will make you able to control your own success in spite of them. You can see how this is a useful skill in a market where watching the crowd rise and fall is part of the “game.”

How to Use Game Theory

The first step in utilizing game theory successfully is by ignoring intuition and instead using all the data they can.

In trading, this might mean that traders use a trend-spotting system to understand the whole ecosystem. They could use bots to find arbitrage opportunities, but they should also become aware of movement in the marketplace so they can capitalize on what those trends mean. Having data behind those trends means making smarter decisions all the time even when a couple of trades buck the pattern and may be false signals.

Here’s the typical emotional roller coaster of trading alongside the currency trading trend chart:

The emotions that go along with the trade cycle swing from ecstasy to despair and hopelessness.

Reacting to trends is natural.

And guess what happens on this roller coaster? Traders, no matter how experienced, wonder if they’re going to get burned this time. Because it will happen sometimes, and second guessing themselves is just part of the “game.”

Will the perfect strategy hit the winning trades every single time?

Why Get off the Roller Coaster?

Traders know they have to keep emotion out of their decisions in order to respond to the environment best. One study found that traders who even simply understood their own emotions were able to make better trades. Another found that a model where investors thought about the consequences of their decisions beget trading patterns that worked to minimize the negative emotion. This panic response led to different immediate decisions regardless of the possibility of a payoff in the future. In other words, if you think about the bad consequences in the immediate, you’ll avoid those bad feelings in spite of a better chance of a positive outcome later.

It’s a way of thinking that’s difficult for humans: we all want to avoid negative feelings in the here and now, and this leads to worse decisions for overall outcome, just as we submit to comfort eating now and put off the negative feelings and consequences that come with it.

Very often we only process the immediate threat of gains and losses. For instance, the emotion study found that when presented with the possibility of a 50% chance of winning $20 or a 50% of losing $10, potential gamblers thought about the immediate — $10 versus $20, instead of how either would affect their lifestyle or wellbeing as a whole and in the context of their other assets (it’s not much).

In another example, the team found that people were willing to pay more for travel insurance that covered airplane death by terrorism versus insurance that covered plane crash death for “any reason.” Buyers got less for their money. In this case, their emotions led them to a worse decision: they paid more and got less.

There’s a better reason to get off the roller coaster:

Our exhilarated feelings coincide with the worst time to issue buy orders and our worst feelings indicate it’s a great time to buy — making emotions a cause of serious mistakes.

Here’s that chart of trader emotions again. This time notice something: The big red “BAD TIME TO BUY!” warning at the top of the chart comes with the most positive feelings about a traders’ capabilities and the market.

That green “GREAT TIME TO BUY” marker at the bottom corresponds to the time a trader feels absolutely hopeless about the market and their own capabilities.

How to Remove Emotion?

Even if traders have a few losing trades with a data-based system, they can be reassured that a big win is imminent. Rather than pulling back, traders should trust their system and be optimistic that losses mean a big win is coming soon.

In other words: winning traders don’t let emotions override their data and they don’t let immediate fears rule their decisions. Applying game theory is one way to do that.

After big wins, traders may similarly think their next trade will also be a win. When it isn’t, the emotional fallout can undermine their course and therefore their long-term success.

Some other tactics you can try to remove emotion from your own thought process include:

· Honing your own perceptions about what the crowd will do and what voices to listen to and which to disregard. This comes from practice and education, which also give traders confidence and less emotional/fear response

· Take less risk to minimize fixating on the possible (dire) consequences

· Talk yourself down from potential losses and gains you haven’t had yet. If you think about the $19,000 Bitcoin pinnacle (when you didn’t sell), and concentrate on how much you’ve “lost” since then, you’re setting yourself up for failure. Think of where you put your “sell” orders instead, and how much you’ll actually make no matter what the currency does.

· Control your fears by spending less time watching the markets. Do what you need to do to be successful and focus on your targets, but watching every blip is just an invitation to panic over every fluctuation. Use tools for analysis, buy, and sell orders so that you know what you need to know 24/7 without staying glued to the market.

· Have a plan. Game theory suggests you should have a strategy and stick to it, using the math of probability and trends rather than your feelings.

The Game of Sentiments

Instead of paying attention to one’s own predictions, removing oneself one, two, or more steps from a decision can be a way to take emotion out of the process — but it comes with a big warning.

This is how we make predictions already, and it introduces bias into the process.

For example, the game of Sentiments is often illustrated online with a contest. In the days of beauty queen contests, a newspaper would run a contest in which you could pick the contestant who would get the most votes as the prettiest girl and be rewarded with a chance to win.

Would-be contestants quickly surmised that they could not pick the beauty queen they found prettiest. Instead, they had to think about what the culture deemed the prettiest and vote how they thought others in the game would vote. This layer of separation from one’s own opinion meant they were using “second degree” decision making, not first (their own pick). The game becomes, “How can I predict what will everyone else think is pretty?”

What economist John Maynard Keyes found problematic about second-degree thinking was that it assumed everyone else would vote their own opinion of the prettiest girl while the lone, clever contestant voted with a different strategy guessing about what the rest of the crowd would do. However, in reality, every contestant was casting aside their own opinion and voting with the crowd.

The smart contestant would develop a new strategy, voting for who they thought would get the most votes based on who they thought everyone else thought would get the most votes.

Epsilon Theory explains this scenario well here.

Ultimately, to win the game of sentiments is to have access to the information that allows you to best ascertain “what all those people think is common knowledge” about beauty. It’s about knowing “common knowledge” — which, of course, has very little to do with beauty.

The same game applies to trading:

You win the game of sentiments by having access to the accurate signals about what others in the game are thinking “everyone knows” and what they believe “everyone will do.”

Our Solution

It’s probably no surprise to say we’re huge on making Ai machine learn all the crypto patterns, signals, and data about trading over the course of a lifetime analysing our traders’ portfolios, continually getting smarter with its analyses and better predicting what everyone else thinks they know and what they think others will do.

Others have different approaches but they’re all aiming to make trading more rational and make sure you’re taken care of, by watching the market when you can’t and protecting your portfolio. Using some of these tools is a great way to remove your biases from your trades.

Developing a trading strategy based on these patterns and data means winning the game of trading — to stick with the data through losing and winning streaks is to remove emotion from trading and rely on a solid system that will continue to be right more than it is wrong is to effectively challenge the emotions of trading that hold most traders (and most people) back from their dreams.