Trading is not an easy profession to master, and just as it is important in competitive sports or performance arts, psychology is the key to success. Trading psychologist, Brett Steenbarger of Brett Steenbarger.com lists five important principles that will lead you to the right path.
Here are five important principles that pertain specifically to achieving a successful trading psychology.
Principle #1: Trading is a Performance Activity
Like the
playing of a concert instrument or the playing of a sport, trading entails the
application of knowledge and skills to real time performances and this is a core
idea. Success
at trading, as with other performances, depends upon a developmental process
in which intensive, structured practice and experience over an extended time
yield competence and expertise. Many trading problems are attributable to
attempts to succeed at trading prior to undergoing this learning process. My
research suggests that professional traders account for well over three-quarters
of all shares and futures contract volume. It is impossible to sustain success
against these professionals without honing one's performance-and by making sure
that you don't lose your capital in the learning process. Confidence in one's
trading comes from the mastery conferred by one's learning and development, not
from psychological exercises or insights.
Principle #2: Success in Trading is a Function of Talents and
Skills
Trading, in this sense, is no different from chess, Olympic
events, or acting. Inborn abilities (talents) and developed competencies
(skills) help determine one's level of success. From rock bands to ballet
dancers and golfers, only a small percentage of participants in any performance
activity are good enough to sustain a living from their performances. The key to
success is finding a seamless fit between one's talents/skills and the specific
opportunities available in a performance field. For traders, this means finding
a superior fit between your abilities and the specific markets and strategies
you will be trading. Many performance problems are the result of a sub-optimal
fit between what the trader is good at and how the trader is trading.
Principle #3: The Core Skill of Trading is Pattern
Recognition
Whether the trader is visually inspecting charts or
analyzing signals statistically, pattern
recognition lies at the heart of trading. The trader is trying to identify
shifts in demand and supply in real time and is responding to patterns that are
indicative of such shifts. Most of the different approaches to trading-technical
and fundamental analysis, cycles, econometrics, quantitative historical
analysis, market profile-are simply methods for conceptualizing patterns at
different time frames. Traders will benefit most from those methods that fit
well with their cognitive styles and strengths. A person adept at visual
processing, with superior visual memory, might benefit from the use of charts in
framing patterns. Someone who is highly analytical might benefit from
statistical studies and mechanical signals.
NEXT PAGE: The Importance of Implicit Learning |pagebreak|
Principle #4: Much Pattern Recognition is Based on Implicit
Learning
Implicit learning occurs when people are repeatedly
exposed to complex patterns and eventually internalize those, even though they
cannot verbalize the rules underlying those patterns. This is how children learn
language and grammar, and it is how we learn to navigate our way through complex
social interactions. Implicit learning manifests itself as a "feel" for a
performance activity and facilitates a rapidity of pattern recognition that
would not be possible through ordinary analysis. Even system developers, who
rely upon explicit signals for trading, report that their frequent exposure to
data gives them a feel for which variables will be promising and which will not
during their testing. Research tells us that implicit learning only occurs after
we have undergone thousands of learning trials. This is why trading
competence-like competence at other performance activities such as piloting a
fighter jet and chess-requires considerable practice and exposure to realistic
scenarios. Without such immersive exposure, traders never truly internalize the
patterns in their markets and time frames.
Principle #5: Emotional, Cognitive, and Physical Factors Disrupt
Access to Patterns We Have Acquired Implicitly
Once a performer has
developed skills and moved along the path toward competence and expertise,
psychology becomes important in sustaining consistency of performance . Many
performance disruptions are caused when shifts in our cognitive, emotional,
and/or physical states obscure the felt tendencies and intuitions that lie at
the heart of implicit learning. This most commonly occurs as a result of
performance anxiety-our fears about the outcome of our performance interfere
with the access to the knowledge and skills needed to facilitate that
performance. Such performance disruptions also commonly occur when traders trade
positions that are too large for their accounts and/or do not maintain sound
risk management with their positions. The large P/L swings cause shifts in
emotional states that interfere with the (implicit) processing of market data.
Cognitive, behavioral, and biofeedback methods can be very useful in teaching
traders skills for maintaining the "Yoda state" of calm concentration needed to
access implicit knowledge.
The most important question I can ask an aspiring trader is: Are you engaged in a structured training process?Education-simply reading articles in magazines, Web sites, blogs, and books-is important, but it is not training. Training is the systematic work on oneself to build skills and hone performance. It requires constant feedback about your performance-what is working and what isn't-and it requires a steady process of drilling skills until they become automatic. No amount of talking with a coach or counselor will substitute for the training process: not in trading, not in athletics, and not in the dramatic arts. Training yourself to proficiency is the path to a positive psychology.
Brett Steenbarger can be found at Brett Steenbarger.com.