So often in my meetings with active (intraday) traders, I hear the phrase "in the heat of the battle." Usually what follows that phrase is a description of some trading mistake: trading too aggressively, ignoring risk guidelines, deviating from planned ideas, etc.
The problem is not that traders make these mistakes; we all do at times. Rather, the problem is that the mistakes become compounded "in the heat of the battle". Once traders are caught up in that heat, they lose the ability to recognize what is going wrong. They also lose their perspectives on markets.
Heating systems in homes have thermostats that control temperature. When the room becomes too cool, heat kicks on. When the room becomes warm, the heat turns off. Many active traders lack an emotional thermostat. They don't know their temperatures. They are like heating systems that get the room hotter and hotter, until the house is unbearable.
One of the core ideas from The Psychology of Trading--and perhaps one of the most important ideas I've ever put forward--is that many of the problems that affect traders are state-specific. How traders think and behave is relative to the states of mind and body that they are experiencing at the time. The reason that coaching (and self-coaching) often doesn't work is that we are in one state of mind and body when we are analyzing and working on our problems and in a completely different state when we are experiencing the triggers that set off those problems.
This explains the common experience that traders have when they look back on their day's performance and wonder, in amazement, how they could have made such rookie mistakes. In a normal frame of mind, they wouldn't have acted so rashly. In "the heat of the battle", they become a different person; they process information differently.
Few challenges are more important to active traders than the ability to develop an emotional thermostat. But talking with a coach, writing in a journal, or vowing to oneself that next time will be different won't touch the problem. As my earlier book stressed, you can only solve the problem by entering the state that is specific to that problem and then reprogramming your patterns of thought and behavior.
My upcoming book will have much to say on this topic, with specific exercises. In my next post in this series, I'll outline a specific strategy that has helped me and many of the traders I've worked with.