Trading Psychology
The root of all of our problems as traders is found in our inability to detach ourselves from our story of survival.
You might have:
A proven edge,
An efficient risk and money management technique,
Enough trading capital at your disposal to give you a fair chance,
The best trading software at your disposal,
A reliable broker with great commissions, …
but regardless of those advantages, if you are still engineering mediocrity for yourself, then some deep changes in the way you think need to be considered. Day after day, your state of mind determines your ability to abide by your rules and act consistently in the markets. And, if you are unaware of your inner process of thinking, thoughts of an uncertain future and memories of a painful past will manufacture anxiety, stress, doubts, and self-criticisms in the present, and those will dictate behavior.
In its essence, trading is just a game of applying a model to the letter. Said this way, it sure seems simple. But, simple doesn’t mean easy! This is especially true when one trades for a living. And, as any real trader who does so will attest, this endeavor is a battle that is difficult to win.
But, possessing a human mind is a two-edged sword. These more sophisticated brains of ours are the reason why we are on top of the evolutionary chain, but they are also the cause of all the problems that we have. With their never-ending stream of thoughts, feelings, and impulses, very often they help us achieve precisely the opposite of what we desire in life.
There is a big difference between knowing something on an intellectual level and actually doing it in practice. For instance, cutting your losses and letting your winners run, are acts that are known to provide not only better results but also better psychological satisfaction. Yet, why do we find it hard to do?
“Real strength is in letting go.”
In practical terms, detachment means surrendering — from this insistent grip we tend to exert on beliefs, habits, visions, ideas, and expectations that don’t serve us well. So we can clearly see how important a skill it is in trading — let alone in life. Yet, the resistance most traders feel to this idea is unprecedented. For instance:
We over-identify too much with our fears. The root of our problems as traders is fear — of not having enough, of not being able to — and the root of fear is the clinging to how we want things to be. We focus too much on money and the vast riches trading can offer us. To various degrees, stress, fears of missing out, worries around losing, disappointments, and more, are all born of the obsession we have over money — or the reward. We don’t always notice this, but it’s true.
When talking about detachment, I am using the term in a broader sense, which can imply acceptance and letting go. Therefore, I will substitute the word ‘detachment’ with ‘acceptance’ or ‘letting go’ where applicable and appropriate.
One of the fundamental lessons that I’ve learned and come to accept is that control in the markets is an illusion.
“For the trained mind, uncertainty equals opportunity.”
Markets are deterministic chaos processes — there is a long chain of variables (some of them random and some not) that have influenced the reality of their current condition. The markets achieve aggregate stability when people have variable time horizons and expectations for their investments. In contrast, a speculative bubble is formed when many people share the same expectations, imitating each other’s decisions to buy, and a market crash occurs when they all “rush for the exit” at the same time. This is also often referred to as causation or causality, but with a dash of “noise”, or randomness because people are not always rational.
What I’m saying is that if trading for a living is something you want to pursue with the least amount of stress possible, you have to work on making your trading process simple and straight forward. You have to give up the fun and thrill of subjective trading in favor of a more consistent and objective approach.
My trading methodology and my expectations are in line with the way markets are: uncertain. I’d rather not know anything… I’m better off that way. I am more calm, serene, I have more time for myself and my loved ones. And above all, my well-being doesn’t hang onto any market direction or trade outcome because I didn’t put much time and effort trying to figure out where they’re going or what an outcome will result in.
These are all based on our feelings and many cognitive biases which can have an uneasy relationship with facts — especially when money in on the line. The only way to counteract that is through a systematic process that is not based on faith or personal conviction but an objective process that can be described mathematically and statistically.
“In its essence, trading is simple, but we insist on making it complicated.”
My advice to you: eliminate subjectivity from your trading approach. You don’t need to know what is going to happen next, because if you have a very clear idea of what will happen, you tend to get very rigidly attached to it, then you shut out a whole range of other possibilities for that very trade. When you get attached, you freeze your desire into a rigid framework which interferes with the whole process of having the numbers work in your favor. Also, let go of trying to make trading for a living harder than what it actually is! Instead, work on simplifying it.
“You can’t get positive results with a negative mind.”
At this point, trading would just be a game of applying a model to the letter. And we know empirically that a lot of people fail at doing such a simple and seemingly “easy” task.
So there must be more to the story; there must be another *deeper* criteria that we’re not considering. Devising a methodology, one can argue, is the easy part. But, the mental aspect of trading is where most people struggle.
It’s one thing to have a methodology, but it’s another thing to follow it during good and bad times. It’s just not easy — especially if you’re trading for a living! Just ask any genuine trader who does so and almost always you’ll get the same answer: while a proven edge and an efficient risk management technique are building blocks, psychology — an appropriate state of mind when trading — is what glues those blocks together!
“The mind is a fascinating instrument that can make or break you.”
“You become fearful the moment you identify with fear.”
The mind has a simple response to what it perceives as danger: avoid, avoid, avoid! And how does it persuade us to avoid this? It tries to smack us with afflicting anxiety and discomforts.
Without cultivating a habit of detachment, those states will always appear to be who you are, in the moment. When you feel identical to everything that passes through your mind, you are, in essence, on autopilot, and you tend to mindlessly react in an unconscious attempt to make bodily discomforts and afflictive thoughts go away.
“In order to succeed, you first have to be willing to experience failure.”
The highlight of what we do as traders revolve around courting uncertainty — it spins and turns, and we merely need to hold its hands and dance with it. But the traders who don’t know the dance, or those who are instead leading a fight, are the ones who typically go home alone (and broke).
Hence, the educational system spends no time teaching us that failure is, actually, an essential part of the process of success. We aren’t taught how to learn from our mistakes and how to rebound from failure — yet this is critical to real learning.
Up and down moves in the markets make our mood swing like a pendulum. And when we are proven wrong, lose, or miss, we freak out because according to what we have all learned to believe, failing means there is something wrong with us. Failure also means the end. So, naturally, we insist and try harder to be right; to “succeed without failing” in order to feel whole, smart, responsible, virtuous, and safe… but it’s a never-ending cycle and a recipe for misery unless we learn to break out of it.
And the natural reaction is to protect what we already know to be true. Example: I am right in my assessment of market direction, therefore I will keep my trade on, even though the market has proven me otherwise. Even though the market is trending, I will exit my trade here for minimal profits because last time I lost money when I kept it on.
“We only see what we are prepared to see.”
A mind open like the sky allows us to see that: . The control we think we have…. it’s an illusion!
This control we think we have on things is an illusion! And if it is so, then failures are bound to happen. But we can minimize their number of occurrences by keeping a growth mindset at all times and by staying open to the lessons they teach us.
Interpretation happens within us. The environment that surrounds us (markets included) doesn’t interpret the information it has to offer. Good, bad, right, wrong are subjective ideas and occur strictly in our minds. So, we are the ones putting context behind our experiences with our own sets of beliefs and values. But, it is possible to change how we live each and every experience. We just have to shift our perspective on what wrong really means for us. Does it mean guilt, shame, frustration, anger, despair, confusion, or intrigue, impartiality, incentive, opportunity to learn, inspiration, creativity? In any case, we create our own reality. If I could go back 10 years, just when I started trading, that is what I would tell to my younger self.
When we adopt a similar approach, every winning or losing trades become data points. By this process of careful experimentation, as we keep trading, we discover more data around what works and what doesn’t.
When we cultivate a sense of stillness and ease in the midst of uncertainty, we allow things to happen the way they want to.
And this letting go of trying, wishing, wanting, has the potential to engineer for us not only consistent trading results but also emotional well-being. It shifts our perspective from one that is solely focused on not failing, and control, to one that is focused on learning, but above all enjoying ourselves in whatever we do and whatever happens.
Most things aren’t as serious as we make them anyways. How does this translate in trading? Let’s say you have a trade on. You might desire a certain outcome for that trade. That is what you want. But what if you let go of this desire? What if you say, “I don’t know what will happen.” (By the way, you really don’t). What if you say, “Let’s see what happens.” You place your trade; you put your contingent orders, and you let it work to fruition. Win or loss, it is what it is, but you fully trust your methodology — which structures your approach to the markets. Now, this particular trade might turn out to be a loss but as you step back and allow things to happen, happen, over time your results will take care of themselves, and your needs will also be met — minus the anxiety, frustration, and other limiting states of the mind.
You have to trust me on this, things will surprise you if you just let them happen as they may! When we become the scientists of our own lives, we free our minds of the emotional stigma associated with mistakes, failures, and being wrong, and instead, we let curiosity and opportunity enlighten our lives.
“Failure is just a matter of perception.”
So ask yourself the question: are you genuinely trying to be successful or are you merely trying to avoid failure?
Since our goal is to make trading pleasant and fulfilling, and certainly as least stressful as possible, we have to find a way not to let winning trades go to our head and losing trades to our heart.
Consider this: picture a guy walking in equilibrium on a rope over the Grand Canyons. What do you think is happening in that person’s mind?
I think the answer is clear: if the guy focuses on falling, in all likelihood, he is going to fall. If he focuses on reaching the end of the line as soon as possible, he also stands a greater chance of falling. However, if he focuses on the part that is in his control — staying present and focusing on the process of keeping his balance which he probably spent countless hours rehearsing — his action will become more faithful to his goals. Similarly, in trading, we all want to make x amount of money in the markets, but this is out of our control. You don’t get to decide what the markets ought to give you in each and every moment. Behaviors, by contrast, is something that you can control. They are the things you focus on in order to achieve your goals of earning x amount of money.
This is your intention, you don’t know if the markets are going to give you that, but you put it out there anyways. And every day you say to yourself, “what can I do today that can set me closer to my intention?” Then you forget the intention and strictly focus on your behaviors.
But it’s also important to acknowledge that you are never going to reliably get a specific amount that you decide upon — but your behaviors are going to help you get as close to it as possible. “If your focus is on money, you will never improve your results. If your focus is on improvement, you will get the money.” When I stopped thinking about the money and started focusing on my behavior, everything changed for me — my stress and anxiety levels went down, and my whole experience of trading changed for the better.
You control your entry, your exit, your risk level, your position size, etc., and your goal is to stick to your process in that regard. But the moment you shift your focus of attention from your process to the money (the need for or the lack thereof), you will begin to obsess over every single tick, and you will be inclined to check your positions every minute of the day. You will tend to take every market movement ad hominem, and you will mess with your trades in an unconscious attempt to make the discomforts go away. I’m sure you have been through this scenario at some point: you go through a week where you trade well; you have had a lot of winners so this begets additional confidence and you keep doing all the right things. But then you enter a string of losses.
You start thinking about the money you lost and want back, and you drop your rules.
OR you say:
“I’m proud of myself, I’ve been following my plan to the letter. Whatever the current results are, I will keep doing the right thing over what merely feels good.” As you can see, one mode of thinking is “money-oriented”, while the other is “process-oriented.” Which one do you think will fare the best results in the end? Which one is less stressful and makes trading a more pleasant enterprise?
if you are operating with a “money-oriented” mode of thinking, you are approaching this whole endeavor the wrong way. If you want to trade for a living and build a durable trading career, you can’t allow winning trades to make you overly happy and enthusiastic and losing trades to make you depressed.
When you trade, you have to empty your mind of any expectations you might be holding for yourself. That is the key to success in this field, and sadly, it is understood by few people.
Focusing on the process of trading is a must, but incidentally, there are instances where your beliefs about money will interfere with your ability to do so.
“Money is just something you need in case you do not die tomorrow.”
But, there is a caveat which most of us ignore: if one’s happiness is solely dependent upon external factors, then happiness will always seem elusive and ultimately unsatisfying. Nothing lasts forever, that is why your well-being cannot solely rest on external factors, like money, bigger houses, trendier clothes, faster cars… even people. You have to learn to find a happiness that is not contingent upon anything or anyone else but yourself. And, this brings us to the following question: would you trade if there was no potential for any monetary reward?
This is all good. But the thing is that to survive in this business, you have to pour love into what you’re doing — so much that money takes second place in your mind.
This is very important to understand because trading is not like any other field where success is proportional to the amount of work you commit to it. Success in trading is proportional to how much you are willing to let go of your attachment to, and need for, money, success, but also certainty, comfort, etc..
I know it’s a tough mental barrier to break — at least it was for me. But it’s the reality of the situation. Nothing worthwhile can be achieved in the markets without undergoing this fundamental shift in approach. This doesn’t mean that you give up your intention to create that which you desire, rather you give up the attachment to the result or the money. The moment you do that, and you combine it with your intention and focus, the money will come, as a by-product. Without detachment, we are prisoners of helplessness, hopelessness, despair, fear, anxiety, stress, trivial concerns, quiet desperation, all of which are the distinctive features of the unprofitable trader.
“If your happiness rests upon what you expect from trading, you are doomed.”
Pursue excellence, ignore success, and above all don’t take your winners and losers too seriously. If you do that, I promise you, your experience of trading will be much more enjoyable and you’ll obtain far better results.
For instance, one of the fundamental lessons that I have learned (and come to accept) is that change is constant and no amount of wishing, wanting, and hoping will ever change that. In fact, there is nothing more important one needs to realize, as an individual first, and as a trader second.
Most people avoid change because they don’t like the discomforts that are often associated with it. As the first signs of discomforts come careening into awareness, we run as fast as possible in the other direction.
“Uncertainty is an uncomfortable position. But certainty is an absurd one.” Many people can’t trade well because they don’t like to wait. They are control freaks and they like things to be moving on their terms. So waiting is painful for them — and I’m not talking about some Guantanamo bay type of torture, but a mere feeling that they are just not used to.
For instance, every time you feel annoyed and frustrated with losses, the neural networks and the areas of the brain responsible for the experience are reinforced, and the structures that produce the experience of being “calm and cool-headed” slowly fall by the wayside.
The areas and structures of the brain that are active in cognitive functions (all aspects of reasoning, thinking, evaluating, judging, remembering, and feeling) are active when we trade. Therefore, the mental processes that take place during this activity (including your thoughts, judgments, emotions, and attitudes) are reinforced. So, how you trade (whether you act impulsively, let your losers go out of hand, cut your winners short, take trades outside of your methodology) you are in essence training your mind in that kind of behavior. But this goes further: whatever you think, perceive, and feel (whether unconscious or intentional) even when you’re not trading, is training the brain to think, perceive, and feel in those same ways when you are trading.
But if you trade for a living as I do, cultivating the right psychology at all times is simply more important than your market edge and your risk management technique.
So, if you really want to make durable changes in your way of trading, amazingly, the simple act of being OK with change and discomforts is the solution.
It also prevents you from falling in long-established neural patterns. Essentially, every time you prevail over your discomforts, these are tiny votes for the kind of person you want to be — one who reliably acts in his own best interests in the markets or the opposite of that.
“A lot of the resistances we experience are really only thoughts.”
We spend our lives lost in thought. This is the natural tendency of the mind — it ruminates, jumps from thought to thought incessantly, and every passing thought appears to be who we are.
Thoughts are part and parcel of our human condition. Our ability to think is at the very core of our evolution as a species. Our thoughts gave birth to arts, literature, science, philosophy, and so on. So clearly, the problem is not thoughts themselves but, I argue, the habitual state of thinking without being fully aware that we are thinking.
“You must first realize the limitations of your own mind before you can transcend them!” What caused me to look deeper into the nature of my thoughts is my own inability to manufacture consistency in my trading results, despite having a promising trading methodology.
“The voice and the images inside your head are not who you are. You are the one who witness them.”
. You don’t lose sleep over a game of Monopoly, do you? (I hope you don’t). Yet, with trading, we are so involved in the stories our mind creates around it, that it becomes practically impossible to perform from a detached and impartial standpoint.
Thoughts are like little bullies in the mind, and they dictate behavior. “Go here… go there”, “Do this, do that”, “You’re not good enough.. you’ll never be good enough”, “Are you stupid? Don’t enter this trade, you’ll wind up losing again”… It’s just an endless barrage of opinions, judgments, comments, and they run our trading and our lives when they are left unchecked. But as soon as we pay attention to their nature, we see that they are a little more than nothing. They are pretty much insubstantial, empty, and illusory. One moment they are here, and the next they’re gone. Thoughts are like clouds, they have no tangible reality or intrinsic existence at all. There is, therefore, no logical reason why thoughts should have so much power over us.
When we recognize the emptiness of thoughts, the mind no longer has the power to deceive us.
But as long as we take its content all too seriously, and as long as we think of our deluded thoughts as real, they will continue to torment us mercilessly, and trading under those conditions can only be a losing game. There is tremendous space and openness when we are not enslaved by our inner conditions. So cultivating an awareness of our thoughts, I think, is the most important exercise a trader can do as he ventures in his journey to profitability.
Awareness is something that is practiced and refined until you’re able to see thoughts arise and you see them for what they are.
Frequent repetition of thought patterns and emotional states actually strengthens the neuro-pathways in the brain, which makes it easier for the same kind of thoughts and emotions to arise again and again, and each time, a little bit stronger and more anchored in your character than ever before. So ask yourself this question: what pathways do you want to strengthen? If you are not paying attention to what you are cultivating as thoughts and emotions, very often (and unknowingly), you are strengthening the patterns that lead to more suffering for yourselves and more mediocrity in your trading results.
“Awareness is like the sun. When it shines on things, they are transformed.”
how do you train your mind to gain awareness of your thoughts and emotions as they are arising? To these questions, there is one simple answer: mindfulness!
In its essence, the word mindfulness means ‘to remember the present moment,’ and the practice, in a nutshell, is one of paying non-judgmental attention to that specific moment.
I have tried almost everything, from affirmations to visualizations, and none of these got me the kind of results I got from a consistent mindfulness practice. And the reason is simple: mindfulness digs below our issues — which have roots in the construct of the “Self.”
When you pay attention, you begin to realize that the content of your mind and the bodily afflicts are not you. In other words, thoughts, emotions, sensations, feelings, all these things are experienced in the space of consciousness, and you — the real you — are merely an observer amidst all those states and changes.
“The highest form of human intelligence is the ability to observe yourself without judging yourself. In essence, this is mindfulness.” Mindfulness is the ability to observe yourself in a non-judgmental way, therefore, effectively it is the guardian of the mind.
When you practice being present — not half present but fully present — you bring in all of you, even for a few seconds at a time, but certainly as much as you can. And when you do this in trading, it taps you into what you need most at the moment, what you need to know, and what you need to do, rather than mindlessly act on a feeling.
“The mind is everything. How you use it determines your reality.”
Mindfulness is the awareness that arises from paying attention on purpose, in the present moment and non-judgmentally.
Mindfulness, as it is, is just brain exercise. Nothing more.
The human brain is unarguably the most profoundly complex organ in the body, and 90% of its activity occurs beneath conscious awareness. This means that, even though we think that we have some control of how we think, feel, and behave, neuroscience suggests that it isn’t so simple.
However, on the other side of this, if we practice being calm, clear, and focused, we can strengthen these networks too. As humans, our brains differ from other animals. This is mostly due to the front area of the brain called the frontal lobe — often called the new brain as it was the last to develop in our evolution.
In essence, what you are doing is that, with every thought that comes into your awareness, you are learning to let go, which starts with letting be, and you are strengthening your ability to do so.
All these quotes are copy-paste from the book “The essence of trading psychology in one skill” by Yvan Byeajee.
