The right trading mindset
This lesson will explore further the concepts that allow you to develop a trading mindset so that you have a clear focus when you trade. Continuing on from the previous lesson, this lesson will explore some of the solutions from trading psychology author Brett Steenberger.
Trading as a performance activity
It is important to consider trading as a performance activity that requires the same level of discipline and commitment as chess, professional sport or military training.
As Steenberger asserts, a trader should acknowledge the need for a "high ratio of time spent in practice/rehearsal relative to actual performance." Generally speaking, a trader should spend more time analysing economic fundamentals or refining entries with historical data, than executing trades. They should also spend significant time testing a strategies before taking them onto a live account.
Steenberger outlines further similarities with performance activities, such as the need for "rapid and comprehensive feedback to allow performers to learn from their practice/rehearsal and incorporate changes in future performances".
There is also a need for "a teacher who guides rehearsals by creating demands sufficient to challenge the performer, but not so overwhelming as to create frustration and failure."
A trader can fill these voids by immersing themselves in a vibrant community in which to exchange ideas, and interact with successful and struggling traders who are undertaking the same path of self-development.
Understanding that trading is a performance activity helps suppress warped expectations. A professional 100 metre sprinter knows that they require the development of muscle and technique with a personal coach to work towards Olympic success. Similarly, a trader must appreciate the need for hard work and preparation, and the importance of external aid to help facilitate development.
Also consider that an athlete’s training is geared towards their discipline – a 100 metre sprinter adopts a different training regime and mindset to a marathon runner. The same applies to trading – a fundamental forex trader may study the Financial Times, whereas a technical trader will review daily chart setups and engage in weekly analysis.
Importance of a work-life balance
Work life-balance is a term used to describe the balance between an individual's work-related and life-related (i.e. leisure) activities. The term was first coined in 1970s Britain, as new technologies such as computers and mobile phones provided employees with greater links to the corporate environment, and began to blur the boundary between work and "life".
Failure to maintain a work-life balance while trading will not only be harmful to other areas of your life, but will have a detrimental impact on your concentration and productivity levels during trading sessions. It will make a trader more vulnerable to the influences of recency bias and warped expectations, and can lead to them forming emotional attachments with trades.
Neglecting a work-life balance can be symptomatic of trading addiction. As Steenberger stresses, "there are times when trading becomes a vehicle for destroying mind and soul. An addiction occurs when an activity provides a strong source of stimulation that, over time, leads to psychological and sometimes physical dependence."
Addictive behaviour" can be seen as something that is pursued even in the face of obvious, harmful consequences. A trader may be considered "addicted" when he trades to the detriment of his health, or to the point of losing all financial responsibility. The solution to addiction is usually the abstinence from trading, although there are a few extreme cases where professional help is needed.
Maintain contact with people
Retail trading can be a solitary profession, so it is important to maintain social contact with family, friends or members of a community. Sport and exercise are clinically proven ways of channelling energy, and reducing stress and anxiety levels. You can also use a trading journal as a springboard for a more general journal that documents thoughts, plans and goals.
Trading and real life
Finally, it's worth addressing the links between trading and real life. By assimilating the two we can understand the challenges of trading psychology in a real life context.
As Steenberger summarises, "Success in trading and life comes from knowing your edge, pressing it when you have the opportunity and sitting back when that edge is no longer present. The worst decisions, in life and markets, come from extremes: overconfidence and a lack of confidence."
Take for example, selling a house or beginning a new job search. In both of these activities, there are a set of decisions that need to made objectively and require positive environmental circumstances to undertake them.
In the case of buying a house, low interest rates and a booming housing market would present a set of circumstances for a good time to buy, whereas starting a new job search would require a stable job market and good prospects in a new company.
The issues arise when impulsive decisions are made, because the surrounding circumstances become secondary to emotional reactions. In the case of buying a house, this may be buying a property based on desperation to own a home, when there is an economic slump – only to see property prices then fall. Someone whose only desire is to get away from their current employer may find themselves in another role with the same drawbacks, especially after quitting their previous role in a high unemployment market.
These kinds of situations can manifest in trading when a drawdown period leads to emotionally-made decisions. Failure to recognise that an edge is no longer present and that the environmental circumstances have changed – the end to a trending market, for instance – can lead to taking trades on impulse, just to recoup losses. It is important to wait for an edge to be present again in the markets.
So far, you have learned that:
- Traders should have the mindset that trading is like a performance activity and have the same level of discipline and commitment as chess, professional sport or military training.
- A guide or a mentor that sufficiently challenges you is important to develop the right set of skills and trading mindset.
- It is important to maintain a healthy work life balance to reduce the effects of emotional influences when trading.
- Trading can be addictive and it is important to recognise the symptoms: trading at the detriment to health and losing interest in financial responsibility. In most cases, stopping trading for a period of time is the best solution.
- It is important to maintain contact with people in a solitary profession such as trading.
- Understanding the links between trading and real life help us come to terms with the psychological elements of the former.