Working on mastering the psychology of trading is different for beginning/developing traders and for experienced traders. I have worked with rookies at proprietary trading firms, and I have worked with experienced money managers who guide large teams. The psychological challenges faced by the two groups are entirely different. What you need to do to master your trading psychology very much depends upon where you are at in your learning curve.
Here is an analogy that might clarify things. Freud’s revolutionary contribution to psychology can be found in his dictum, “Where id was, there ego shall be”. The id represents our basic, primal instincts: our flight and fight tendencies. When we are triggered by past, unresolved conflicts, we tend to regress to our instinctual mode. The purpose of psychotherapy is to help a person process their issues and feelings in the medium of a helping relationship. This enables them to gain perspective on what is truly a threat in the present versus a leftover response from our past. The heart of Freud’s therapy is that we first confront and resolve our conflicts in the here and now context of the helping relationship. Once we can begin to constructively handle our issues within therapy, we’re ready to tackle them in our day to day lives. Therapy thus replaces the id with the ego: we replace our flight/fight triggers with rational thought and planning.
The field that has come to be known as positive psychology takes Freud’s work to a new direction. Instead of working on resolving past conflicts and painful repressed experiences, positive psychology has us identifying and building our unique, distinctive strengths. For example, I might experience a loss of motivation at work and my performance might suffer. A traditional therapist might have me explore conflicts about my work and with my colleagues. Resolving hidden problems in the workplace could help me regain my motivation. The therapist addressing my situation from the perspective of positive psychology might help me understand the positives that I need in my life and that might be missing on the job. For example, if one of my basic strengths is intellectual curiosity, I might need to address my situation by changing how I interact with my team at work–or perhaps I need to find different work.
So now we can appreciate the difference in psychology between beginning and advanced traders. Beginning traders, unaccustomed to ever-changing, volatile markets, find themselves coping with their flight/fight stress responses and the ways in which those color trading decisions. Experienced traders, on the other hand, find that their greatest challenges occur when they do not adequately cultivate and utilize their strengths. For example, where the rookie might respond to volatile action in a stock with decisions based on FOMO, the experienced trader might be challenged by finding the best risk/reward expressions of their trade ideas.
For the experienced trader, a key to trading success is knowing what speaks to you and what you’re truly good at. You cannot play to your strengths if you aren’t intimately familiar with what those strengths are. Working on correcting weaknesses only gets you so far. Eventually, if you’re going to progress from competency to expertise, you need to master your own positive psychology.
An obstacle I’ve faced in my own trading is that I simply become bored with following markets and I stop trading. Creativity and learning are my two greatest strengths, and I lose motivation when I’m not discovering and doing new things. The common wisdom of trading psychologists is to turn everything you do into reliable, repeatable processes. That is precisely what bores me. If trading begins to feel like an assembly line, I start to feel trapped in a rote, routine job. To keep trading fresh and exciting, I need to do the same thing that I do in my marriage and in my personal life: find new challenges and new opportunities and always, always devote some portion of my time to innovation.
I recently wrote on the topic of finding different sources of trading edge. I also wrote on the topic of developing resilience as a trader. The two topics are intimately connected–for me, and for many people I work with. What keeps us going during the inevitable drawdowns is that we’re continually learning, continually discovering, continually moving forward. Doing new things keeps us psychologically fresh.
Earlier today, I began analyzing a new dataset. I looked at market breadth broken down sector by sector. Interestingly, over the last few years, when breadth strength in the consumer staples (XLP) sector has greatly exceeded breadth strength among the consumer discretionary stocks (XLY), the next 10 to 20-day returns in the overall market (SPY) have been significantly above average. This finding has set off a flurry of queries into various sector rotations and how those might act as meaningful measures of market sentiment. New data, new patterns, new trading opportunities, new motivation and drive, new games to play and win.
We master the positive psychology of trading by drawing consistently upon our own positives and expanding those. I believe this is the single greatest frontier in the field of trading psychology. More to come!
Further Reading:
Should High Achieving Traders Seek a Balanced Life?
Therapies for the Mentally Well: Proven Techniques for Building Your Positive Psychology
Radical Renewal: Tools for Leading a Meaningful Life
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