Wednesday, June 17, 2020

Your Self-Talk Shapes Your Trading Psychology

Self-talk is our ongoing processing of life events.  Most often, this processing reflects whether events are good or bad for us, what we would like to happen, etc.  This is why I emphasize in the Radical Renewal book that self-talk is our ego.  To the extent that our egos intrude upon our trading, we cannot be fully market focused.  One way of dealing with this problem is meditation, which quiets self-talk and takes us out of ego mode. Another way of dealing with disruptive self-talk is to learn to step back from negative processing and interrupt its damaging effects, as described in the recent Three Minute Trading Coach video.

The meditation approach attempts to exit us from ego.  The cognitive approach keeps us in ego mode, but shifts the focus from negative to constructive.  From the cognitive perspective, the problem is not self-talk, but disruptive self-talk.  If we talk to ourselves in constructive, encouraging ways, we can maintain a positive mindset--and that is associated with superior learning and performance.  The key question is whether our self-talk is helpful to our subsequent processing of market information or whether it distorts our plans and intentions.  

One of my favorite forms of self-talk following a losing trade or missed opportunity is, "What can I learn from this?"  I don't continue trading until I have a concrete takeaway either in terms of the market or in terms of how I'm trading the market.  For example, I recently shorted the market in early morning trade and then watched as the market initially went my way and then rebounded sharply on higher-than-expected TICK readings.  I immediately said to myself that the buying support was significant and that I should be alert for a pullback to a higher low.  Sure enough, that scenario materialized and I was able to take the long side and profit from a move to overnight highs.

This form of self-talk is more about processing what *is* happening, rather than what is happening to me and my P/L.  Talking what is happening out loud is a kind of real-time journaling.  We talk it, we hear it, we internalize it.  A great goal for traders is to become better and better at constructive self-talk.