Best Quotes From The Psychology of Trading – Tools & Techniques For Minding the Markets:
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Successful market participants seek out their weaknesses and learn when they fail. Unsuccessful ones avoid their shortcomings and, thus, fail to learn.
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You will not become a better trader by emulating a market guru. You will become a better trader by identifying the occasions when you are already trading well and then modeling your future performance on those.
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This fearless inventory will require an extensive trading journal that you can review at the end of each week. The journal should include the trades you made, the research-based rationale for the trades, your profit targets, your stop-loss parameters, your frame of mind during the trades, and the outcome of the trades. Each week you will grade yourself on how well you actually followed your trading plans, and each week you will conduct a review of what you did right and what you did wrong. The goal is to create a feedback loop of continuous quality improvement in your trading.
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Find the exceptions to your problem patterns – the times you are doing things that bring you closer to your goals. Then turn those exceptions into solutions by doing more of them. That is the solution focus…Traders will be able to trade by building on their successes, becoming more of who they already are at their best.
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Emotionally troubled traders have defined themselves as the problem, and it is their achievement motivation that then drives them to turn on themselves. They are doing something good – trying to eradicate the problem! By identifying the old solutions that are no longer working and making those the problem, traders can stop the cycle of losing and beating themselves up.
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When your body is itching to move and your mind begins to wander, and you think you just can’t tolerate a moment’s more meditative quiet, stick with it several minutes longer. What will happen is quite remarkable. Like a runner who ‘hits the wall’ and becomes exhausted, only to gain a second wind after forging on, your consciousness will find a second wind beyond the boredom threshold. It will take effort, and it will take practice, but the payoff is great. Beyond the boredom threshold lies the Internal Observer.
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The problem is not that traders experience unpleasant emotions. The problem is that such emotions tend to shift their modes of information processing, diverting the traders from attending to and acting on information in the environment. A large body of literature in social and personality psychology has found that continuously self-focused attention distorts a person’s processing of events by activating negative modes of thinking. When traders experience negative emotions, they tend to focus on themselves and their trading – and not on the markets. At such points, they are more likely to abandon their trading plans, to impulsively enter or exit positions, and to otherwise trade in a manner that is contrary to their training and experience.
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Taking your emotional temperature means periodically assessing whether you are overaroused, underaroused, in a positive emotional state, or in a negative one. This assessment in itself entails the activation of the Internal Observer. In taking your temperature, you remove yourself temporarily from the situation at hand, interrupt your normal flow of thoughts and activity, and observe the state of your mind and body at the time. The goal is to maintain self-awareness, even as you remain engaged in the flow of market activity.
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Attend to yourself before attending to the markets. If you are not in your trading zone, you don’t want to be putting your hard-earned capital at risk. Frustration after one or more losses or missed opportunities; eagerness after scoring a win; boredom and a desire for excitement; fear and procrastination at times of opportunity – these are some of the most common ways in which emotional shifts alter your perception and response to events and color your trading.
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By mentally rehearsing stop strategies under conditions of relaxation and cognitive focus – playing movies in your head of experiencing a drawdown and honoring your stops – you can make the minimization of losses an automatic part of your behavioral repertoire. In a very real sense, you want to normalize the process of losing; making it so familiar that it is no longer threatening. Uncertainty is built into the market; losses are a cost of doing business.
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People lose money in the markets because the person who places the trade very often is not the same person who manages and closes the trade. Quite literally, another self has taken over – another mind.
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The first psychological step toward trading success, as I emphasized earlier, is keeping a journal of all your trades and the state of mind you were in when placing the trade, the thoughts going through your head at the time, your feelings, and so on. Before long, you’ll identify the states that are your good traders and those that are the bad ones. You will know which lenses work for you and which don’t. And, most important of all, you will cultivate the habit of being an Observer.
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A theme common to many of the most successful traders is planfulness. Successful traders are highly intentional in their approach to their craft. They treat their trading as a business and follow a careful business plan. They are purposeful with each trade, and they follow well-researched entries and exits.
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This is a very important concept: The very solutions to people’s trading woes are apt to produce anxiety, and they are likely to invoke all sorts of defenses as a result. This means that one part of the human psyche is likely to fight change – and the uncertainty of the unknown – even as the person ardently desires it and realizes its necessity. Resolving this internal tug of war is an essential step in psychological change.
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Invoke old patterns, activate the Observer, shift the mind state, construct new endings: This is the very essence of emotional change. If you can initiate a new response while feeling the pull of old patterns that haven’t worked, you will have made a major step toward change. The first step in transformation is interrupting old patterns as they occur.
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Many analysts, newsletter writers, columnists, and trading coaches present themselves as gurus, emphasizing that they have the answers to market success. Even if these individuals were successful – and evidence of that is generally woefully lacking – it is far from clear how one could ever gain confidence in one’s own trading simply by absorbing the words of the guru. Indeed, by maintaining an aura of special insight or information and appealing to individuals who feel lost, the guru inevitably feeds the very dependence and lack of confidence that undermines successful trading.
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It is a rare individual who can form a conviction strong enough to act on and yet remain sufficiently flexible to reverse this conviction in the face of objective evidence. Simple human nature, not any emotional disorder, cuts against this grain, allowing one to interpret the world through his or her beliefs and convictions. Successful traders are trading against their own human nature, making unnatural ways of processing information natural.
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The average trader, tossed to and fro by various mind states, is poorly equipped to sustain such effort. If immersion is crucial to reading the metacommunications of the markets – just as it is critical to learning a foreign language – it is little wonder that emotionally reactive traders fail to master the markets. Their self-focused attention competes with the very processing of subtle information that provides the basis for trading expertise.
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Most people use a relatively small bandwidth along the dial of consciousness. The shifts in effective therapy that I have mentioned represent those occasions when one moves from the comfort – and limitations – of one spot on the dial to a fresh frequency. The goal of counseling is to enable people to control the knobs that move them from one frequency to another. When you are stuck in a given frequency, it is all too easy to forget that the knob is even there.
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The vast majority of traders I have encountered do not need therapy. Rather, they need to learn to become their own therapists, by observing their triggers and shifting to new modes of thought, feeling, and behavior once their problematic tapes begin playing.
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You have to enact success before you internalize success. No one talks himself into a revised mental map. Powerful, non-ordinary experience, not well-intentioned ‘positive thinking’, is the fountainhead of personal change.
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Trading success is a function of possessing a statistical edge in the markets and being able to exploit this edge with regularity. Trading failure is most likely to occur when you trade subjective, untested methods that possess no valid edge or when you are incapable of consistently applying edges that are available.
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Change begins with repeated and intensive self-observation. Keep a journal of all trades, the reasons you made the trades, the states you were in while placing the trades, and the outcomes of those trades. Over time, isolate the trades that went awry and the patterns common to those. Then isolate the successful trades and their shared ingredients. Imagine that, trapped within you, is a self-destructive trader about to go bankrupt and a master trader poised on the brink of success. How does that self-destructive trader make decisions? How does that master trader operate? Once you can answer those questions, you are better positioned to do less of what doesn’t work and more of what will bring you to your goals.
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Many traders who report emotional problems in the market are experiencing their difficulties because they have not found a good fit between their trading styles and their personalities.
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If traders are to be successful, they must fight sobering odds and surpass the efforts of many competitors. They are not automatically equipped for the challenge. Their descent into the underworld requires that they face their personal demons, fighting those cognitive and emotional tendencies that would distort their efforts at identifying, understanding, and trading market patterns. If they are to succeed, they must become more than they are; they must exercise a control and a mastery well beyond that demanded by ordinary life.
Use Your Internal Observer to Create a Feedback Loop of Continuous Improvement:
The Psychology of Trading is an interesting book that combines Brett Steenbarger’s knowledge and experience as both a psychologist and a trader. One of the major themes of the book is that traders need to develop tools and techniques for “trading from the couch”. What this means is that we need to become our own therapist. We need to have the ability to detach from our in-the-moment sensations and emotions, and invoke our “internal observer”. This allows us to build the critically important self-awareness required to correct our impulsive and irrational tendencies. We all have biases that distort information and skew our decision-making process.
Another key observation that Brett has made in his career as both a psychologist and trader is that people tend to be problem-focused. What this means is that we tend to get stuck and lost within our own problems, unable to escape. Our same patterns of thinking and behaving continue to get us the same negative results. But there are often times when we think and behave in an effective manner, and those are examples that we can model from. By thinking about times when you traded correctly, for example, times when you executed your trading plan without hesitation, you recognize that there are actually times when you effectively executed. Then all you have to do next time your negative pattern is in progress is interrupt and replace it with how you operated in the effective moments. This is the solutions-focus. It’s about finding exceptions to our problem patterns and using those exceptions as solutions.
Within us, there is both an impulsive and disciplined trader. Our own self-awareness and self-reflection dictates which one comes out.
Learn More in the Trading Success Framework Course
Written By Matt Thomas (@MattThomasTP)
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- Top 20 Quotes From The Disciplined Trader By Mark Douglas
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