Trading Psychology: Is It Really Necessary?

Posted On 14 Jun 2016

Some years ago, after teaching a class in trader psychology a student came up to me and asked in a deadpan gaze, “So what does this stuff (psychology tools and techniques) have to do with trading?” I looked her in the eye and responded with the question: “What does cold have to do with ice?, What does conduction have to do with electricity? or What does single-minded focus have to do with winning?” The answer in all three examples as with trading psychology is… everything!

Trading and psychology are not normally thought of in context with one another; after all, trading in its purest form is “the act of exchanging one thing for another.” Psychology is simply “the science of mind and behavior”. But, when you truly consider the act of trading in the financial markets and that trading and investing is a mental and emotional game, the two terms fit like a hand-in-glove. Trading requires mental and emotional tools. In a transaction you are either: preparing, analyzing, processing or executing, all of which require mental and emotional tools. If you don’t have mental and emotional tools; for instance, focus, patience and iron-clad self-discipline, well, that’s like driving without a steering wheel. You will not only lose your way you’ll eventually crash and burn without them. Secondly, trading is nothing if not about getting consistently successful results. Furthermore, any result (the outcome of a purposeful endeavor), whether positive or negative, is a product of three variables, thought, emotion and behavior.

Whenever you do something, no matter how mundane or simple, you initiate a sequence of intentions (thoughts – often unconscious) designed to regulate or satisfy a desire (emotion) which drives that action (behavior). A trading example might include noticing the price action nearing your hard stop-loss whereupon you tell yourself, “That’s going to hit my stop and take me out and that means I’ll lose…and that means I’m a poor trader…and that means I’ll lose all my money eventually.” This thought progression is often times out of your awareness; it is also immediate which frequently activates fear. To quell the emotional discomfort of the fear you move the stop feeling an immediate, albeit quite temporary, relief (the first tier result). Then moments later the self-loathing sets in because you have again violated your rules; not-to-mention that in most instances of rule violations you in all likelihood will experience a loss anyway. And, because you have increased your risk by moving the stop you lose more (the second tier result). Learn to be disciplined and prevent emotional reactions during trades with trading psychology.

The above example illustrates how negative trading psychology can dismantle good intentions and positive trading very quickly. Thank goodness the flip side is also in play whenever you choose to reinforce your mental and emotional strength and endurance in the trade. Here are some simple notions designed to help you bring and maintain your A-Game at the trading platform by supporting your fierce focus on what-matters-most in the trade.

Aim to remain in the Now of the trade. It is critical to your effectiveness to keep your attention focused on what you are doing right now. When you’re in a trade that is the top priority. In order to get the most out of your performance you must remain on task and on purpose. In other words, you only have 100% of attention, and if you are ruminating about that last trade that went sour you will reduce the amount of attention to devote to the task at hand. Also, if you are worried about what might happen in an upcoming trade then you’ll have less attention available for the most important item, what you are doing now.
Identify your purpose for trading … the Big Why. The first item on your trading to-do list is to “identify or uncover” your purpose; your compelling reason. This is where you connect the what-matters-most in your life, to the what-matters-most in the trade. This will activate your passion; for instance, family, loved ones, friends, a community cause. Passion, once it has been summoned will reinforce positive trading psychology and support you in staying true to your commitments, rules and trade plan when the going gets difficult.
Reduce distortion and distraction. Distorted judgement can cloud your ability to see clearly and analyze the asset landscape. For instance, if your thinking becomes muddled due to limiting beliefs about your skills or the charts, then it’s important to manage that distortion and get back into a zone of objective reality. Additionally, if fear, greed or anger are all over you then it is quite easy to become distracted and later find yourself having snatched defeat from the jaws of victory. If you can control distortion and distraction you will go a long way towards being a consistently successful trader.
Measure, verify and document your trades. Information is the brick and mortar of building your capacity for strength and endurance in the trade. This begins with getting all the information possible from your trades by documenting them. You’ll identify what is not working and armed with this data you’ll be able to address each issue and you’ll begin to change; one trade at a time.
Align yourself in body, mind and emotions. Conflict is one of the derivatives of having a dual brain. Let’s face it, there are times when you either can’t make a decision or you are confused. It’s crucial for your thinking to be based in supportive empowering concepts; for your body to be relaxed and patient and for your emotions to be positive. This is congruency or alignment and with it you will find yourself propelled towards your goals.

These components of trading psychology are just a few of the mental and emotional items that you’ll need to be able to follow through with consistency in order to develop the psychological capacity for emotional strength and endurance in the trade. You might not want to embrace the term, but your psychology is always in play…for good or for bad. This is what we teach in “Mastering the Mental Game” online and on-location courses. Ask your Online Trading Academy representative for more information. Also, get my book, From Pain to Profit: Secrets of the Peak Performance Trader.