Wednesday, September 13, 2006

Research in Sport Psychology: What It Means For Traders

Of all the performance fields, sports have stimulated the most research. A 2001 review of findings in sport psychology, for example, takes up well over 800 pages and 30 chapters and already it is being replaced with a 900+ page volume in 2007. When I began writing my book Enhancing Trader Performance, I realized that traders--and mentors of traders--knew little about this research, and yet many of its findings are directly relevant to trader development.

One of my favorite researchers in the sport psychology field is Janet Starkes in the Department of Kinesiology at McMaster University in Ontario. Her research summary in the 2001 Handbook of Sport Psychology is a particularly clear integration of work in the areas of sport and dance.

Here are a few conclusions from the chapter by Drs. Starkes, Helsen, and Jack and what they might mean for traders:

** "The finding that experts in a particular sport are better than novices, not merely at physical skills but also on the underlying perceptual, cognitive, and strategic components of sport, is robust in both laboratory and field research" (p. 175). In other words, when people become skilled, they literally learn to see things in new ways and think in new ways. It's not just a difference of hardware (having better memory, vision, or concentration); experts develop their own software: internal programs that enable them to recognize patterns and act upon them rapidly.

** "The primary importance of the "10-year rule" is that it seems to hold up regardless of the domain investigated. As such, it is one of the most robust findings in expertise research to date" (p. 175). The development of the "internal software" that enables batters to recognize pitches, soccer players to seize openings in the field, and traders to find setups on the fly requires a lengthy process of development in which experience becomes internalized to the point where it is second nature. Structured practice, sustained over time, is essential to success.

** "Understanding what practice is best and how practice should be carried out are even more important questions than how much" (p. 175). As sport psychologists say, it's not that practice makes perfect. Rather, it takes perfect practice to make perfect. Practice that is effective provides immediate feedback and correction to learners and structures tasks in a logical progression, with skills broken down into components for repeated drilling. Sitting in front of a screen and trading is not practice; sitting in front of a screen and drilling placing and managing orders in the book based on readings of order flow is.

** "Data from sport studies also indicate that those practice activities that require the greatest physical effort and mental concentration are ultimately the most enjoyable" (p. 175). This gets at the heart of what develops expertise. The expert performer, in trading as in sport, is born with certain talents and finds the exercise of these to be fulfilling and enjoyable. This sustains the developing performer through the lengthy, 10-year learning curve. The "flow" state described by Csikszentmihalyi is also a state of enhanced information processing. A key to training success is structuring learning to sustain the flow state: that is a major function of coaches.

** "Whether one examines wrestling, figure skating, karate, soccer, or field hockey, there is a montonic relationship between the amount of practice in which one has engaged throughout one's career, and one's eventual athletic success" (p. 186). The way I stated this in my book is that, in every performance field, expert performers spend more time practicing and honing skills than in actually utilizing them in formal competition. Rarely, however, is this the case among traders. Is it so surprising that--according to industry insiders--the average trader blows out of their account within seven months?

On my personal site and in this blog, I cover a range of ideas related to the psychology of traders and the psychology of markets. Few of these ideas, however, are as important as the ones above. Trading psychology can be so much more than endless discussions of controlling emotions, instilling discipline, and thinking positively. The best trading psychology is training, properly structured and informed by research.

There are some good online trading rooms out there. I recently met Andy Swan of Daytrade Team, and it looks as though they're educating traders about trading patterns in real time. I have nothing but positive things to say about Woodie and the CCI Club, which is an unusually supportive and informative real-time forum for learning trading. John Carter's Trade the Markets service comes highly recommended as a place to observe and learn trading in real time. I've known Linda Raschke for quite a few years now and can only offer the highest praise for her continuing online, real-time efforts to educate traders in both futures and equities arenas.

Those are great places to start your training. Eventually you'll need a trading gymnasium: a place to practice skills, obtain feedback, and develop your own expertise. I'm pleased to see that the Chicago Mercantile Exchange, in partnership with the Chicago Board of Trade and the New York Mercantile Exchange, is taking a leadership role in addressing this need. With that kind of institutional support, we may yet get to the point where the development of traders can reach the level of sophistication that we're seeing in sports.