Wednesday, February 22, 2006

A Note on Trading Psychology

I just finished an email to someone at a trading firm in which I tried to summarize the essence of trading psychology in a single post. Here's the gist of what I had to say:

Under conditions of perceived risk and uncertainty (after all, what we react to is what we perceive) we no longer process information in our accustomed ways. At a brain level, regional cerebral blood flow shifts from the frontal cortex (our executive center) to motor centers that facilitate those famous flight or fight responses. This denies us access to our usual good planning, judgment, and decision making. As a result, we can end up making decisions that we look back upon in amazement: "What was I thinking?!" The answer, of course, is that we *weren't* thinking at the time. We were reacting: managing our perceptions of threat rather than the objective trades in front of us. Effective brief therapy for traders enables them to reprocess perceptions of risk and uncertainty, so that the blood shifts--and the associated state shifts that generate anxiety, frustration, and impulsive behavior--cannot occur.

My book The Psychology of Trading was an effort to explain this process and provide basic tools and techniques for traders to use under conditions of heightened risk and uncertainty. In the new book I'm currently writing, I will provide actual "therapy manuals" to help traders become their own therapists.

Anticipating market movements from historical studies provides a valuable edge in trading, but any edge is worthless if our states of mind prevent us from acting upon the information effectively. My hope is that the articles on my personal site, as well as the book, provide traders with some help on that front.