Wednesday, May 07, 2008

Ten Core Ideas of Trading Psychology

1) We are most likely to behave in inhibited or impulsive ways, violating trading rules and plans, when we perceive events to be threatening;

2) What we perceive to be threatening is a joint function of events themselves and how we think about those events;

3) A key to gaining control over trading and maintaining consistency is to be able to reduce the threat associated with market events and process adverse outcomes in normal, routine ways;

4) We can reduce the threat associated with adverse market events through proper money management (position sizing) and through proper risk management (limits on losses per position);

5) We can reduce the threat associated with adverse market events by training ourselves to respond calmly to adverse outcomes (exposure methods) and by restructuring how we think about those outcomes (cognitive methods);

6) Optimal skill development in trading will occur in non-threatening environments in which learners can sustain concentration, optimism, and motivation;

7) A proper mindset is therefore necessary to the development of trading skills, but does not substitute for such development;

8) The cultivation of trading expertise is a function of the amount of time and effort devoted to learning and the proper structuring of that time and effort;

9) Proper structuring of learning involves the setting of specific, doable, cumulative goals and the provision of rapid feedback and correction regarding the achievement of those goals;

10) Practice does not make perfect in trading or anything else; perfect practice makes perfect. Training must gradually build competencies and correct deficiencies in a manner that sustains a positive mindset and optimal concentration and motivation.


Series of Posts on Becoming Your Own Trading Coach

Programming Our Own Experience


The Financial Philosopher said...

Dr. Brett:

Your urging of "perfect practice" is wise. I believe, in general, the business world, especially the financial industry, is ridden with the disease of the "knowing-doing gap."

We are taught in schools to "talk smart" but rarely our knowledge is put into practice. There is a great difference between ideas and implementation, the latter of which is the greatest in importance but the least in application.

Thank-you for leading the cause of closing the "knowing-doing gap."

"But this is that which will indeed dignify and exalt knowledge, if contemplation and action may be more nearly and straitly conjoined and united together than they have been…" ~ Francis Bacon, Advancement of Learning

David said...

These apply to fundamental investors as well, just with a longer time horizon. Many pros could stand to hear these. Good post.

Neil said...

Dr Brett,
today good example of why I ignore money flows, they have minimal predictive

flows had been into tech and financials I believe past few days

just in time for the correction as the big boys sold those sectors today

maybe i am wrong, imho

Soleil said...

Well said, Dr. Brett. I made a similar point to Dr. No. today.