Saturday, July 30, 2016

Three Questions to Ask About Your Trading Psychology

A little while ago, I wrote on the topic of three questions to ask about any market.  That post became far and away the most popular post in TraderFeed's 10+ years online.  That was followed by a post on three questions to ask about your trading.  All too often, we turn to psychology for answers when the stark reality is that our distress and frustration are caused by poor trading practices.  

In this final post in the series, we'll take a look at three questions to ask about yourself and your capacity for peak performance.  How we manage life outside of trading plays a central role in how we perform as traders.  Think of it this way:  all of life is practice for performance.  Our approaches to life's challenges inevitably shape our approaches to the challenges of markets.  How we handle risk and opportunity in life impact our handling of losses and gains in markets--and the reverse is true.  Successful people build successful habit patterns, which means that personal life and performance become mutually reinforcing.

With that in mind, here are three questions to ask about your trading psychology:

1)  Am I living a goal-focused life? - There is no extraordinary achievement of a lifetime that does not result from a succession of extraordinarily productive and successive days.  Big achievements are the culmination of small, daily achievements.  Getting through day by day cannot lead to standout performance month by month.  Successful people push the envelope on a daily and weekly basis, expanding their comfort zones.  That fuels sustained effort over longer time periods.  The goal-focused life is a life based on learning, growing, and developing.  Both stasis and effort can become habit patterns.  Immersion in routine is a great formula for routine performance.  Greatness lies just beyond routine, beyond our comfort zones.  Small wins--the achievement of small goals--fuels the internal sense of winning, and that fuels much larger wins.

2)  Am I leading a meaningful and fulfilling life? - Two of the most important dimensions of emotional well-being are happiness (doing things that bring joy to your life) and satisfaction (doing things that are meaningful and deeply rewarding).  When we experience meaning and fulfillment outside of trading, we are best able to weather the ups and down of profits and losses.  We're also most likely to be in an energized psychological state that fuels our focus and persistence toward goals.  When we lack meaning and fulfillment outside of markets, losses on trades begin to feel like losing in life.  That can be extraordinarily disruptive.  When we lack well-being in the rest of life, too often we try to manufacture it in trading.  That leads to overtrading, where we place our capital at risk more for psychological reasons than logical ones.  Look at your relationships; look at your activities and interests outside of markets.  If you would lack a full life if you could not trade, you will be vulnerable in your trading.

3)  Am I leading an energized life? - We are physical beings, not just psychological ones.  The state of our mind is intimately connected to our physical state.  If our bodies are tense or drained, we will find it difficult to be calm and focused.  Meditation and yoga are methods of using physical activity and breath control to achieve new cognitive and emotional states.  Aerobic exercise yields significant gains in emotional well being and stress management.  When we are physically energized, we are most likely to be inquisitive, creative, and willing to push our envelopes.  When we are operating on a partial battery charge, we get through daily activities and never move beyond the routine.  Note that one way to lead an energized life is to lead a meaningful one, making the most of your spiritual beliefs, values, and relationships.  All of life, from how we eat and sleep to how we spend our free time and who we spend time with, either gives energy or drains it.  Successful people are remarkably successful and staying plugged in and recharged in all areas of life.

A good start for working on your trading psychology would be to keep a personal scorecard that looks at these three areas daily:  Am I goal-focused?  Am I doing things that are meaningful?  Am I staying energized?  We can write in journals all day long.  Unless we're actually working on the areas in life that are significant, we're unlikely to make and sustain positive changes in life--and in performance.

Further Reading:  The Mia Principle