Psychology Psychology of Trading

What sort of trader are you? A Trigger Happy Terry or a Fatalistic Fred. In this article the author looks how most traders fall into certain trading 'types'.

?Know thyself? exhorted the ancient Greeks. Pursue intelligent, disciplined self enquiry and you will come to understand the treasures of the self. This timeless Delphic dictate could, I believe, serve well as a focus for effort for those who today would profit from trading the financial markets. Know your own strengths and weaknesses, physically, mentally, emotionally and spiritually. Accept and understand them and learn how they relate to and feature in the market environment and you give yourself some valuable edges.

You gain clarity of purpose. You have the conviction to stand behind your actions and the equanimity to ride out the vicissitudes of the market. You are also better equipped to structure for yourself a methodology that reflects your personality and risk profile. Also, and crucially, you begin to lift the veil on the intentions and actions of the other market participants. Their game plan becomes clearer the more you accept and reclaim the parts of yourself that have been split off, disowned or otherwise ignored. Self knowledge increases your predictive capacity.

The Roman poet Seneca, in a gesture of magnanimity was able to declare that "nothing human is alien to me". If he was around today and he walked his talk then he'd probably make a great trader . Feeling comfortable with the far continuums of fear and greed allows for a measure of transparency into others actions. Expand your self awareness and the shenanigans of the market can be comfortably assimilated into your steadily increasing account balance. Know that anything can happen and accept this possibility at all times and no surprises can derail your journey to consistent profit.

The big players, the institutions, market makers, specialists and others who have many more noughts on their account balances than the rest of us ply their wares most successfully against those who lack the self knowledge to perceive "the tricks of the trade". We're not necessarily talking conspiracy here, just that there's a bit more to it than having a grasp of fundamentals, technical analysis and level 2. I have heard market makers described as masters of emotional manipulation [in my own learning process I have been less flattering about them] but they are just doing their job and if you want to take part in their winner takes all game then you have to know the rules.

It is received trading wisdom to follow certain rules. Plan your trade and trade your plan. Run your winners, cut your losses. These time tested, battle hardened nuggets beckon us all, from the novice to the pro, to follow them to the promised land of profit. Presumably, many of the majority who end up on the wrong side of the win/lose equation are familiar with these rules too. Knowing what you should do is the easy bit. Knowing how to do it is where the challenge lies , where the real work of trading occurs and where most fail. How, for example, do you run a winner when, perhaps unused to profit and grateful for what is on the table ,you are greeted by an overwhelming inner chorus of "take it" - How do you cut your losses when they may, as with other areas in your life away from trading where hope has often been rewarded, come good in the end?

Many would be trading hotshots, flush with the confident glow of achievement from other areas in their lives, bring what they believe to be tried and tested systematic approaches ,with inbuilt assumptions of success, to the market only to become aghast at the regular, protracted but ,of course, unforseen moves in the opposite directions of their positions. The market, we learn, is always right. It is no respecter of systems. It culls the naïve, the stubborn, the faint hearted and the complacent alike with ruthless precision. It takes no prisoners but can and does hold many hostage to fear and greed. Like Keynes said, the market can remain irrational longer than you can remain solvent.

For sure, those who opt for the implicit security of rationality and linear logic will find much to cause them upset and conflict in the market. They will be confounded by the painful realisation that qualities that serve them well elsewhere in their life cost them money in the market. They will face a stark choice-either to stay with their losing ways but retain an imagined integrity that comes from sticking to their principles or abandon their attachment to the "system" they have been following , accept the pain and loss to self esteem this may incur and begin the task of finding a way that works.

Loss, financially, and in its gut wrenching, puke making physical manifestation is one of trading's great probabilities. The stories of many successful traders are replete with colourful tales of early loss and subsequent recovery and thriving .Think of the initial losses sustained on the path to trading mastery as dues paid to illuminate the hidden, recessed aspects of self that otherwise remain as magnetic lurkers that threaten to sabotage your trading ambitions. As you become aware of these myriad expressions of shadow that have claimed safe harbour within your psyche so you can accept and embrace them and reconstitute them as tools in your trading armoury.

The fast, pacy action of the market gives the lie to the fact that trading is essentially a trip for those who are patient. Those who can endure will endure. Those who can't will skulk off and console themselves with the war stories their diminished war chest has bought them. The patient can wait. They understand that the waiting is the work. Most lives are centred around waiting for, relationships, money, fulfillment, Godot? The rapid growth of online daytrading is an act of vengeance on waiting. It releases us from the tyranny of postponement. It allows us to "just do". Masters of the mouse, we channel the energies of that we have not yet achieved through our index finger to a screen of flashing numbers. For some, the ability to express themselves in such an unfettered way, free from the constraints ordinarily imposed on them by work, family and society the inevitable financial loss is a price willingly paid.

The market is a melting pot where ambition and expectation jostle with the statistical certainty that most will lose ,a place where intensity of feeling is experienced[and sought]. The money on the line parameters of real time trading heighten the emotional charge in rough proportion to the time frames being traded. The active day trader roller coasts through more scenarios than a swing trader. Each to their own, be comfortable with your choice.

Psychology itself, like trading, is a speculative activity. It can only seek to persuade, to suggest. It is a commitment to understand things rather than an exact science. However, continued observation of our market behaviour can give us clues as to the repeating patterns of loss inducing behaviours that snare us. Given that the numbers on your screen become a significant part of the daily environment that you interact with it may be useful to be aware of the qualities and predispositions in yourself that you bring to this "relationship".

Perhaps a psychoanalyst would view market behaviour that proves unrewarding in a regressive context ,pointing towards the unexpressed, hidden maelstrom of the unconscious as the money losing culprit. A more humanistically oriented psychologist would focus on what the market represents for you, what you need from it and what it offers you on a non financial level.

We are made of many parts, disparate energies that rub together all in search of recognition, approval, redemption. In my work as a trading coach I use several techniques to facilitate an understanding of the ways we can undermine our efforts to be successful. Sub personalities, from Psychosynthesis, develop and crystallise around particular traits or predispositions that we have within and can act as energetic diversions from the whole self. They clamour for expression, for the daylight of awarenesss.

They are a model, a map, neither inherently good or bad, but in terms of the market we could define, for simplicity's sake, the seven deadly sub personalities that will inhibit our chances of success.

Trigger Happy Terry loves the process of trading but only in as much as it distracts him from the work he needs to do on himself. He convinces himself that by sitting in front of the screen all day long he will become a great trader. He's a scalper, frightened to run his winners ,impatient, anxious and underconfident. He's obsessive/compulsive, destined for a hard landing or at best a poor hourly rate of return for long, stress filled days.

Fatalistic Fred sometimes rationalises his poor trading results as being the will of God or a higher power that actually has a slightly more glorious destiny in wait for him. His fatalistic approach doesn't permit him to ask any hard questions. He doesn't take responsibility for himself and he doesn't want to. He deludes himself into thinking he has learned to follow the market. His pseudo humility masks a frightened ego afraid of hard work.

Thrill seeker Phil is an adrenaline junkie who looks to the action of the market to fill a void in his life he dare not look at. He will trade bigger size than his account warrants and relish the addictive rush that accompanies this. Perhaps the market is his Mistress who always gives him what he needs .He probably doesn't have much of a life outside trading.

Get even Steven brings a crowd of unresolved grudges to the market. He gets hurt and seeks retribution, believes in Old Testament justice. He can't/won't admit defeat, he clings so tenaciously to his sense of personal woundedness. He makes a reasonably quick, undignified exit from the market and adds it to the long list of things that have betrayed him.

Kamikaze Kevin takes huge risks as a way of defining himself in the mould of the hero he considers himself to be. A double or quits swashbuckling romantic, he can't be troubled to practice the pragmatism that may ensure his trading survival. The man/boy who refuses to be tamed, he is assisted by the market in his quest for a spectacular wipeout.

Paralysed Pete can't get into good trades or out of bad ones. He sees plenty of good opportunities but can't pull the trigger. Frozen, overwhelmed by doubt and a sense of his worthlessness he hasn't made the big decisions about what he really wants from his life. Makes himself feel ok by rationalising that he has learned to be cautious .The market slowly grinds him down and spits him out in little pieces.

Histrionic Harry is the control freaks alter ego. When he is forced to relinquish his tight grip because? trading his plan? kickstarts a turbulence he is completely unprepared for he becomes bewildered and throws tantrums.

Cursing his misfortune, he sulks off. He returns until his quest for vindication becomes too expensive.

Perhaps some of these sub personalities are recognisable to you. Perhaps not. I ,myself, became unhappily familiar with most of the above on my own learning curve, gradually accepting the painful truth that their respective modus operandi did bring payoffs but not in the financial sense I had hoped for. I began to understand some of the errors of my trading friends in this light. One guy, let's call him Jeff, nurtured on the easy success of the turrn of the century runaway bull, became more and more of a Kamikaze Kevin as the bull withdrew its horns. He finally came to ground courtesy of some very stubbornly held, long positions in a couple of former tech darlings, Baltimore and Dialog. He'd borrowed to fund his margin and suddenly was looking at a 60k loss and a crushing, almost fatal blow to his self belief.

In response to the imprecations and admonishments of his wife he finally gave up trading, remortgaged his house and retired to lick his wounds. You could almost hear the thud as he threw in the towel. He didn't trade for two years, reflecting all the while on his previous [and apparently uncharacteristic] misdemeanours. He started again with a small pot, only 2k,and over two years earned his spurs by garnering this into 20k and is now a consistently net profitable trader on the up. What he understood, amongst other things ,is that trading is a game that is won or lost inside one's own mind. Ultimately it is about studying oneself rather than the markets.

Many trading errors are ascribed to that all purpose baddie "the ego". I always chuckle when I read trading books that tell you to check your ego at the door. Oh yeah. If only it was that easy. Well it ain't. The ego is a multifaceted entity that reserves its best performances for the times it can do the most damage.

It can camouflage and subdue itself and maintain a low profile until it is provoked into action whereupon it will demand instant gratification and brook no arguments in its quest for pre-dominance. The ego cannot be crushed, dismissed or shut away. It needs to be acknowledged and befriended, brought into your toolkit as a valuable ally. Take charge of it, feed it elsewhere in your life and your trading will improve.

It seems that my ego is at its most insistent and niggling whenever I am sitting on a winner . It craves satisfaction via the premature snatching of profit . Ways I have found of dealing with it centre around bringing it into perspective and simultaneously seeking objectivity. I have two chairs in my office. One is permanently sited away from my desk so that should I feel the need I can go and sit in it and, if you like, tell the temporarily stuck trader what he must do from an objective place . Of course, this ability to be detached becomes internalised after a while and there is less need for the musical chairs routine but it is crucial to know that you have a voice of clear, sensible objectivity inside that you can trust to take the hard, but right, decisions. A friend of mine plays a tape that he himself has recorded that merely repeats either I, Doug, run my winners or I, Doug, cut my losses. Others I know try to reframe their actions so as to con the poor old ego as in for example pretending they are trading properly and responsibly with someone elses dosh or pretending they are holding a loser instead of a winner and then following the ego's preferred strategy of holding that loser.

It is also probably the dastardly big E that makes us deny what we see on our screens in favour of what we think or expect. So much about trading involves self discipline and as you become more familiar with the inner urges that require that discipline so your trading improves.

Keeping a daily trading journal allows you to play "Big Brother" with your ego. You can spot the areas of self sabotage as they jump off the page at you day by day.

Another useful procedure is to draw a chart of your own equity curve on a daily basis in your preferred visual format. This can illustrate the steadiness or otherwise of your hopefully upward momentum and alert you of potential trouble. If , for example, you like to trade a bit of spiky action then you must be on your guard in case you replicate this on your own equity chart. If you live by the spike then make sure you don't die by it. Know when you are due for some consolidation or sideways movement!

In conclusion, you've got to know what you're up against and realise and accept that much of this is inside your own head/heart/mind. Understand yourself and gradually align your perspective with that of the market's and the veils begin to fall away from your eyes.

What is vital to understand is that the market, by nature, is a self cleansing mechanism where few survive and prosper. Those that do need to be clear of the psychological baggage that requires resolution elsewhere in their lives. Bring your "issues" to the market at your peril. It will cost you dearly. A key ingredient in the recipe of regular returns is knowing when not to trade, being able to identify in yourself when you are at less than optimum and at these times sit on the bench and enjoy the spectacle free. Standing aside is a valid position. Save your strength and fire for when you need it. We need as many edges as possible to achieve consistent success- rigorous discipline, technical understanding ,adequate finance, time and space but it is probably through the development of self knowledge that the independent trader finds his best shot.
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