Thoughts on Trading Psychology

One person who wrote me (Mike) has requested I write a guest blog based on a Monday morning conversation in the room about trading psychology.

It started as a brief discussion on cognitive abilities, areas of brain used in differing tasks and how this relates to trading.

With the US on holiday it was a perfect time for some of the differing experiences of members of the group to ‘shoot the breeze ‘ and see down which interesting avenues the conversation would move.

I have edited it a bit and removed parts to try and make it easier to follow. Hopefully there is something of benefit for you.

Me: A brain scan of someone trading would be interesting so we could see the neurons firing in which part of the brain. Then do the same with the same person when they are slightly drunk and really drunk and or/ drugged so there would a scan of their brain operating then. It would be fascinating to compare the two scans.

Such a test could also be used on one successful trader and one unsuccessful trader. There may be difference in which part of their brain lights up with the neurons firing. If that was the case the research could then take the bad trader and teach him how to be better and successful. Then scan them again when trading and see if they are using a different part of the brain – or maybe there is much more brain activity. It would be fascinating to see if successful traders use a different part of their brain.

The discussion then moved on to pyschology and how successful people use certain traits that make them successful.

These can be taught.

Me: One of my friends is a pyschologist and does teaching on trading floors in the city. Using different words he does however say much of what you say/ teach on here Mike. One of the main things is having a well prepared plan, being confident in it and being settled in sticking to it.

Mike L: That is why “trading in the zone” is so important

Me: Yes, but what it is is being absolutely confident that you have done the work, fully understand what you are trying to achieve and being prepared to adhere to it

Mike L: at peace with the market is how I see it

Simon M: zone being a state of mind when trading without fear and being in flow with the market, having our perception of market information neutral and not coloured by bias or fear

Me: There are huge similarities between trading mindset and top level sport as well

Simon M: yes, both traders and top sports people are confident and don’t fear mistakes. They can put the past instantly behind them

Me: Compartmentalise as well which is the ability to remove the result from the process and just to concentrate on the process. This is very important. If a sportsperson concentrates their energies, mental and physical on the end goal (medal, winning the Premiership in five months time etc) they lose focus on the small steps immediately ahead of them that they need to achieve if they are going to have any chance of fulfilling their longer term aim. The ‘a walk of 1000 miles starts with a small step’ idea.

Then they analyse each stage (kick, trade, decision, delivery, race etc) whether won or lost, good or bad and seek improvements and understand errors to eliminate. then wipe the mind of anything negative and solely concentrate on the next event with full confidence, a settled mind as you have fully prepared yourself and therefore your chances of succeeding are hugely improved.

Such belief in process is huge in sport – just listen to the words players and managers use in interviews (skillsets, execute, gameplan, strategy, discipline, journey, process etc)

So you can see how similar that is to Mike on here. The thing is only those who want to enjoy the process of learning and improving (and that takes humility) will benefit on here ( and they will benefit hugely)

Those who want a quick fix – trading calls etc will wither away as they lack the passionate interest, enjoyment in working through a learning process and the patience to keep going however slowly they may be improving.

PMA – Mike, Simon and Michael frequently mention PMA (Positive Mental Attitude). In relation to the above conversation what that would mean is being confident in your ability because you have done the necessary preparatory work and have a game plan settled. You would not waver from it and would only change it as the market dictates. PMA is not ‘fluffing’ oneself up into a belief that you are going to win. Such ‘confidence’ is a veneer that can mask insecurity or a lack of work.

That was the gist of the conversation but the main tenets to be taken from it are the role of process.

To merely concentrate on pips/points is to put unnecessary pressure on yourself. The result should happen for you if you have done the work and that means the studying, the levels, the disciplined stops and the patience to wait for a set-up that gives a high percentage chance of working out.