Sunday, June 04, 2023

The Greatest Challenges of Trading Psychology - III: Mindset


In the first post of this series, we took a look at how one of the greatest challenges to our trading psychology comes from approaching the process of expertise development the wrong way, unwittingly creating stresses and trauma that impact our subsequent learning and trading.  The second post examined how we often view financial markets incorrectly, looking for our edge in trading without properly recognizing that these edges are continually changing.  Doing the same thing again and again in the name of discipline is a great way of getting run over--and damaging your mindset--when markets shift.  

In this post, we will explore how the wrong view of mindset leads traders to trade poorly and ultimately hurt their psychology.  Many traders seek an optimistic and even aggressive mindset in the desire to make meaningful money.  By emphasizing the outcome of trading, they ensure that their mindset will rise and fall with their P/L.  An important performance principle is that focusing on the outcome of performance typically gets in the way of performing.  Does a great painter, while creating a work of art, spend time thinking how much the painting will sell for or whether it will be displayed in a famous museum?  Does a surgeon, performing a procedure in the emergency room, dwell on how wonderful the outcome will be?  Positive self-talk may have its place in our psychology, but surely not in the middle of our performances.  For peak performance, we don't want an aggressive mindset, a positive mindset, or an excited mindset.  We want a focused mindset.

This doesn't mean that we eliminate all emotion from performance.  The flow state is one in which we are so absorbed in the doing of an activity that we lose our sense of time and our self awareness.  That is a pleasurable state in itself and a powerful motivator for those who love what they do.  It's in that flow state that we're most likely to be productive and achieve our best efforts.  Interestingly, the flow state is also our greatest source of creativity.  Quite literally, we see markets better when we are highly focused on what markets are doing.  Our self-talk takes us out of flow and often places us in an aroused, fight-or-fight mode in which narrows our perceptual frame.  It's when we're focused and in a state of emotional well-being that we're most likely to act on opportunity.

This is why a major theme of the Radical Renewal online book is that great trading comes from the soul and not from the ego.  When we are outcome-focused, we are ego-focused and that takes us out of the zone of the flow state.  The right trading mindset is absorbed in markets, opening us to the intuition of implicit learning.  It is not coincidence that my research has found that intellectual curiosity is a number one predictor of trading success.  The truly successful traders are motivated by the process of doing and learning, not just by the outcomes of trading.  When we value learning and growing, we can always extract reward from trading, even when profits aren't there.  

As Earl Nightingale points out above, we are always programming our minds.  What we focus upon, we become.  From that perspective, if there's nothing more important to you than profits and losses, you've already lost.

Further Reading: