Tuesday, September 02, 2014

Why 90% of the Mental Game is Your Trading

As I mentioned some months ago, mad props to anyone who can duplicate dubstep with regular instruments, especially with a bass guitar that plays a magnetic field theramin-style.  One way to stay creative is to stay in touch with people who are creative--across different fields.  

I was recently contemplating whether markets would bring us scary pullbacks or spritely rallies when an email came from a group interested in a webinar.  They were soliciting my participation, according to my contact, because--as we all know--90% of trading success is the mental game.  The group would be open to any topic I chose, he explained.

Until, of course, I chose the topic of how 90% of the mental game is skilled trading.

Now why is it that no one proposes to a brain surgeon that 90% of what he or she does is a mental game?  And if 90% of performance is a mental game, why do Olympic athletes spend 90% of their time on skill development?  

Is making an instrumental version of Skrillex the result of mastery of a mental game?  If you control your emotions and stick to a plan, will you generate music like they do?


But 90% of the mental game being trading well; there's a bass guitar worthy of a Hot Hand!

So here are three trading practices that reliably lead to emotional disruption:

1)  Poor risk management - Oversized positions; holding positions that are more correlated than you realize; failing to clearly define and trade a risk/reward relationship for each trade--all of these create outsized losses, which in turn generate outsized emotional responses and subsequent potential for disruption of trading.

2)  Failure to plan - Trading without an explicit process for clearly formulating an opportunity set; trading ideas and patterns that are untested and unproven:  these generate loss and frustration, which then color thought and action going forward.

3)  Failure to adapt - Markets become more volatile but trading sizes don't change; the trade becomes choppier but trading continues to pursue momentum:  doing the same thing when the environment changes is a sure way to become confused, then frustrated, then reactive.

Show me traders troubled by emotion and nine times out of ten I'll show you traders who are taking improper risk, who are underprepared, and/or who have been trading static methods in dynamic markets.  What those traders need is not counseling, coaching, or therapy.  What they need is to trade more intelligently.  If a chess player takes imprudent and uninformed risks early in a game, does not prepare for an opponent, or plays the same way regardless of the opponent's strategy, we would not attribute his or her losses to a failure of any "mental game."  

True, psychological variables become relevant once skills are honed.  Then mindset can help deploy them consistently.  But no amount of focus on the mental game can substitute for skill and preparation and the need for strategies that possess an objective edge in the marketplace.  Trading randomness with a positive attitude will make one a good loser, not a high performing winner.

That's the Scary Monster webinar no one wants to sponsor.  It's so much easier to believe the Nice Sprites that tell us we can all make money if we just have the right attitude.

Further Reading:  Ten Questions That Go Bump in the Night