Saturday, January 30, 2016

The State of Our States: Trading With Self-Awareness

The recent post on burnout emphasized an important--but often unrecognized--point: We derive energy not just from the state we're in, but from shifts in our physical, emotional, and cognitive states.  Too much exercise; too much concentration; too much rest and we become fatigued: we lose energy.  Variety in our states enables us to be serious and to have fun, to be active and to have moments of quiescence.  When life becomes too routine, we paint ourselves into a psychological corner in which we occupy only a fraction of the healthy, vital states available to us.

Why is this important to trading?  

What we know--and therefore what we can act upon--is in part a function of our state of mind.  We recall something important in one mindstate; we become distracted and forget it in another mode.  We study diligently for a test--and then can forget it all if we become test-anxious.  We know our trading rules and are committed to them when we're focused--and then we abandon all discipline when frustration strikes.

So much of trading boils down to pattern recognition.  We recognize how short-term price behavior fits into a longer-term picture; we see how fundamentals line up with price action; we observe how volume behaves around certain price levels.  If what we know is in part a function of the state we're in, an essential challenge of trading psychology is to sustain the states that are optimal for pattern recognition.  Are those energized states, or are they quiet and focused ones?  Are they happy, positive states, or are they ones in which we dampen emotion?  Are they states in which we're actively engaged with people, or are they ones in which we sustain an inward focus?

The fact of the matter is that each of us processes information differently and so best apprehends patterns in different ways.  The introverted and analytical person likely requires different states for information processing than the extroverted and intuitive person.  Only our successful life experience--and especially our successful trading--can tell us how we best perceive and act upon patterns.

We can practice race car driving for years, but we'll lose on the race track if our car is badly out of tune.  The problem with many traders is that they are out of tune: they fail to sustain the cognitive, emotional, and physical states associated with their unique success.  There is more to market knowledge than self knowledge, but without self knowledge we cannot make use of even the best market insights.  Self-awareness facilitates market awareness.

Further Reading:  Burnout as the Absence of Emotional Variability