Friday, September 13, 2019

Key Perspectives in Trading Psychology - 2: How We Can Process Market Information More Effectively

In the first post in this series, we took a look at our two distinct information processing systems and how those interact to either assist or interfere with our trading.  Drawing on the recent blog book that I released, Radical Renewal, now let's take a look at two specific strategies that can help us process market information more effectively:

1)  Strategies that build our joy and happiness - Fascinating research from Dr. Barbara Fredrickson suggests that psychological well-being (happiness, fulfillment, energy, closeness to others) not only makes us more productive and physically healthier; it actually broadens our field of vision.  When we are stressed, it is as if our perception becomes tunnel-visioned.  Under conditions of well-being, we broaden our vision and perceive more at the periphery.  A simple example of this is, when positions move against us, we can become fixed on screens, hanging on every tick.  When we experience well-being, we can sit back and more easily explore various pieces of information to detect patterns.  A different way of stating this is that, when we have greater well-being, we have greater access to intuition and our capacities for pattern recognition.  What we do to build our well-being (inside and outside of trading) helps us generate better trade ideas.  A great exercise is to review your trading journal entries and identify the ratio of positive, happy, fulfilled sentences to upset, frustrated, negative sentences.  None of us like to lose, but it's the trader who can extract joy from learning from losses that is most likely to rebound.

2)  Strategies that build our quiet - As the first post emphasized, when we get into the fight or flight stress mode, our bodies speed up.  When we eliminate our inner chatter, we are most likely to achieve our flow state and absorb the patterns that markets present.  This is why meditation has been effective as a way of accessing those pattern recognition skills and achieving greater clarity of perception.  Research has found that the mindfulness created by meditation is helpful in treating such problems as anxiety and depression.  Similarly, meditation can help traders exit their self-relevant/fight and flight processing and become more aware of what is happening around them.  Research also finds that meditation can also help us reduce stress, improve focus, and increase the quality of our sleep.  Other strategies, including physical exercise, yoga, and prayer, can similarly contribute to a clearing of our minds and improved energy and focus.

In sum, we can see that the traditional advice that traders should control their emotions and be more disciplined is limited.  What we want is a set of tools--and indeed a lifestyle--that allow us to better access our capacities for insight and understanding.  By increasing our focus and broadening our perception, we can become better idea generators and better equipped to detect meaningful changes in market behavior.

Further Reading: