Trading Psychology - Stage 2. Acknowledgement.

So, our trader comes to realization that his inner mind a) greatly influences his trading performance and b) isn't always under his, trader's, control. Naturally, he wants to take control over himself - and this is what it is about, self-control.

You can view it in the same terms as you do in life in general. We all found ourselves in a number of situations where the right way to act was not what our emotions dictated. Boss whose thinking doesn not light up the office with knowledge and wisdom? Kid right behind you whose only purpose in life seems to be to pound your seat with his feet during whole flight? Chatty co-worker who doesn't let your button go until he enlightens you about all the plot twists of the soap opera you never knew existed? Leisure-minded driver in front of you who doesn't seem to recognize green as permission to move his foot from brake to gas? Go ahead, list all your gripes with the world, I'll wait couple minutes. OK, an hour.

... Done? Cool, let's continue. What is it that keeps you from giving all the offenders listed above the piece of or your mind (providing you do keep yourself in check)? Or, let's say, from grabbing the ice cream from the passerby when you happen to want it and he happens to have your favorite kind? Discipline does, reinforced by society customs that serve as limitations on our behavior. "Freedom of you fist ends where freedom of nose starts". Now, imagine all those limitations being removed and all reinforcements gone; imagine any negative outcome of your action being limited to you only so no moral or ethical brakes either. Are you garanteed to stay as disciplined and restrained? Heck, some can't even with all those restraining factors in force. Are you more likely now to give in to temptation and act your emotions out?

Probably yes. But that's exactly what we have in trading environment. There are no external factors keeping you from causing harm to your account. If you allow your emotions to take over and start governing your actions, no one stops to tell you "hey mister, what the heck do you think you are doing?". No one calls 911. Do as ya please and may it do ya fine - that's the psychological backdrop we deal with in the markets. With this realization comes understanding that in absence of external restraints we need much stronger self-discipline and self-control in order to continue following the rules.

Next question is, naturally, how? It starts with right understanding of the very nature of the market as an uncertain environment. Such understanding creates a foundation for the proper mindset. It continues with some strategies and tricks helping a trader form strong set of rules and motivations. My favorite are "Model Trader" and "If I Were Smarter" described in The Master Profit Plan . The process takes a while usually. How successful you are in creating the proper mindset and strict self-discipline will actually define how successful you are in trading.

Let's move on to the description of the third stage so you have a clear idea what you need to arrive to.

Trading Psychology - Stage 1. Blissful Unawareness.

As I mentioned in the previous post, first stage is usually the one where a newer trader doesn't acknowledge the role of psyhcology in his trading. It happens out of ignorance or arrogance.

In a former case (ignorance) it's simply lack of knowledge and mistaken notion that one can trade succeffully if given "right" system or indicator ot tip or whatever causes one to enter and exit his/her positions. It usually takes a while before a trader starts seeing how his mindset influences his trading and how his personal traits shine through his trading decisions. It comes as a surprize realization that different traders will get different results while trying to apply the same system. It is counter-intuitive, isn't it?

In a latter case (arrogance), a trader shows some kind of denial - it's "not me" attitude, thinking that goes along the lines "maybe it's a problem for some but I am in control of myself", "this stuff is for weak-minded" etc. Needless to say, it's rarely the case... and even more importantly, it's not so much about weak vs. strong mind as it is about influence one's personality has over one's trading.

In any case, the important thing at this stage is to come to appreciate this aspect of trading. It happens when one sees how much truth there is in saying "everyone gets what they want out of market" (Ed Seykota I think?) Again, seems counter-intuitive, right? After all, don't we all want to succeed, to make winning trades, to make money? Sure... but it's not what our conscious mind wants, it's about what our inner core dictates, and that is not always easy to realize and control.*

Simple example to illustrate the idea: do you know people who repeat certain behavior patterns harmful to themselves? Getting themselves into relationships with types that make them miserable, over and over again? Repeating the same mistakes in their interaction with others, obviously not learning from the past? I bet you do (although you personally never act like this, right?) So, why do we do it even though we see (or could see if we looked) that these behavioral patterns hurt us? Because those patterns are not just some easy to break habits; rather tthey are part of our personality, of who we are, and it takes much more than simple decision not to do that anymore to change our ways. Pretty much the same thing happens in trading - we know what not to do yet we continue doing it.

As soon as one realizes all this, the first stage is completed. The role of psychology in trading is acknowledged, denial is over - and this forms the foundation for a change.

*My favorite example of this phenomenon is one I referred to several times in earlier writings, although not on this blog I think - Russian movie Stalker. Briefly: there is a certain machine granting wishes (stalkers in the movie are people who take clients to it through many dangerous traps). Machine grants wishes alright but there is catch: it's not a wish that you stand in front of the machine and announce that will be granted... it's a wish that constitutes your essence, your core, your deep desire - and it's not necessary the one you realize and announce to yourself and to the world. Pretty much what happens in trading and pretty much what the author of that saying meant.

Psychology 101

One of those neverending debates among newer traders... role of psychology in trading. Some claim it's all there is to trading. Some argue it's nothing but red herring, and one just needs to follow his signals (system, indicators, whatever) and no psychobabble will ever be needed. Yet some say psychology is important and assign some weight to it - "80% of trading is psychology"... or 95%... Not sure how they measure it, I personally like 76.364%.

Two things to say about this.

First, we are different. Some simply cannot change their behavior and no matter what system they are given they just can't follow it. Their personality takes over pushing them into all kinds of trading no-nos. Then there are others who don't seem to experience any impact of their inner workings, they see the light and follow it. Obviously, the role of psychology will be drastically different for those two types.

Second, and most significant for most of us. We go through different stages in our learning curve. As far as trading psychology is concerned, I can clearly see three stages that are most common among traders.

First stage is total ignoring or underappreciation of this aspect of trading. By ignorance, by arrogance or for whatever else reason, a trader doesn't give it much thoughts while focusing on technical side of trading.

Second stage is acknowledgment. Running into troubles with their inner gear, reading books or listening to others, traders become aware of the ways their personality interferes with their trading. They have met the enemy.

Finally, third stage is dismissal of psychology again. Maybe dismissal is not the right word but that's how it feels for it's no longer needed. At this stage it becomes unneeded as a trader overcomes his inner barriers, changes himself, learns to behave in a right way and this correct behavior becomes second nature. Just as learning to swim you stop thinking of how to move when swimming, in the same way you stop giving time and thoughts to psychology of your trading again - seemingly returning to a first stage, although it's obviously another level you reach. You simply mastered it and stopped thinking about it.

It's important to understand that this third stage exists and make it your target to achieve it. Too many traders simply get stuck at the second stage - they think of it all the time, they make it their point of focus to such degree aand for so long that they just can't seem to get out of it. Development stops, they become locked in this endless inner digging. No need to rush through this second stage but to get stuck in it forever is no fun either.

In the following posts I intend to discuss each of those three stages a bit deeper. And, if you are lucky to belong to that second type, ignore this part of blog altogether. Check out the fourth stage though which discusses the highest craftsmanship of this side of trading.