Thursday, September 25, 2014

A Preview of Trading Psychology 2.0: From Best Practices to Best Processes

One of the great disappointments I encounter when I read writings on the topic of trading psychology is that they invariably touch upon the same themes:  discipline, controlling emotions, etc.  Having worked with traders and portfolio managers for over a decade now, there is so much more to the psychology of trading than "sticking to your process" that I decided I had to write a book about what I was experiencing but wasn't reading.  The title reflects that interest:  Trading Psychology 2.0:  From Best Practices to Best Processes.

I think Ted Hayes hit on something important in his recent interview.  He pointed out that the personality traits relevant to success among early career traders are different from those that generate success for experienced ones.  Perhaps so much writing concerns discipline and emotional control, because those are the dominant concerns of the new traders who buy the books, haunt the websites, and seek the help.

At several of the firms where I work, no one even gets an interview unless they have years of experience managing significant capital with a solid track record of profitability and risk management.  So by the time those traders join the firm, discipline and emotional control are not screaming priorities.  Instead, they deal with other challenges.  In Trading Psychology 2.0, I refer to these challenges by A-B-C:

*  Adapting to changing markets
*  Building on strengths
*  Creating creativity

In adapting to different markets by leveraging their strengths and generating new ideas, successful market participants are not so different from successful businesses in fast-changing industries, such as technology or social media.  When markets change from year to year, stasis is a formula for failure.  The successful trader, like the successful tech firm, must constantly innovate.  Moreover, once traders generate those innovations, they must turn best practices--what they do that is successful--and turn them into robust, best processes.

I think this is very, very important:  What makes a trader successful is discipline:  doing the right thing with fidelity.  What keeps a trader successful is innovation:  doing new things and turning them into disciplines.  Conscientiousness makes for success, but it is openness that makes for adaptation.  Trading psychology as a field has done a fine job of articulating the importance of discipline.  My hope is that the new book will broaden the discussion to include a research-informed look at mastering change and innovation.

Further Reading:  Being Your Own Trading Coach