Unique Applications of Psychology to Markets

 

6/28/2026 - A key element in positive trading psychology is ensuring that your trading process draws upon the values and interests that bring your greatest happiness and fulfillment.  In other words, trading should be an expression of strengths that have already provided you with success, joy, and meaning.  

Here's a personal example:  What gives me the greatest well-being in life are long-term commitments to what I find meaningful:  a romantic relationship; having children; raising my rescue cats; helping people as a psychologist.  Being a significant part of the lives of others is the source of my greatest fulfillment.  

At various times in my life I've tried very active, short-term trading.  It has taken a very short time for me to realize that my passion lies elsewhere.  I enjoy discovering and making good trades, but it feels as though something is missing for me if that's all I'm doing.  

Conversely, I *love* research, finding new things, and sharing them with others.  That brought me to the academic world and is a big part of what is driving my latest market project, which is detecting patterns of breadth and market movement that accompany big trend shifts in the stock market.  That project is so interesting to me that I devote many hours each week creating and analyzing databases covering many years of market activity.  Sharing my findings with others who are equally passionate in their discovery process is tremendously fulfilling.

And applying the research to participate in big market trends is immensely gratifying.  Not because I love trading per se, but because I love discovery, sharing discoveries, and seeing discoveries validated.  It's great to be passionate about trading; also great to be passionate about investing oneself in markets and sharing those investments with others who are immersed in creative discovery.

What makes us most successful and fulfilled in markets is an expression of what makes us successful and fulfilled in life.  

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6/26/2026 - Why is it that top performing traders who lead teams or who describe their "setups" and trading style online--even walking people through their trades--can't produce the same level of success among followers that they have had?  If trading can be boiled down to rules, patterns, and setups, why can't Market Wizard levels of success be replicated?

There is a parallel phenomenon in psychology.  Leading therapists map out their therapy in workbooks and manuals so that patients can overcome their anxiety, depression, etc. using the best practices of best therapists.  The problem is that it doesn't work.  The advice is sound, the exercises are evidence-based, but there is something to live therapy that cannot be replicated in a self-help guide.

And how about simply programming the top traders' setups and letting the computer do the trading?  Or programming the computer to take the role of therapist?  Why doesn't that work as well as live performance?

So much of trading success is based on what people trade, not just how they trade it.  So much of psychotherapy's success is based upon how and when it is applied.  When there is true mentoring, a person learns to replicate not only what the mentor says, but *how* they apply it.  The expertise of the mentor is captured in how they do what they do.  A painter could verbally describe all their strokes and colors, but no one would become a world-class artist by simply listening to such descriptions.

We learn by copying the masters.  We broaden our learning by working with multiple masters.  We develop our own style when we integrate the lessons from those masters.  Trying to learn on our own from books, videos, and websites doesn't work.  If it did, we'd see many more Wizards and masters.  No "trading psychology" can correct the injuries that result from learning a performance field the wrong way.

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6/25/2026 - Professor Ed Diener, in his above quote, points to an important insight from his research:  Happiness is a process.  It is not just an emotional state that we sometimes experience; it is something that we *do*.  Happiness is actually a combination of two emotional states:  joy and fulfillment.  We are truly happy when we are immersed in what we love doing and in what is meaningful to us.  This is why relationships are such powerful vehicles for happiness: they can make us happy and they are deeply meaningful.

Many of our problems occur when we lack happiness in our lives and seek "feel good" activities as a substitute.  That is how we can end up eating and drinking too much, how we can become involved in drugs and other activities that feel good at the time, but are ultimately empty in terms of fulfillment.  What is fulfilling is what speaks to our values: what is most important to us.  It is what speaks to our souls.

Overtrading occurs when we lack fulfillment and turn to trading to fill our voids.  It is not merely a lapse of discipline.  Rather, we are missing something in our lives and are trying to make up for that by engaging in the thrills and profits of trading.  Of course, that ultimately creates losses and an even deeper sense of emptiness.  Conversely, many of the most successful traders I've known work closely with others--often in teams.  They enjoy the challenges of trading, but they also find the rewards of teamwork deeply satisfying.  For them, trading is more than exploiting setups and trade ideas.  It is a way of connecting to the aspirations of others and sharing aspirations with them.

When we read the Market Wizards interviews, it becomes clear that the happiness they find in trading is not only a place; it's a process.  They love to learn, they love to dig for opportunity, they love to learn with others and from others.  Trading, for them, is more than a feel-good activity.  It is a deep expression of who they are.

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6/24/2026 - In the Positive Trading Psychology book, I go into detail regarding the use of neurofeedback (real time feedback about our brain wave patterns) and its application to trading and trading psychology.  The key idea is that, when we learn to identify the brain wave patterns that accompany focus and good trading, as well as the patterns associated with frustration and impulsivity, we can ensure that we truly only trade when we're "in the zone".

What makes biofeedback especially helpful is that we typically see changes in our brain wave patterns *before* we are consciously aware that we're losing concentration, becoming frustrated, etc.  Once we see that our brain waves are no longer in our zone, we can step back and engage in exercises (such as meditation) that will return our focus.  That is proactive trading psychology:  working on our problem patterns before they actually occur.

I have also used real time heart rate feedback from the Fitbit watch as a way of monitoring calm vs. agitation.  Increased variability in heart rate readings is typically associated with poorer cognitive focus.  This often occurs at times of distraction and frustration, not always connected to markets.  Starting the trading session with a meditation routine can be useful in defusing such frustration.

The smartwatch also measures the quality of sleep each night, which I have found to be correlated with my ability to sustain focus.  These real time readings allow us to adjust our trading to our state, avoiding trading when we are not fully calm and focused.  Real time readings also help us identify what we need to do to start our days in the zone.  For instance, I know that drinking alcohol in the evening leads to lower sleep quality that night, which in turn leads to difficulty in sustaining concentration.  I also have learned that going to bed an hour earlier than usual and waking up earlier leads to better sleep quality and improved productivity in my morning routine.

Traders are like athletes in training.  We are most likely to perform at our peak if we keep our bodies and minds at their peak.  We don't have to wait for FOMO, greed, and fear in order to work on our psychology, and we can improve our psychology even when we're not beset with FOMO, greed, and fear!

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6/23/2026 - One of the great tragedies in the trading world is that trading psychology has become equated with the psychology of beginning traders, thus focusing on such things as discipline, emotional control, fear, greed, and frustration.  To use the analogy I often turn to as one who teaches at a medical school, it is as if we were to discuss the psychology of the emergency room physician in the terms that apply to beginning medical students.  Of course the beginner in any field has doubts, needs, ambitions, etc. and those can color decision-making.  What makes a professional a true pro is that they have moved beyond those initial self-doubts and concerns and now can focus on the challenges of peak performance.

An area of psychology that applies to the pros is the ability to access intuition in generating trade ideas.  Intuition is implicit or tacit knowledge:  it's what we know, but don't know that we know.  It shows up as gut feelings and flashes of insight.  Intuition comes to us; it's not something we can manufacture upon demand.

There are, however, things we can do to access and activate intuition.  The more things we see, the more things we can connect.  That is why, in the interviews of the Market Wizards, we find that so many of them spend hours and hours reviewing charts and markets.  They are feeding their heads with example after example, confident that intuition will capture the patterns of strength, weakness, reversal, and continuation.  

Because their review is conducted in a state of intense focus, the successful trader is not only seeing more things, but processing them more deeply.  The quality of focus--its sustained intensity--fuels the generation of intuitive insights.  To the outside observer, it simply looks as though the Market Wizard works harder than others.  It's more than that, however.  What makes the magic of a Wizard is how they work--and what that work generates in terms of intuitive learning.

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6/22/2026 - When a psychologist/therapist speaks with a person, the truly important themes emerge when there is a discrepancy between *what* a person says and *how* they say it.  The mood and tone and body language suddenly don't fit with the meaning of the message.  That is the first sign of potential conflict, and it signals an opportunity for the therapy.  Growth occurs when we are physically, emotionally, and cognitively aligned.  That is when we're most open to absorbing new meanings from life and pursuing fresh sources of purpose.  

In markets, trends persist when there is an alignment between the behavior of the parts of the market and the market as a whole.  When the components of an index begin going their own way, that is an early sign that the market sector is losing alignment.  The tide is no longer lifting all boats; the winds are shifting.  Changes occur within the alignment of the market before those changes manifest themselves as clear price reversals and new patterns of movement.  

Listening to the market the way a therapist listens to a client--carefully gauging not only what is happening but how--allows for flexible trading.  Conviction makes convicts:  We become trapped by what we attach ourselves to.  When we listen with an open mind, the subtle shifts in market behavior become clear.  

The meaning of market action lies in *how* it gets from Point A to Point B.

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How to Change Your Trading

 

3/20/2026 - In his excellent book The Trader's Journey, Peter Robbins points out that most traders spend their time trying to establish an edge in markets--a "positive expectancy", but spend less time on "the second component of their edge, which is their ability to trade the strategy consistently and accurately" (p. 106).  To change your trading, it's important to figure out whether your rules need adjusting or whether you need to work on the trading of those rules.  A very valuable strategy is to investigate how your rules would have performed in different past market conditions.  Often, rules that work in one kind of market environment fall down when trends, correlations, and volatility change.  No rules work ideally in all market conditions.  That is why it is important to first have metarules that tell you the kind of market we're in and then develop the rules that work in each market condition.  Thus, you will have metarules that tell you when we're in a range market, a trending market, a topping market, a bottoming market, etc.  Each market condition will have its own "playbook", enabling you to adapt to shifts in trading conditions.  When you review your trading, you want to see if you indeed identified market conditions correctly and, if so, whether you made the adaptation necessary for that type of market.

Peter Robbins' observation about the ability to trade the strategy consistently requires that you be able to assess market environments consistently and adapt your trading processes to each market condition.  Changing your trading means first identifying market conditions and then seeing if your rules for trading those conditions:  a) were followed; and b) were profitable, if they had been followed.  Every market day is like a new basketball or football game, requiring preparation for the contest and adapting decision making to the unique opportunities of the situation.  Very often, traders lose money by doing what had made money before market conditions had radically changed.

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3/19/2026 - Successful discretionary trading is not subjective trading, just as successful discretionary medical practice is not subjective.  The discretion of the professional is based upon rules and principles and those rules and principles are based upon research into what is helpful and what is not.  The systematic trader automates those rules and principles; the discretionary trader adds to those rules and principles an element of judgment regarding the immediate situation.  Thus, in my own field of psychology, there is a wealth of research regarding what people need to do to combat anxiety or depression.  It is the discretionary job of the therapist to apply this research in the best way for a given client, keeping in mind what the client is ready for.

So how is this related to how we change our trading?  Many times, we make subjective attempts to assess and correct what we have done, but none of it is grounded in rules and principles that have guided our past success.  Every element of trading process should be rule-based and clearly written out:  What constitutes an opportunity; how much capital should be risked on that opportunity; how trading that opportunity should be entered; how exits should be constructed; how stop loss levels should be calculated; etc.  

Only once we have the various elements of trading process clearly identified can we then go back and see what we did well and what we could have done better.  How can we be consistently profitable traders if we haven't grounded our decision-making in consistent rules?  A big part of the learning process in trading is gaining enough experience, first in practice trading and then by trading small, to create the rules that bring you success.  

We change our trading by first identifying what part of our trading needs to be changed.

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3/18/2026 - In trading, as in medicine, the right course of action to make improvements is to first diagnose the situation.  If we're trying to change our trading, we first need to clearly identify what needs to be changed.  The most basic distinction is:  Do I need to change how I'm finding opportunity?  (i.e., are my ideas wrong?) or do I need to change how I'm trading the opportunity that is there? (i.e., do I need to improve timing/entries/exits/sizing/expression of the idea/etc.?)  How can we figure that out?

The key best practice is to examine closely what happens to your trades *after* you have exited them.  Did your ideas generally work out, or were you right to get out when you did?  Many traders examine their P/L and review markets, but they don't intensively re-view how they got into and out of the trade.  As a result, they're in a poor position to truly know if they need to change how they come up with trades or whether they need to figure out how to better execute and manage the trades they initiate.

There's a principle in positive psychology that, when we make too much use of a strength, it can become a weakness.  That was the case for my trading.  I was so careful about risk management that I exited trades too early.  Many of them would have worked out well if I had let them breathe.  The answer was to initiate trades with smaller size and give them a good amount of room to play out.  Then, when they started to work out, I added a second, larger clip to the trade that had a relatively tight stop.  For instance, if we broke out of a range in my direction, I exited if we reversed back into that range.

This allowed me to get bigger in ideas that were showing promise, and it allowed me to not micromanage my trades.  Most important of all, it changed the psychology of my trading.  I now actually looked forward to my initial position going against me so that I might have the opportunity to get bigger in an idea I liked.  This is a great example of how changing our trading can change our psychology.

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3/17/2026 - I'd like to take a step back and ask a question that comes before, "How can I change my trading?"  That question is "Should I continue trading?"

I recently received an email from the spouse of a trader who was worried about the trader's history of emotional trading, blowing up, vowing to trade better, and then repeating the cycle all over again.  That pattern was taking a toll on the relationship.

Please read the following closely:  I have worked with dozens and dozens of highly successful traders.  None of them has reached their success after patterns of emotionality and repeated blowup.  

None of them.

Yes, successful traders have gone through painful drawdowns and, as we read in the Market Wizards books, they learn from those and turn their trading around.  When risk-taking occurs again and again and again with emotionality and repeated losses, that is not a learning curve.  That is not healthy.  That is addictive behavior.

Do successful physicians learn by becoming emotional and killing one patient after another?

Do successful airline pilots learn by flying emotionally and crashing one plane after another?

Few people will tell you your trading is addictive.  Not the person who wants you to hire them as their "trading coach".  Not the person who wants to sell you their software or their trading seminars.  Anyone who offers to "mentor" emotional traders who blow up again and again is something other than a mentor.

Trading addiction causes trauma.  You can learn more about trading addiction through these articles and links and by asking these questions. 

Changing your trading can mean changing yourself before you ever resume activity in markets.  And maybe activity in markets is simply poison for you and your life and you should find work that makes you feel good about yourself and that helps you do good for others.

The worst trading loss of all is the loss of your happiness and the loss of those who care about you.  

Do the right thing.

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3/16/2026 - How can we change the negative thought patterns that stand in the way of the solution-focused mindset described in the previous post?  Fortunately, research in psychology provides us with ways to shift our mindsets.  Craske and colleagues (2022) describe four exercises that research has shown increase our feelings of happiness and fulfillment.  Those four practices are:  1) loving-kindness; 2) gratitude; 3) generosity; and 4) appreciative joy.  In loving-kindness, we meditate on and rehearse the feelings of love and caring we have toward others.  In gratitude, we rehearse feelings of appreciation for all that we have.  Through generosity, we focus on bringing joy to others and through appreciative joy we find happiness in the joy of others.  Many times, by focusing on who and what we love we can rehearse all four of these experiences.  Spending quality time with my cats, for example, is a way of immersing myself in these feelings.  The idea is to make these four experiences regular parts of our daily life.

There are many cognitive therapy exercises that help us combat negative thought patterns.  It turns out, however, that we can best combat the negative by rehearsing and building the positive.  It is much easier being constructive and solution-focused in our trading if we've been actively positive in our daily lives.  It's also a great example of how building spiritual strengths helps us overcome negative tendencies.  We best achieve a positive trading psychology when we bring positivity to our lives. 

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3/15/2026 - In this series of posts, we'll take a look at what you specifically need to do in order to make improvements in your trading.  These various change efforts, when combined, provide you with a platform for growth that can make improvement an ongoing process.

The first key to changing your trading is to prioritize the changes you want to make and focus on one change at a time.  Change requires concentrated effort, and it requires consistent effort.  When we try to change everything, the odds are good that this is coming from frustration, not from a sustainable plan.

As described earlier on the blog and in the Positive Trading Psychology book, the first step toward change is the solution-focused recognition that the odds are good that the change you want to make is already happening, but on occasions you're not recognizing.  When your trading problems are not occurring, you quite possibly are doing something right and already making the change that you want to see more consistently in your trading.  So that is why it is important to journal and analyze occasions when you trade well and figure out how you did that.  For instance, a more focused preview of markets and preparation of your trading may have prevented you from overtrading.  That is super important.  Once you recognize this, you can turn the focused preview into a consistent daily process.  

The solution-focused mindset is a game-changer.  We don't have to make ourselves totally different.  We simply need to be more consistent in being who we already are at our best.  In the next post, we'll look at how you can achieve that consistency.

New Techniques For Improving Trading Psychology

 

3/6/2026 - In their research review of successful psychological techniques, Barlow et al discuss methods by which we can achieve "cognitive flexibility".  This is important because how we think greatly impacts how we feel and how we act.  If traders can become more flexible in how they think about markets and their trading of markets, they can avoid the negative traps associated with fear, greed, and frustration.

This is a great example of how advances in psychological research can lead to new and better practices in trading psychology.  

The authors identify two specific "thinking traps":  jumping to conclusions (probability overestimation) and thinking the worst (catastrophizing).  These lead us to overreact to situations and respond to those situations in rigid ways.  The first step in changing these patterns is to become aware of them in real time.  This means that we must build our skills at "metacognition":  thinking about our thinking.  

The first step in that process is to recognize--as it's happening--when we are overreacting to a situation.  Typically that will be signaled to us by feelings of frustration.  We need to make frustration a cue to take a brief timeout, so that we can challenge the automatic thoughts that are frustrating us.  In taking that time out, we're reminding ourselves, "It's my thinking that's making me feel this way; it's not the only way to see the situation and respond to it".  Or, more simply, "Here I go again, overreacting!  How can I put this situation in perspective?"

Taking the time out to think about our thinking is half the battle.  In the next post, we'll look at the other half:  what the researchers recommend to change our thought patterns.

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3/5/2026 - The 48 positive emotional experiences listed in yesterday's post (below) create a checklist both for your daily experience and for your trading experience.  The idea here is the reverse of what traders typically do with their journaling.  Instead of writing down all your mistakes and negative experiences, write down your best trading decisions and most productive experiences and then identify, from the list of 48, which emotions accompanied your productivity.  If you do this over a period of time, you'll notice a pattern in the positive emotions that contribute to your best ideas and best actions.  

For instance, your market experience that is accompanied by inspiration and curiosity and also by a sense of serenity and calm may mark the generation of your most profitable trade ideas.  Conversely, when you're trading out of stress and fear of missing opportunities, that could mark your worst trading.

Once you know your best patterns, you can set up routines/processes that draw upon these emotional experiences.  Instead of only combating the negative, we are looking to understand ourselves and build our positives.

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3/4/2026 - What are the positive emotions that lead to enhanced overall wellness and to peak performance?  If we can track our positive emotions--and what helps generate them--then we become able to trade at our best.  Craske and colleagues offer a "positive emotions dial" that actually is a system for "diagnosing" our optimal experience.  Here are the categories on their dial:

Optimism:  Hopefulness, Positivity, Encouragement

Exuberance:  Vivacity, Liveliness, Animation

Serenity:  Peacefulness, Calm, Relaxation

Gratitude:  Thankfulness, Appreciation, Contentment

Euphoria:  Joyfulness, Merriment, Cheerfulness

Love:  Affection, Compassion, Empathy

Zeal:  Passion, Determination, Motivation

Delight:  Enjoyment, Amusement, Pleasure

Fulfillment:  Honor, Pride, Confidence

Exhilaration:  Excitement, Enthusiasm, Eagerness

Inspiration:  Fascination, Interest, Curiosity

Elation:  Happiness, Pleasure, Satisfaction

Please pay close attention:  Here is the foundation for an entirely fresh approach to trading psychology.  Study your best trades and your best trading periods and identify where you stand on the above dimensions at those times.  That includes what you're experiencing in your personal life and during your trading.  What is the positive context that drives your greatest successes?  Those are the emotional experiences that you want to cultivate, day to day and week to week.

What if we've had it wrong all this time?  What is combatting our most negative thoughts, feelings, and actions is *not* the way to win at trading?  What if we've been ignorant of what drives our success all along and simply need to do more of what makes us our best selves?  

No amount of fighting losing will bring us what we need for winning.

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3/3/2026 - In the Positive Trading Psychology book (p. 132), I cite reviews of research that conclude "that happiness contributes to our work success and the quality of our relationships contributes to our happiness".  I point out that "The challenge for our trading processes is to create happiness habits that keep us energized, inspired, and fulfilled, so that the power of repetition can not only help us undo our negative patterns, but instill new, positive ones.  For the peak performer, every day should be practice in building happiness habits".

Negative thinking and self-blaming can be thought of as unhappiness habits.  Happiness habits are ones that energize us physically, that make us feel appreciation and gratitude, and that focus on opportunity.  It is not enough to avoid the negatives; we want to build the cognitive, emotional, and physical positives that keep us at our peak.  As I discuss a bit later in the book, we not only have triggers for our worst thoughts and actions, but also positive triggers that cue us to act upon opportunity.  One of my positive triggers is a brisk walk each morning to start my day after feeding the cats.  It is during that walk that I engage in prayer and meditation, voicing my thanks for the day, for my family, and for the challenges that help me grow.  The goal is to start the day invigorated and inspired--and then to carry those experiences forward throughout the day.  

When we make happiness a habit, we are much less likely to fall into the negative emotional traps experienced by traders.

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3/2/2026 - An important insight from recent research in psychology is that it takes emotion to change emotion.  Simply talking about problems or writing about them in a journal does not truly help us internalize solutions.  In emotion-focused therapy (EFT), couples work on their problems by giving voice to the positive feelings that typically underlie the negative reactions that bring them for help in the first place.  For example, members of a couple might distance from each other and grow further and further apart.  In EFT, they learn to express the feelings of hurt and disappointment that lie behind the distancing--and the desire for love, closeness, and acceptance beneath their pain.  In expressing these feelings constructively (with the therapist's help), the couple regains a sense of openness and connection.

For traders, reactions of anger, frustration, and revenge trading mask their disappointment over their results and their positive desire to find and act upon opportunity.  When the trading coach points out that occasions of frustration are occurring at points where markets are acting in unexpected ways and that many other traders are likely to be fooled by this unexpected market action, the trader is then able to view the period of frustration as a potential period of opportunity.  This enables them to replace the negative emotions that can lead to tilt trading with the positive curiosity of digging into market action and detecting new patterns.  

Traders do not talk themselves out of tilt.  The trader learns to replace the negative emotions of tilt with the positive emotions that accompany best trading practices.  Once the trader recognizes that frustration occurs when new and different things are happening in the market, it becomes possible to step back, identify the fresh opportunity, and return to successful trading and a successful mindset.

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3/1/2026 - With the bombing of Iran over the weekend, the death of the Iranian leader, and subsequent retaliation, we have the prospect of markets in turmoil this week.  A spike in oil prices, a flight away from risk (stocks), and a move toward the safety of fixed income instruments (bonds) are expected.  With VIX already hovering in the 20 region, we can expect a meaningful degree of volatility in the near term.

Here is a great opportunity to work on our trading psychology.  The game has changed for the time being.  New participants may enter the market (keep an eye on volume), reflecting the need of money managers to limit their downside.  Too, it is not clear that this will be very temporary.  China receives a large amount of their oil from Iran and surrounding countries and would be quite impacted by any disruption of the Straits of Hormuz.  Russia has already made it clear that it will be more willing to act unilaterally in the face of this action by the U.S. and Israel.  In short, we will have more (and different) market participation and more uncertainty and volatility.

The worst thing traders can do is blindly go forward, trading the same themes and chart patterns that have guided them recently.  A valuable technique employed by psychologists is exposure work, in which we face stresses through imagery work and mentally rehearse our coping.  Doing that again and again helps prepare us for actual stressful events, because we've already prepared ourselves and activated our responses to challenge.  This same approach can be very helpful in a new and volatile market environment.  We can observe and observe and see how markets are trading and note the patterns that are appearing.  We can mentally rehearse trading those patterns and make the unfamiliar more familiar.  The key to the success of this method is giving ourselves the time and space to observe the new market conditions and figure out how we can best trade them.  

By itself, market movement is not opportunity.  It only becomes opportunity when we are prepared and understand the movement.  Exposing ourselves again and again to various scenarios prepares our psychology as well as our trading.

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2/27/2026 - An important body of research suggests that our lives are not disrupted by an excess of stress, but by our lack of balance between stress and well-being.  When we have many things in our lives providing happiness, fulfillment, and closeness with others, we can tolerate very high levels of stress and emotional demand.  It's when that balance is disrupted that our stress becomes distress.

In their recent summary of research, Craske et al outline a number of "positive affect treatments" that combat depression and anxiety.  Their research finds that techniques that enhance our positive experience are more effective in improving mood and functioning than techniques designed to reduce negative states.  Among the techniques they employ are methods for enhancing loving-kindness, gratitude, generosity, and appreciative joy.  Notice that we can think of these methods as ways of growing our spiritual strengths.  

The implications of this line of research are profound.  It may well be that the ups and downs of market performance and the stresses we feel as a result are only problems if we don't have sufficient positive emotional experience in our lives.  By literally exercising our capacities for joy, gratitude, love, and giving, we create buffers for all of life's stresses--and we become better people in the process!

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2/26/2025 - Well, the new book is finally available!  The subtitle says it all:  Turning personal strengths into trading strengths.  The big challenge for developing traders is figuring out what they do well and then leveraging that in their trading processes.  Yes, it's important to avoid trading on tilt, fear, greed, etc.  Doing less of the negative, however, will not achieve positives.  The important perspective that the book discusses is that your trading success will draw upon the same strengths that have created your life's successes to this point.  Think of your greatest accomplishments, your greatest areas of mastery.  Somehow, in some way, your trading has to leverage the talents and skills behind your life's greatest achievements.  

In this series of posts, we'll look at innovations in positive psychology that can improve our trading psychology and our trading practice.  The solution focus is one of the most basic innovations, where we turn our attention to situations in which our problems are not occurring.  We don't always trade with poor discipline.  We don't always trade emotionally.  What are we doing when we are disciplined and level-headed?  Is there something we're doing that we're not aware of that actually is the solution to our problems?  Many, many times, our best practices are hiding in the situations where our problem patterns are not occurring.  Let's journal those exceptions!  Let's learn from what we're doing right!

In the book, I describe the learning process at SMB Capital, where newer traders operate in teams with more experienced traders.  In some teams, the experienced mentor and the developing trader will share a joint account and make decisions together:  what to trade, how to size it, how to manage the risk, etc.  Yes, this is a great practice for learning trading, but notice how it is also a great way to study successes and identify best practices.  If everyone you team up with shares just one thing each day that they did well and breaks it down to show how they did it, imagine the acceleration of learning and development that would occur!  Even if you use a trading community to find just one trading buddy, that could greatly expand the development of your trading strengths.

Studying the one or two or three great trades you placed in the last week helps you internalize the ingredients of your success, but more importantly helps you internalize a sense for your own greatness.

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:

Radical Renewal

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Finding Psychological Techniques for Traders That Actually Work

It is common that I hear traders describe techniques they are using to make changes that sound good on the surface but that, in fact, are not effective.  A great example of this would be the use of trading journals to review the day.  Such review might be helpful for learning and, if focused, could help with goal-setting.  But the process of making personal changes is not going to be fulfilled by doing some writing.  Change requires a different focus and a very different mindset and emotional state.  Writing down an intention to be more disciplined in trading is worlds apart from using psychological methods to rehearse that discipline and create a sense of emotional urgency around the rules and practices.

In the most recent Forbes post, I lay out an important principle:  the challenges that impact our trading are closely related to the personal challenges that bring people to counseling and psychotherapy.  We first encountered this notion in the Psychology of Trading book, but the idea of a continuum linking all of our challenges is broader.  As the Forbes post lays out, an important implication is that the techniques that help people with anxiety, depression, anger, and the like are effective for parallel problems in the performance domain:  stress, negative thinking, frustration, etc.

This is huge.

There are evidence-based psychological methods known to help people with diagnosable emotional disorders.  Every one of them can be adapted to help us with normal, developmental challenges and with the unique problems associated with the quest for peak performance.  Moreover, all those techniques accomplish their goals relatively quickly, as the most recent research review of brief therapies lays out.  

We would never consider turning to unproven home remedies when research-backed medical help was available.  Similarly, it makes no sense to turn to pop-psych, feel-good solutions when there are reliable methods for lasting change readily at hand.  In upcoming posts, I will review some of these methods and their application.

Further Reading:  Proven Techniques for Peak Performance

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Trading Psychology Diagnosis: Identifying the Root of Trading Problems

Every trained physician knows that diagnosis precedes treatment.  We have to understand what is going wrong before we attempt any kind of solution.  Auto mechanics engage in the same process: they listen to the engine, look under the hood, and run tests before they identify problems and begin to fix them.  

Too often, traders attempt solutions for their trading problems before they've truly understood the sources of those problems.  Equally often, mentors and coaches of traders offer their solutions without actually going through a thorough diagnostic process.  In this post, I will model for you a way of thinking that can help you identify what might be going wrong with your trading.  This way of thinking is anchored by several important questions.

Question #1:  Is there actually a problem here?

This may seem like a strange question.  You've just drawn down; you've been frustrated in your trading.  Of course there's a problem!  The issue, however, is a bit more subtle.  Any successful trading is still a probabilistic enterprise.  Hit rates and Sharpe Ratios don't grow to the sky; people are fallible and markets embed a fair amount of uncertainty.  As a result, losing periods are inevitable and frustrations will be encountered.  Just as we expect baseball hitters to strike out every so often and football quarterbacks to throw incomplete passes on occasion, we can expect losing trades.  A trading approach with a 60% hit rate could be phenomenally profitable, but it will still encounter strings of losing trades with regularity.

What this means is that we begin the diagnosis by examining a meaningful sample of past trading, not just the last few days or trades.  A frequent day trader making many trades a day might look at the month's results and compare with results from the past year.  A longer term trader might need to assemble data over a year or more before confidently identifying a problem.  In other words, to identify a problem, it's necessary to see that recent results fall short of past ones and that recent drawdowns are not similar to past ones.  That requires a proper historical view.

When traders assume that a problem exists without a sufficient historical analysis, they run the risk of tinkering with methods that work and making those methods worse.  This is very true when traders begin to trade systems.  They become discouraged when the system has a (normal and expectable) drawdown, so they begin to change the system, front run the system, etc.--only to turn the setbacks into protracted slumps.

Sometimes traders are taking too much risk--trading position sizes too large for their actual loss tolerance--and those strings of expectable losing trades create a "risk of ruin" situation.  In such a case, the trader can look at hit rates and average win/loss statistics and determine whether the problem is in risk taking or if the actual performance of the trading methods has changed.

All of this is a strong argument for keeping detailed performance metrics on your trading.  Only by comparing recent performance to past performance can you understand if you truly are improving in your trading or having an actual problem.  If you're a beginning trader, then you would compare your recent returns to the returns you achieved in simulation mode.  (For more on trading metrics, see this post; also this post.  A detailed treatment of trading metrics can be found in Chapter 8 of The Daily Trading Coach). 

Question #2:  If there is a problem present, is it associated with a change in the market(s) you're trading?

My first hypothesis when I encounter a trading problem (my own or that of an experienced trader) is that the problem has occurred for a reason, and that reason is related to a change in how markets have been trading.  Because of those changes, the methods that had been working no longer command the same edge.  

A great example of this has been the recent decline of volatility in the stock market.  Many, many traders who made money from momentum and trend trading have suffered during this low volatility period because moves no longer extend and, indeed, tend to reverse.  That, in turn, leads to frustration and discouragement.

The key tell for when trading problems are related to changes in markets is that people trading similar strategies are also experiencing performance difficulties.  This is one reason it's important to have a broad network of trading colleagues, even if you trade independently.  If the great majority of traders trading similar styles are also experiencing drawdowns, you can safely assume that not everyone has turned into an emotional basket case at the same time.  

Performance indexes for various hedge fund and CTA strategies are available from industry sources and can help identify when certain approaches are winning and losing.  For example, the Barclay's short term trading index (STTI on Bloomberg) tracks the returns of professional money managers trading short term momentum and trends.  The performance of those managers over the past year or two has been dismal, again related to the collapsed volatility of markets in the wake of low interest rates around the globe.  

If your trading problems are widely shared and can be linked to shifts in how your markets have been trading, no psychological exercises in and of themselves will solve the problem.  Nor is it a solution to put one's head in the sand and hope that markets will "turn around".  Rather, the answer to the trading problems is to adapt to the new environment and search for fresh sources of edge that can complement one's traditional trading.  For example, one might find mean reversion or relative value strategies that nicely complement one's directional/trend/momentum trading.  The combination of trading approaches truly diversifies returns and produces a smoother P/L curve.  (See Trading Psychology 2.0 for a detailed presentation of adapting to changing markets).

Question #3:  If there is a personal problem present, is it--or has it been--present in non-trading parts of your life?

Here is a very, very important issue.  Many personal issues, such as anxiety, anger, depression, attention deficits, and impulsivity, show up in trading, but not exclusively within trading.  For example, a person might have trouble with patience and frustration in personal relationships, and those same problems crop up in his relationship with markets.  Similarly, a person might have self-esteem problems in life that then show up as negative thinking patterns during periods of market losses.  When the emotional patterns, thought patterns, and behavior patterns that interfere with trading are also occurring and interfering with other aspects of life, that is a strong indication that simply working on trading will not be sufficient.  It makes sense to seek professional help.

The great majority of psychological challenges can be dealt with via short-term approaches to counseling and therapy.  Research suggests that problems such as relationship difficulties, depression, anxiety, and anger can benefit significantly from cognitive, behavioral, psychodynamic, interpersonal, and solution-focused approaches. (A thorough review of research and practice in this area can be found in the textbook that I have co-edited.  A new edition will be coming out late this year).  The key to brief approaches to therapy is that they are highly targeted and make active use of exercises and experiences during and between sessions.  

In situations in which the psychological problems have been longstanding, when there has been a family history of similar problems, when those problems have been severe (significantly impairing important areas of life), and when those problems have been complex (impacting many areas of life, as in drug or alcohol abuse), longer-term approaches to helping are generally indicated.  Attempting short-term approaches to help for more significant problems runs the risk of relapse.  When problems have been longer standing, severe, and complex, it often is the case that more than one form of help is required, such as medication help in addition to therapy or group sessions (as in A.A.) in addition to counseling.  In such instances, it is very helpful to have a thorough assessment from a qualified mental health professional.  If there is meaningful depression and/or anxiety, a workup from an experienced psychiatrist is helpful, as safe and non-habit forming medications often can play an important role in addressing the problems.

Depression, anxiety, attention deficits, addictions, bipolar disorder, relationship problems--these impact a high percentage of people in the general population.  Traders are not exempt from these general problems.  Assuming that an emotional issue impacting trading is necessarily a trading issue may prevent you from getting the right kind of help.  No amount of writing in a trading journal will rebalance neurotransmitters in your brain or solve the conflicts you bring to your marriage.  When you see the problems affecting your trading also affecting other areas of your life, it's a strong indication that a more general approach to change will be needed.

Question #4:  If the problem you're facing occurs uniquely in trading settings, do you need psychological coaching or do you need further mentoring of your trading?

Here again is an important distinction.  Especially for newer traders, frustrations and other emotional problems arise in trading simply because they are still young on their learning curves.  What they need is not simply emotional coaching, but guidance from experienced mentors who can help them correct trading errors and more consistently apply trading skills.  Even experienced traders can encounter drawdowns and frustrations because they are making trading mistakes that a mentor can pick up.  I recently worked with a trader who was very discouraged because of a drawdown that occurred simply because he was not closely monitoring correlations among his positions.  What he thought were several independent trades turned out to be versions of the same trade once the central bank indicated a possible policy shift.  He lost money because he was too concentrated in that one, converged trade.

This is yet another reason why it's very helpful to be connected to networks of peer traders.  Many times such relationships offer mutual mentoring that can address situational problems and mistakes in trading. 

When drawdowns and disruptions of trading are more psychological and situational, several psychological approaches can be helpful, including behavioral methods (exposure therapy) for anxiety and performance pressure; cognitive restructuring techniques for perfectionism, overconfidence, and negative thought patterns; and solution-focused approaches to identify and expand one's own best practices.  (Specific applications of these methods can be found in The Daily Trading Coach; the creation of best practices is a major topic within Trading Psychology 2.0; an overview of cognitive and behavioral techniques for improving trading performance can be found in Enhancing Trader Performance).

Behavioral techniques are skills-building methods that you practice in real time, during problem situations.  You literally are teaching yourself new skills and new habit patterns.  For example, a very simple behavioral technique would be to take a break during trading whenever you feel anxious, frustrated, bored, or discouraged.  You quickly recognize that you're not in the right mindset for trading and you take a break from the screens.  During that break, you might engage in other skills-building activities, such as relaxation training to slow oneself down and reduce tension.  Behavioral methods are typically practiced outside of trading hours so that the skills become automatic in real time, when problems crop up.  

Cognitive restructuring methods are techniques that you use to identify and challenge patterns of negative thinking that can distort your emotions and interfere with sound decision making.  Many traders, for example, become highly self-critical when they miss a trade or when they take a loss.  This can interfere with their focus on the next opportunities.  In cognitive restructuring, keeping a journal helps the trader become more aware of his or her thinking and challenge that thinking when it's harsh and negative--or when it's overconfident!  

Solution focused techniques are ones that examine what you are doing during your best trading, both in terms of trading practices/processes and psychological self-management.  The goal of solution focused work is to "do more of what works" and become more consistent so that best practices can turn into repeatable best processes.  Trading Psychology 2.0 contains 57 best practices contributed by myself and other traders; the chapter on Building Strengths also embraces a solution-focused approach to identifying what you do best and building your trading around it.

The bottom line is that how you work on your trading should reflect the diagnosis you make of your trading challenges.  Sometimes we encounter challenges because of tricky markets; sometimes because of our psychology; and sometimes those challenges are just a normal part of risk and uncertainty in markets.  In this post, there are quite a few ideas tossed out.  For more information on those, you can simply Google the relevant topic by entering "Traderfeed" and the topic of interest.  Thus, enter into the search engine "Traderfeed solution focused" and you'll see quite a few posts relevant to that topic.  If you want even more depth and detail, the above book references will be useful.

In an upcoming series of posts, I will identify 20 top challenges that traders face and highlight specific approaches to work on each of those.  Yet another series will look more into detail into evidence-based techniques that help traders and when to use those.  All of this is part of a grander plan to eventually link all the posts into a free, user-friendly, comprehensive online encyclopedia of trading psychology.  

Thanks, as always, for your interest and support--

Brett

Turning Emotional Trading Into Informed Trading

Apparently there were some sound quality issues during the latter portion of my webinar presentation yesterday.  For those who missed some of the ideas that I will be covering in the summer workshop in Chicago, I'll sketch those out in two posts.  

The first idea is that many of our patterns of poor trading are themselves triggered by shifts in emotional state.  Among the more common emotional triggers are:

• Overeagerness and overconfidence - Winning can skew our subsequent decision making;
• Frustration and anger - When we lose, our frustration can lead to impulsive decisions;
• Anxiety and uncertainty - Fear of losing can interfere with proper risk taking;
• Negativity and depression - Losing can begin to feel like being a loser 

An important principle is that many, many of these emotional triggers are themselves set off by changes in the marketplace.  When markets change their volatility, trend, etc., the trading patterns that worked at one time no longer work.  Patterns that had not worked now suddenly seem to come to life.  The wise trader entertains the hypothesis that emotional state shifts are potential indications of changing market regimes.  The emotions we feel are information that tell us to step back and reassess market behavior.  

In other words, we can use our emotional awareness to become more emotionally intelligent.  Once we shift states and recognize that a trigger has occurred, we step back from trading and reevaluate our expectations and ideas.  Emotions become a tool for flexibility and adaptability--not a trigger for rigid behavior and poor trading. 

Too often, we treat emotional responses as things to overcome or avoid.  If we are closely attuned to the markets we're trading, how we feel can often provide the first clues as to something different in those markets that we need to pay attention to.

Further Reading:  Trading Emotionally, With Intelligence

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When Trading Problems Are More Than Trading Problems

Consider the following situations that I've encountered recently:

*  A trader was concerned about his inconsistent performance.  He asked for help with sticking to a set routine.  When I gathered background information, it turned out that he had significant symptoms of depression and a family history of depression.  Because he did not have a full-blown major depressive disorder, he assumed that his inconsistencies of mood and energy level were simple lapses of discipline.

*  A trader asked for help with overtrading.  He took too many trades, especially when he became frustrated.  His impulsive decision making was costing him money.  He wanted to find a way to achieve greater discipline in his trading.  His history documented a lifelong pattern of attention-related problems and poor frustration tolerance.  He had been diagnosed with attention deficit disorder in grade school but stopped taking medication and assumed he had outgrown the problem.

*  A trader showed good trading results, with superior risk-adjusted returns.  He did not take meaningful risk, however, and as a result never made much money.  Despite encouragement from his manager, he found it difficult to increase the size of his trades.  His early adult history included episodes of social anxiety and psychosomatic problems related to anxiety.

In each of these cases, the trading problem was the result of a larger problem.  The trader approached the problem as if it was a trading issue when in fact it required professional attention.

Not every problem that impacts trading can be solved by goal setting, writing in journals, and placing motivational post-it notes on a computer monitor.  Sometimes a trading problem is a manifestation of a much broader problem.  No amount of talking with a trading coach can properly address issues of depression, ADHD, or anxiety.  If you examine your history and find problems that have occurred outside of your trading, perhaps those need to be considered as possible causes of your trading concerns.  The right diagnosis and the proper help can be the best thing you could do for your trading.

Further Reading:  Best Practices for Dealing With Drawdowns
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Changing Our Minds By Training Our Brains

Very important data suggest that we are able to change our thoughts, feelings, and behavior by directly working on making brain changes.  Because of the brain's plasticity, exercise of particular brain functions stimulates growth in the relevant brain regions.  A good example of this was recently reported in The Wall Street Journal, as evidence accumulates that we can treat depression by training the brain. 

We usually think of talk counseling, therapy, and coaching as being activities that influence our social and emotional functioning directly.  Fascinating research finds, however, that successful talk therapies make important brain modifications.  For example, when counseling is effective for clients with anxiety disorders, imaging studies find brain changes that help explain the change. 

Might it be the case that we can make changes in thoughts, feelings, and performance far more efficiently by intensively training the brain rather than the usual regimen of writing journals, setting goals, and talking to others?  Traditional professionals, from psychiatrists and psychologists to counselors and coaches, have little incentive to pursue this track; their training--and their reimbursement--comes from dispensing medications and talk.

Those medications and talk therapies indeed have been shown to be effective; I am not arguing against those.  Rather, I'm suggesting that people might be able to make very profound changes surprisingly quickly by targeting brain functions for intensive training.

Greater trading discipline and more consistent performance?  Greater emotional control and improved focus?  Enhanced cognitive flexibility and creativity?  Improved willpower and ability to sustain the quest for goals?

What if there were a cognitive equivalent of CrossFit that could train all of these?

Before there are enlightening answers, there are promising questions.

Further Reading:  Three Applications of Biofeedback
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