Wednesday, April 28, 2010

Core Ideas in Trading Psychology: Trading as a Performance Activity

Prior Posts in This Series: Introduction to Trading Psychology

There are three meta-themes that have dominated the TraderFeed blog and my three books on trading psychology. The first is that trading is a performance activity; the second is that personal and professional development is a function of building on strengths, not just addressing weaknesses; the third is that markets exhibit state shifts and repetitive patterns that mirror those we observe in ourselves. This series of posts will elaborate on the three themes; this post will focus on the performance aspects of trading.

What accounts for trading success? Is it having setups and trading systems that are better than those of others? Is it having an iron self-discipline? Is it a function of personality or inborn talent?

There are many possible explanations for why people succeed in markets. The idea of trading as a performance discipline is that the process of mastering markets is similar to the process of mastering any performance domain, such as athletics or public speaking. We begin with certain talents such as the abilities to process information quickly and synthesize large amounts of data, the capacity to sustain attention, and personality traits that enable us to keep a relatively steady mindset in the face of uncertainty.

These talents, and the interests that develop early in life, help guide us toward activities that we find to be rewarding and fulfilling. As we pour ourselves into those activities, we develop skills that are specific to the performance field. Such skill development is often facilitated by work with coaches and teachers, who structure practice sessions that hone particular skills. Such deliberate practice is what turns talent into actual performance, as we progress from being novices to developing competence and eventually expertise.

This developmental course is typically a lengthy one and involves numerous setbacks as well as milestones. What sustains the growth process is a very strong interest in the performance field and a learning process that nurtures continued motivation and a sense of growing mastery. Talent and interest will not turn into expertise if they are not channeled into ongoing learning, review of performance, and efforts at improvement.

This is why traders require training--like a physician or Olympic athlete--not just education. This is also why simulated trading, the practice of specific trading skills prior to risking capital, is an essential step on the way toward learning to manage real money and handle real risk. It is the deep, intensive exposure to markets over time that enables traders to internalize the market's recurring patterns and develop a feel for trading.

Many traders fail to reach a high level of development because they change what they're doing--run from one approach to another--long before they could ever build and internalize core trading skills. Many others fall short of their potential because their development is relatively unstructured, with vague goals and few concerted efforts to learn from experience.

Think of how an Olympic athlete develops from childhood to the point of elite competition and think of how they train for an Olympic event: that will provide a useful template for how traders can reach similar elite levels of performance. Psychology is necessary for elite performance; it is not sufficient.

Much more detail on these themes can be found in my trading performance book. See also the posts on Constancy of Purpose, Devotion to Development, Resilience, Enhancement of Perception, and Multiplier Effects. Also relevant is Finding Your Niche in Life and Trading.