Saturday, July 18, 2009

Psicología del Trading/Trading Psychology: The Perils of a Divided Mind

Many thanks to the Serenity Markets site for the Spanish language translation of this important post outlining the role of emotions and intuition in trading decisions.

A while back I met with a trader who had been losing money consistently. He was frustrated and spent much of his time voicing his frustration. As I watched him trade, I had the distinct feeling that I was interacting with someone who was tone deaf. Although I knew he had experienced success in the past, it seemed as though he had no "feel" for market action.

He talked about chart patterns, indicator readings, and the movements of various stock groups, and everything he said made sense. When it came to assembling those observations into insights into likely market movement, however, he was lost. He could analyze well, but there was no creative synthesis. He was like a physician who observed all the symptoms of a patient and ran all the right tests and could not diagnose the problem.

A key moment occurred later when I came into his office after he had experienced a few winning trades. Gone was the frustration and negative self-talk. To my amazement, he calmly explained what had been going on in his market and outlined how he planned to trade his view. He made significant money that day.

It is difficult to appreciate that much of what we know is accessible only when we are in a proper mind state. We see that among test takers: all their studying flies out the window when anxiety strikes. "I traded like a rookie today," one trader recently told me. What he really meant is that he could not access knowledge and skills that he did indeed possess.

Often, the culprit is self-focused attention. When we are thinking about our P/L, our recent losses, our need to pay the bills, our need to make money back, our trading slump, etc., the result is that we are no longer immersed in the "doing" of trading. Like the public speaker who forgets her well-rehearsed lines when she worries too much about audience reaction, we become "stupid" when we are in a divided mind state.

Still, if we're to coach ourselves successfully, we *need* to be self-aware and self-focused. How do we stay market-immersed and mindful of self at the same time?

This post suggests an answer to the dilemma: by creating time for reflection outside of trading--before and after market sessions and during breaks in the day--we can keep ourselves in a mindset conducive to immersion and focused attention. During that time that we're working on ourselves, there are many exercises that can keep us "in the zone"; indeed, I wrote the trading coach book in short, focused lessons specifically to aid traders in the heat of market action.

Trading success, I believe, involves an alternation of two modes: being market-focused and being self-focused. If we fail to engage in the latter in a planned, purposeful manner, it will intrude into the market focus time and disrupt performance. Creative synthesis in any endeavor occurs when we are immersed in what we are doing. Paraphrasing Lincoln: A mind divided against itself cannot stand."