Traders tend to make the same one or two mistakes over and over again. Here’s a five-step process to help stop the self-sabotage.
In a trading psychology group I am part of, a question was posed on whether there was a program to specifically target a trader’s psychological issue. Issues that may be preventing him or her from executing trades according to a trading plan (or not making a plan at all). The works of Norman Hallett, Dr. Van Tharp, and Dr. Alexander Elder were all mentioned, along with “general” practices such as exercise, yoga, meditation, etc.. These are all people or activities which I have researched and utilized over the last 10 years, and which produced some results.
Over the last few years, though, I have used a different approach. It is outlined in probably one of the most thorough, actionable, and hands-on way to deal with just about any psychological issue you’re facing as a trader. And this is a non-trading book.
Here I will attempt to summarize how I personally target my trading psychology quirks. If you are a new trader you may not know anything about trading psychology and may be wondering what I am talking about. To provide a basic introduction, below I have listed a few articles and books to usher you into the world of trading psychology.
For those of you how have traded for a while, you likely know some of the tendencies you have and how those tendencies and personality traits can at times sabotage your trading. This is what the field of trading psychology tries to minimize or prevent.
Our Human Biases Which Hurt Us in Trading
We like to think that we think logically and clearly. We don’t. We likely never completely can, but being aware of our biases and how our mind works can provide us a huge edge. It is also the starting point of our journey to improvement.
We first need to isolate an issue to work on, and at the moment it is quite possible you (me, all of us) have hidden biases that are negatively affecting our life and performance. Here are some resources which highlight human bias (articles are linked, books are not linked):
Bias, Blindness and How We Truly Think (PDF) by Daniel Kahneman
Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
Random Reinforcement: Why Most Traders Fail by Cory Mitchell, CMT
9 Ways to Improve Results Through Trading Psychology by Cory Mitchell, CMT
The Art of Thinking Clearly by Rolf Dobelli
Time for Action
Knowing about these things doesn’t help. It is like knowing that a good diet will make you feel better, or that exercising will trim the waistline. Knowing doesn’t produce results. I had to look at my trading (and life as a whole) and discover where I had these biases—or what I was not accepting about myself, my actions, or the market—and then had to go through a process to ultimately come up with a course of action.
The process I use is outlined in a non-trading book: Accepting the Radical by Ronna Smithrim and Christopher Oliphant.
The thing that is different about this book is that it does not attempt to “fix you,” which is where a lot of other methods falter. If you are just a high strung person, or extremely aggressive or conservative, that likely isn’t going to change much…at least not any time soon. You can use drugs or try to quell these traits, but they are there, so trying to fix them is not the answer (in my non-psychology-professional opinion). Quite likely you and others (and me) have already tried to “fix” yourself, but with limited success.
This book outlines a different approach, one which forces us to plan for our traits and understand them, instead of trying to fix them.
This subtle shift makes a world of difference in seeing relatively quick results in terms of our trading and life in general.
Here is the general process. There is no way I can do the book justice, so I encourage you to pick it up and work through it on your own for your own trading psychological issues (or non-trading issues).
The 5-Step Process
This is a greatly summarized version of the process. It does take work. I bought a few note pads and scribbled down about 50 pages working through different “events. ” As you go a bit deeper into why you react a certain way under specific market conditions or market stressors, I encourage you to write your thoughts down. Remember, the ultimate goal to come up with a plan for handling what is sabotaging you, so writing it down for future reference is important.
- Go through, in explicit detail, an event that causes you to react (such as a trading condition) in a way that is not in your best interest. What do you feel, and how do you react? The event is a reality that must be faced for this process to work, even if in the end you decide your plan is to avoid it (but you still need a plan for that, so go through the steps). All events are neutral, it only us who apply an emotion to them. So if you feel a strong emotion toward something while trading, you are dealing with a potential “event.”
- Accept the emotion that is caused, and also accept the event (stressor) and the consequences of your actions for reacting to the event (stressor). At this point you are just admitting to the reality of the situation and that there is something to work on. For example, you may have a tendency to remove your stop loss when you are about to take a loss, hoping that giving the trade a bit more room will allow it to move back into profit. You then become mad at yourself (or the market) if the loss gets bigger. Acknowledge what you are doing, and that you often feel angry, and that moving the stop loss can produce very large losses.
- Go into discovery mode. List how this personal trait or your reaction to the event has both positive and negative aspects. Listing positive AND negative is important, because we may find what we view as a weakness can be turned into a strength. For example, if you feel you are too conservative this may reduce your profit but it also shields you from potential losses. You can’t change that you are this way. If you try to be aggressive you’ll likely find yourself under extreme stress. So list every positive and negative aspect you can think of (for your own “issue”) so you really understand all angles of it, and can begin to appreciate what this trait does for you. If you take large losses, dig into why that is and what positive and negative traits are at work.
- Integrate and accept. At this point, you have discovered that this trait is not likely something you can change per se, and you’ll be able to see that while it may be negative at times, it also has positive aspects. This is not meant to glorify bad behavior. It is meant to reduce the charge of the emotion. Often we beat ourselves up so much for our mistakes because we haven’t seen how our mind is trying to protect us, or is actually trying to get us what we want but is going about it the wrong way.
- Once you have accepted the good and bad qualities of your trait/event, then you need to make a plan for how to manage it. For instance, if you overtrade and need constant stimulus, the constant stimulus part may not change. You can try to change that part of you, or you can just plan for that aspect of your personality. Maybe you have a little game open while you trade, maybe you write while you trade, maybe you join a trading chat room. Maybe you start trading a 1-minute or tick chart, day trading, instead of swing trading which is more low-key, for example. When you insolate an event or issue, make a plan for it. Make it work for your trading, instead of constantly fighting against it. If you really can’t seem to cut losses, maybe consider trading (buying) options, so your risk is capped on each trade from the outset.
There is nothing wrong with you…unless you feel you need medical help. In that case, go seek medical and professional help! Sometimes we just need to look a problem, and if we can’t find a way to solve it, make it work for us instead. Think of ways to accommodate any trading issues so it doesn’t inflict as much damage. Fully accept that the issue may not be going away any time soon, but that doesn’t mean it isn’t possible to trade, and trade well. Go through the process.
This process helped me plan for all sorts of issues. We often can’t fix an issue, but we can learn to plan for it and execute a plan so it doesn’t have the negative consequences.
By Cory Mitchell, CMT @corymitc