Because we don't say yes to stock market demons today, we are going to be talking about one of the most dangerous and honestly hardest to catch mistakes that traders make when trading within the stock market. This is also sadly one of the most unforgiving mistakes because once you make it, it changes the perception of how you think and how you trade within the stock market perhaps forever, but without being overly dramatic. This is in my opinion, the single biggest reason that most traders fail. and this mistake is none other than random reinforcement.

So random reinforcement. This is when a trader brings a bad technique or bad habit to the market and by chance it happens to work and they make money. This makes the trader believe that he or she is becoming a better trader using the skill, when in fact they are not. It also convinces them to accept this new skill as useful and further develop their skillset with this particular bad skill in its foundation.

There's also the flip side of this coin where a trader brings a good technique or good habit to the market and by chance it doesn't work the first time they try it. This negative reinforcement from the market makes this trader believe that this skill is not useful and then they just throw it out even though it would make them more profitable in the long run. So before we get more into this, the only thing I ask of you in return for helping you avoid this dangerous mistake is that you hit that beautiful and ravishing like button. And also don't forget to subscribe for more short, sweet and simplified videos on how to trade the stock market.

Ok, so let's go ahead and take a look at how random reinforcement happens. You're cruising online, you're looking through old price action, whatever, and you've happened upon a new trading technique. You then bring that to the market and boom. The first time you use it, you make money.

That's how the positive reinforcement cycle starts. That first positive success reinforces to your mind that yes, this traded technique, it might be valuable to me in the future, but you are still cautious at this stage. You know better. So you bring it to the market again the next day, and then boom.

by chance it works again. Now you are even more reinforced. You are twice as much reinforced as you were the day before. So you keep testing it and testing it.

And by chance, or perhaps because of other unknown commonalities, it just continues working. But as we know, trading is an odds game. and just because one technique or strategy works a series of times, does it necessarily mean that it is a good strategy? And it doesn't even necessarily mean that your success using that strategy wasn't just random luck. There's a certain odd that you're going to win, and there's a certain odd that you're going to lose when it comes to any position.

So just because you want a series of times, that doesn't necessarily mean that it's a winning strategy. Overall, invest your success with this new strategy on the first few trades is really just that it worked on the first few trades. Doesn't say anything about the future trades, it just says that hey, look, this worked on the first few trades. I'm going to continue testing it.

Do not assume automatically that this is going to work forever. This is just something that so far has worked, but the sample size is too small to really get an accurate picture if it's going to work over the long run. But your subconscious it doesn't know that it is wired to run away from the bad and run towards the good. And maybe you know this.

So you keep testing it and some of the time that you test it, it actually doesn't work. But then you rationalize it away to yourself saying, oh, I guess I just didn't execute it correctly this time or even worse, you may assume that the problem isn't this new technique, but rather something else in your skill set and rethink the good habits and practices that you already do. So each time this new technique gets reinforced as good, you get this little warm, jolly feeling and this gets warmer and warmer. and it gets reinforced time after time.

Now, granted, if this strategy that you're employing is really out of whack, it probably won't get randomly reinforced for very long. But even if your strategy is true 30% of the time, you may find yourself assuming that hey, maybe it's true 80% of the time and that even though you don't win 80% of the time, you'll just rationalize it by saying oh, I just goofed it didn't follow the strategy correctly and this will further reinforce the effectiveness of the strategy in your brain even though it's not effective to begin with. And soon you'll start adding parts of this new strategy to your other strategies and adjusting your entire trading strategy revolving around this new technique that you've found. You'll soon find that the strategy that you thought was so great has spread like a virus and infected all the other strategies as well as your overall trading outlook.

And the worst part is that you'll be extremely confident that you know exactly what you were doing because of all that positive reinforcement that you got. Now with that being said, I'm about to share a personal example of how this happened to me and how I was able to overcome it personally. But before I do this. I Do want to make sure that you will Not listen to the demon.

the demon that is random reinforcement in the market. If you understand this, I Encourage you to comment below. Just say no if you comment this below. I Promise it'll be embedded in your mind and you'll remember this in the future.

You'll know that whenever you are positively reinforced on a skill in the future that that doesn't necessarily mean that it is a good skill and that only time and experience testing the skill will prove it to be effective. So I remind you even if you're not somebody who usually comments I Highly encourage you to comment below because we don't say yes to stock market demons. Okay, so let's go ahead and talk about my personal experience with random reinforcement. So when I first started trading, I was looking for a concrete entry point that would allow me the highest amount of upward potential overall but also limit my downside.

and at that time I was pretty unaware of confirmation points as well as signs of a reversal. So I was looking for something else. So I tried out a bunch of different theories that I had but then eventually came across this phenomenon that one stocks were oversold and increased but remained below the oversold line and after hours that they would then continue going up the next day or at least make it back to fair value. Now this belief was not grounded in any sort of logic whatsoever, but rather just an occurrence that I had found.

So I practiced a few times and found that this indeed was the case. I've had kateed focusing on finding stocks that fit my volatility criteria but would only allow myself to actually buy in if it dipped to oversold and then ran partially in the after-hours I repeatedly found this valuable and was reinforced eight out of ten times or so now. I would skin every day after hours to find positions that were not just oversold but also increasing in that period. Now, the problem with this wasn't so much that I was scanning for oversold stocks that were showing signs of a reversal, but rather that I would quite simply use after-hours run-ups as a be-all end-all method of deciding whether or not to enter a position.

Obviously, this is a highly flawed strategy and has lots of issues with it, but this is what I was doing at the time and it didn't even matter to me like as long as it ran up and after hours. if in pre market had tanked, it didn't matter. I would probably even add to my position if it had tanked in the pre market. The only thing I cared about was that it was oversold, that closed and that it was running up in the after-hours And this is because I kept finding again and again that after oversold runners tended to increase the next day and I kept having more and more luck with the strategy so he kept getting more and more reinforced.

But then all of a sudden a combination of market condition changes and personal changes in focus from one sector to another led to my overall strategy with this not working anymore, but since I had previously found success by And oversold after Hours runners, I figured that that part of the strategy must still be gold and the problem must have been something else that I was doing wrong. Wasn't with that? it couldn't because that had already been successful. So I checked my confirmation strategy, my measure of risk, and my overall time chart emphasis and adjusted everything back and forth, but nothing was really helping. So I decided to write down each of the specific criteria that I was using and adjust each one separately and proceeded to back test each to see where the issue was.

It was then that I realized the problem was actually in my buying oversold runners and not in the other parts of my strategy. by writing everything down and testing each of them individually and apart from each other, I was able to figure out what was wrong. It had then hit me that I had built my whole trading strategy around the faulty premise that oversold after-hours runners would most of the time go up, and honestly, the premise may have been partly correct. They may be more likely to go up in the next day just by chance.

That subsection in that certain market condition could have had that pattern where 70 to 80 percent of after-hours runners do. could he need to go up the next day? But the problem is, this wasn't true in the long run, so it didn't add to my long-term consistency. And this mistake is the most dangerous because what you do it once it becomes sort of a pattern of mistake section where you make other mistakes within that first mistake and it all builds on a foundation of mistakes where you just don't really know what went wrong. But let me go ahead and finish this with an analogy.

An analogy that I like to use is that of a car salesman. say you are a car salesman and you were having a hard time selling cars. So you go to your boss and ask him for advice. He says son, don't you worry all you need to do is simply Pat the potential buyers on the lower back and more people will buy cars from you.

At first you think what, this minor detail won't make much of a difference, if anything, that'd be weird, but you are desperate to sell more cars so you do it anyways. and the next day you find that every single person that you approached with this new technique ended up buying a car from you. You immediately think you just hit the Golden Goose but you're not completely convinced yet. So you try it again the next day and my chance.

It works again the next day. Every single person that was interested in buying the car ended up buying a car. So you're then super excited and you accept this skill as something that is very valuable every single time someone wants to buy a car from you, you touch them in the lower back. Then all of a sudden you start having problems selling cars.

Again, you are very confused on what the problem is. This time you already know the secret with touching customers on the lower back and so you keep doing that. But you're wondering why they're not buying cars from you anymore. But what you don't realize is there may be external factors that are motivating the car sales.

For example, when you started employing the technique, there could have been a sale going on, or perhaps a random occurrence of buyers that were more interested in buying cars before they even walked in. And that would mean that you're increased success of selling cars wasn't due to your new lower back technique, but was despite of it. but because that random reinforcement happened right after you started employing the lower back technique, it was reinforced and you assumed that that was the reason that they were selling more cars. But you don't know that.

So now that you're not having success, you're not going to be looking at that part of your skill set. you're going to be looking all the other ones that are probably already good habits. You may say oh maybe I just make too much eye contact or oh maybe I'm too friendly and you might start adjusting strategies that we're working all because you weren't aware that that new strategy that you were employing isn't actually helpful at all. So you start getting rid of a bunch of strategies that are good.

Meanwhile, employing a strategy of patting customers on the lower back which is actually not helping you in the long run. you actually is making them feel uncomfortable and less likely to buy cars from you. Now you may ask yourself, well, why would something be randomly reinforced like that in an odds game? Even the losing strategy will win a certain amount of the time, but it's about coming out on top in the long run as compared to the short run. So what is my suggestion to fix this problem? Well, my suggestion to fix this problem is to simply write down each new technique and backtest it.

using a rewind trading platform such as Thinkorswim can then test any new strategy or skill that you're employing on a bunch of different sectors and a bunch of different price action from from a bunch of different time spans, and then you can come up with a rate of success, then test it on the actual market, and you can even try have different combinations of strategies and techniques to further increase your odds of success. But moreover, the whole point of this is that it is extremely important to continuously test out all of your trading techniques and make sure that they are still relevant to the current market conditions. Much like old cars occasionally need new parts, your training style can use some adjustments from time to time anyways. I Hope this video was helpful for you.

If you have any questions, do not hesitate to reach out below or join our Facebook group zip Trader circle. We also have a trading tutorials playlist so if you're completely lost on where to start, you can get started there anyways. Have a great day folks and I'll see you in the next video.