I chose to read this book to get some deeper insights into the psychology behind being a successful trader.
What I learned:
Change
Change begins in the mind. The physical activities that are being changed happen because of a concentrated effort to adjust the process of the way we think. Emotions are the catalyst that drive true transformation. We can use the emotions we experience as information about why things may be working or not working. Journaling is a great way to self-evaluate. Change is an ongoing process, and it is important to stay active in our progress.
Stress and Distress
There is a difference between stress and distress. Stress happens for a reason. It is a mental and physical mobilizer. If we are prepared, understand where our niche is and can remember what to do in stressful situations, stress is our friend. This takes work. We must take steps to understand what is actually happening that triggers our senses. Journaling helps keep track of how situations affect us psychologically. Something I found very interesting that applies to all areas of life concerns depression. Depression is a way for nature to suppress motivation. We all have a perception of our real selves, and a perception of our ideal self. This gap is where we take meaningful action to get to our ideal self. If we don’t know how, or think it’s impossible, depression can set in and suppress our motivation to reach our goals. Creating SMART goals and understanding how the market is affecting us are our greatest tools in taking control of our destiny.
Psychological Well Being
Our quality of life affects the quality of our trading. Essentially, we think best when we feel good. The opposite of happiness is emotional dis-ease, a guilty feeling that comes with letting life’s opportunities slip by, or settling for less than we want out of life. That feeling of guilt is foundational, and it affects the rest of our lives. The best way to avoid this feeling is to set SMART goals and work toward them every day. Diversification in life, and in markets reduces performance pressure, which allows us to become immersed in whatever we’re doing. It takes effort and intention to cultivate calm and emotional resilience to be successful in trading. Access to intuition requires a calm mind, and intuition is necessary to pick out patterns. A trader must be resilient because he will face significant stresses every day. Diet, physical well-being, and morning routine all contribute to the quality of your trading day.
Steps Toward Self-Improvement
Being a successful trader takes consistent work on self. Keeping a journal is the foundation of self-coaching. The idea is to recognize core patterns that lead to trading in certain ways, whether they are the things you’re thinking about or what you’re feeling, or your physical state before you start the day. Self-improvement is not only about shoring up weaknesses, it is about building on strengths. In an occupation like trading, missed opportunities or not maximizing profits contributes to lesser profitability the same way losing trades do. So finding where your strengths are and improving on them is just as important as managing risk. Other facets of self-improvement are consistency, repetition, and creating a safe environment for change.
Breaking Old Patterns
Our greatest shortcomings in dealing with relationships will find expression in markets. Our relationships, past and present, really act as a mirror for how we experience ourselves. By identifying our defense against the pain of old conflicts, we can become an observer, able to take an objective perspective of what may be triggering us to make poor decisions. Disrupting old patterns should be a daily practice. We can always learn more about why we do things.
Remapping the Mind
Our mind is a complex of maps called Schemas. Throughout our lives, especially while developing at a young age, we develop these schemas, or mental maps that we filter our experiences through to make sense of the world. Sometimes these maps can be distorted, causing us to react to certain experiences irrationally. If we experience something traumatic, it shapes an emotional response to that stimuli, and can create an automatic response to future situations that we perceive could hurt us in some way. Often it is not obvious what it is exactly that is evoking these strong emotional reactions, but their existence is evidence of a negative thought pattern that was learned at some point in the past. In trading, we are on a bit of an emotional rollercoaster. All kinds of negative thought patterns can be triggered in a trading session. And it is very difficult to determine the root cause of these patterns based just on our trading behavior. But the key is to identify that a pattern is there, and that is best accomplished by using a journal to track each trade and analyze not just what was going on in the market, but what we were thinking and feeling at the time. Then we can begin the work of picking out the patterns that affect our trading negatively. Cognitive work is the process of identifying these patterns that are a product of distorted thinking, and replacing them with more realistic ways of viewing the world. This is done by disrupting the negative thought pattern as they occur. A way to do this that works for me is imagining it’s happening to someone else and I’m watching it. By making myself the observer, I can remove myself from the thought pattern and think objectively about better ways to view the problem. Framing the problem pattern in a different context also works well . When viewing the problem in a different way, it makes it easier to respond in a different way.
Learning New Action Patterns
Thinking is a kind of behavior. Learning is about reinforcing behavior. If we don’t reinforce our behavior, the links between cause and effect weaken and die. We can utilize social groups to accelerate learning curves because just seeing others rewarded for positive behavior reinforces our own. We can be trained. Exposure is very important to behavioral change. Even the avoidance of negative experience can be a reinforcer of behavior. It is best to face whatever we’re afraid of and overcome it, triggering an emotional response which is highly motivating.
Coaching Your Trading Business
Management of capital is imperative. In the beginning, you need to know that trying to do too much with too small of an account is a good way to blow up. Position size and risk should start small and grow over time. A trading business is like any other business in that it needs to be well planned out to succeed. Clearly defined goals need to be determined, followed by a detailed plan of how to reach them. The plan will have to include the cost of overhead, how much you anticipate in returns, what kind of trading you’re doing, average win size, average ratio of winners to losers, average percentage of winners to losers, variability of returns, and how large your account needs to be to sustain drastic swings. The more data the better. Keeping detailed metrics is crucial to improvement.
Diversification of trading is an ongoing process that should be practiced throughout your trading career. Trading different markets, time frames, and patterns creates multiple profit sources and leverages talent. The more one knows about the market the more effective the trading is. Searching for new ways to profit is always on a good traders mind because markets change.
Risk/Reward needs to be calibrated regularly. You don’t have to have a huge edge, but the edge you do have must be consistent. The level of portfolio risk should match the level of the traders personal risk tolerance, and should be a function of anticipated reward. Every trade should be looked at as a hypothesis, with an anticipated outcome. Entry, stop-loss, and exit is the main framework. Trade management is the set of decisions made after entry. When to take profit, when to let a trade run, when to scale in or out, is all based on the fresh data coming in as the trade plan works itself out.
Something I thought was very interesting was the idea of thinking in themes. Themes are narratives that the trader constructs to makes sense of what’s going on in the market. Events that are occurring in one sector could have a logical impact on another, or on several others. Having a feel for market sentiment is something that separates a real trader from the pack in my opinion. Without constructing market themes, traders will trade the same way in all market conditions and become frustrated when results are all over the place.
Lessons from Trading Professionals
The overlap from all the traders in this section is research, data, and metrics. Constant review and analyzing of metrics is just as much a part of trading as the actual execution. You can’t have one without the other and expect to be successful. Each of the traders in this section use a journal.
I got a lot out of this book in both a trading context, and life context. I’ll use what I learned here to maximize my learning curve when I start trading after release.
