The Most Important Skill in Trading Psychology

 

Coaching ourselves to trading success requires that we know our strengths and our vulnerabilities.  All of us have our triggers that are associated with the unresolved conflicts and unmet needs that we bring to trading--and to other areas of life.  Not as well recognized is that we also have positive triggers that cue us to activate our strengths.  If we don't know our positive triggers, we can't establish processes that cue our success and benefit from them.  If we can't anticipate our negative triggers, we can't intercept them before they do harm to our trading accounts.

The most important skill in trading psychology is self awareness.  If we are not mindfully self-aware, we operate on autopilot, miss opportunities to put our strengths to work, and expose ourselves to emotional triggers that can hurt us.  If we know our triggers and can actually anticipate them, we gain significant control over our trading.  

A common positive trigger is feeling in the flow of our trading, absorbed and operating in the zone.  That state of heightened focus is one that sets off our intuitive pattern recognition, allowing us to see opportunities unfolding in real time.

A common negative trigger is frustration.  When we undergo a loss and become angry and frustrated, the resulting fight/flight response leads us to trade reactively.  In that state, we cannot possibly see actual opportunity unfolding.

Taking periodic breaks during the trading day and assessing our degree of focus and frustration builds our skills at self awareness.  When we become increasingly able to identify our states in real time, we gain the option of guiding our trading actions accordingly.  If you know you're seeing the ball well, you can take a meaningful swing.  If you know you're agitated and not seeing the ball, you can step back, work on your focus, and preserve your capital.  That is huge.

At SMB Capital, a mantra is "One Good Trade".  Taken after Mike Bellafiore's book of that title, the mantra tells us to just focus on the next trade and what will make it a good one.  Notice how this is actually an exercise in self-awareness.  If we don't know what goes into a good trade--and what we need to avoid to prevent a trade from going bad--we can't recover from a loss (or build upon a gain) by making "one good trade".

Good traders know the market.  Great traders also know themselves.  

Market awareness + self awareness = consistent profitability.

Further Reading:

Strategies for Building Self Awareness

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How to Coach Yourself to Trading Success

 

Suppose we are all like Clark Kent:  an ordinary person on the outside with hidden superpowers and also a vulnerability to Kryptonite.  

Suppose you begin coaching yourself by looking, looking, looking through all your trades and all your life's successes to find your one superpower.

Suppose, in that search, you examine all your trades and all your losses to find your Kryptonite.

What if your path as a trader is to find your personal superpower and figure how it comes out in your trading?

What if your path as a trader is to find the Kryptonite that has created your life's greatest failures and figure out how that shows up in your trading?

The real enemy is viewing ourselves as average.  We are superheroes with super vulnerabilities.  Our path to success requires that we embrace both realities.  Then we can truly act as our own trading coaches.

Further Reading:

The Heroic Dimensions of Trading

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Overcoming Emotional Trading - Part Three: Eliminating Tilt Trading

 

In Part Two of this series, we took a look at the importance of focus and concentration in successful trading.  Indeed, if we are focused and "in the zone", there is no way that emotionality can disrupt our trading.  On the other hand, if we are caught up in P/L and the need to make money, every price movement will have the potential to be disruptive.  Going on tilt means that we become totally reactive in our trading rather than planned and proactive.  We act on fear, greed, and impulse and make decisions that we would never make if we were in our usual calm and focused state.  Tilt occurs when the needs we bring to trading dominate our need to understand and follow markets.  

Please review this post on a powerful technique for overcoming tilt trading.  The key to the success of this method is to train yourself to enter a state of mind and body that is incompatible with tilt.  This can be accomplished with breathing exercises, meditation, and biofeedback work.  It takes practice, but quickly pays off:  Once we can enter a calm, relaxed, focused state at will, then we can recognize in real time when we're starting to become emotional and quickly place ourselves in our focused zone.  The goal is not to eliminate emotion from trading, but to recognize it in real time and become able to shift gears when we need to.

As I noted in my talk with traders at SMB, it is the awareness of danger--the view that tilt is the enemy, not losing money on a particular trade--that allows surgeons and elite military troops to tackle dangerous missions and remove emotion from their work.  The key to eliminating tilt from our trading is to mentally rehearse situations of loss and frustration while we engage in exercises that keep us focused and slowed down.  As long as we're slowed down physically, we can't be worked up emotionally.  These exercises can be part of our daily preparation, where we reinforce the idea that losses in trading are normal and are not threats.  The real enemy is tilt and the loss of emotional control.  When we enter trading totally aware of the dangers of tilt with techniques that help us stay calm and focused, we're like the surgeon or soldier operating in a risky environment.  

A prepared mind never enters tilt.

Further Reading:

Training Your Focus

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Overcoming Emotional Trading - Part Two: Training Your Focus

 

So often, the problem with discipline in our trading is not an excess of emotion, but the relative absence of focus.  If we grow our capacity for focus, we activate the parts of our brains that are responsible for planning and problem solving--not the parts that respond to threat with flight or fight.  

In the first post in this series, we saw that utilizing mental rehearsal with respect to position management--our stops and even our take-profit levels--helps us take the emotion out of decision making.  One of the reasons for this is that frequent and prolonged mental rehearsal actually serves as training for focus and concentration.  When we review performance and rehearse our trading plans, we are creating an associative link between our state of focus and the execution of our processes.  Doing this again and again strengthens this link, so that when we face decisions in real time, we can activate our intensified concentration and bring to mind all the things we've been rehearsing in that focused state.

Training our focus helps us make decisions in the heat of battle.  Rehearsing our plans in the state of intensified focus cements them, so that they become automatic and not laden with emotion.

As I recently shared, brain wave biofeedback (neurofeedback) is an effective tool for training our focus.  When we get real time feedback about our state of concentration, we can figure out how to enter and stay "in the zone".  The biofeedback platform I use, Muse, allows users to engage in video games that give them better scores when they stay more focused.  Playing the games repeatedly and moving up to more and more challenging levels turns the biofeedback sessions into a kind of mind gym, where we strengthen our concentration and extend it for longer and longer times.  Working with a teacher to learn yoga or meditation can serve a very similar purpose.

What I find particularly helpful is mentally rehearsing stressful situations in trading *while* tracking my focus in the biofeedback.  Going through scenarios again and again and training ourselves to stay focused literally trains mind and body to take emotion out of decision making.  We are not only exercising our capacity for concentration, but our specific ability to stay focused in stressful circumstances.

We can grow our heads.  When we stay switched on, it's amazing how emotions switch off.

Further Reading:

Three Dimensions of Trading Focus

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Overcoming Emotional Trading - Part One: Mental Rehearsal and Stops

 

Unless they are trading very specialized strategies, most traders do not win on significantly more than half of their trades.  What makes them profitable is that the average size of their winning trades nicely exceeds the average size of their losers.  Indeed, it's not uncommon to see traders make a little or lose a little on most of their trades.  Their profitability comes from a few sizable winners and from the absence of sizable losers.  Risk management is absolutely key to consistent profitability.

This is why setting stop losses is vital to successful trading.  We need to clearly identify what would tell us our trade is wrong and commit to exiting immediately.  For example, I may see selling pressure in the stock market, with several minutes of negative NYSE TICK readings.  I notice that the market cannot move below the previous level at which we had similar selling.  On the first sign of buying pressure, I go long and my stop is at the most recent lows.  Right away, this provides a favorable risk/reward.  It also makes good sense to me because a violation of the recent lows tells me that buyers have not taken control.

Such setting of stops is as much a psychological exercise as a risk management one.  It is not enough simply to identify a price level for exit.  This must be an emotional commitment.  By mentally rehearsing scenarios in which we're stopped out--visualizing the market action that would take us out of a trade and how we want to respond--the setting of the stop becomes an emotional preparation to handle the loss.  If we are mentally rehearsing a negative scenario and making that scenario familiar--and if we know in advance how much we can lose on the trade and can accept that--then losing no longer becomes a shock or a threat.  Repetition takes the emotion out of negative scenarios.

We always want to create psychological safety in our trading.  Our sizing and our stop losses should be such that we can lose and always come back.  As I've mentioned in the past, we should never lose so much in one trade that we cannot be profitable by the end of the day.  We should never lose so much in one day that we cannot be profitable at week's end.  And we should never lose so much in a week that we can't have a winning month.  If we achieve that kind of consistency of process, we will be consistently profitable and cultivate a consistent trading psychology.

Further Reading:

Using Emotion to Change Emotion

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