Saturday, May 23, 2009

Building the Internal Observer

Perhaps the most important psychological challenge facing active traders is sustaining the capacity for self-observation. When traders are trading well, they are focused on markets. When they are not trading well, they find themselves immersed in distractions. In both cases, they are not observing their performances and what they are doing right and wrong. That is why it is important--during and after the trading day--to create procedures that facilitate one's "internal observer": journaling, meeting with coaches and mentors, reviews of performance, etc.

Much of my recent book, The Daily Trading Coach, consists of specific behavioral, cognitive, and psychodynamic exercises to help us become better self-observers. These are also techniques that allow us to interrupt problem patterns, so that we can avoid repeating past mistakes.

No techniques can be effective, however, unless there is a willingness--and a recognition of the need for--time away from the trading screen. Many traders talk themselves into the assumption that any time away from trading will create missed opportunities. That keeps them locked in their old patterns.

I see time away from the screen as a kind of insurance policy: you *might* miss a move occasionally, but that's the premium you pay to insure that you'll be in the right mode when you are trading. You don't complain if you never have an opportunity to file claims against your homeowner's insurance policy. It's there for peace of mind and security.

There's a similar peace and security that comes from the self knowledge and self discipline--the internalized sense of control--that comes from ongoing self-observation. It's not enough to work on markets; your work on yourself is what gives you control over exploiting your edge with consistency.