Trading is a Psychological Battle
"Stress narrow's your focus and makes you revert to earlier response patterns. You do what you did when you were a beginner. You do what your broker or advisor suggests. You do anything simple." - Dr Van K Tharp
Not all endeavors are made equal
Finding a winning trading system is relatively easy at face value. In fact, there are hundreds if not thousands of strategies that have favorable risk to reward ratios and can be learned within a few weeks with proper focus. I suppose the same could be said for a good diet. If you wanted to be lean and strong, there are hundreds of ways to go about it, cut the carbs, up the cardio and increase the protein - hey presto!
Then again, perhaps we could say that about practically everything we want or at least 'think' we want. Relationships, careers, travel and self-fulfillment. Do you see the conundrum here? The steps to get what we want are not that difficult in theory, following them on the other hand is what separates the good from the great. It's the discipline, determination and our value alignment that makes the difference.
Somehow market players (new and old) think that the discipline required for all of life's endeavors or 'wants' is different with trading. Somehow having access to the stock market guarantees that one will make money or so the delusion goes. Few grasp the true reality of trading.
The painful truth however, is that trading is the least forgiving of all pursuits. Discipline in trading needs to be iron-clad and consistent or you could ruin yourself psychologically and financially. Unlike a diet where you can have cheat meals and still get away with it (the odd time), cheating on trading systems can end in bankruptcy and devastating loss.
In order to be a successful trader or person,you need to develop a style and strategy that is aligned with who you are. I call this value alignment or mental congruency. If your mental world becomes misaligned and your trading system is hard to follow, you will be an anxiety fueled mess that fails to follow his or her rules and jumps from strategy to strategy looking for the 'Holy Grail' (which doesn't exist).
The same principals are universal which is why the axiom of 'know thyself' is relevant and timeless in trading. Failure to understand yourself and be fully accountable for your behavior can create unparalleled confusion. Unlike other aspects of life such as career or personal relationships - trading will not cater to your ego.
Failure to assess yourself objectively and be honest about your results is not sustainable.
A Different Set of Rules
The luxury of delusion we get in jobs and at home is a hindrance that must be expelled at an early stage in trading. In your job or at home we tend to validate each other all the time: "You're doing great!","No you aren't putting on weight","Of course it's insert generic name's fault". By trying to protect each other from critical feedback our societal or cultural agreements can do far more harm than good.
In trading, not knowing why we do what we do but doing it anyway stems from this misalignment. We have two completely contrasting belief systems coming into play.
The misalignment between these constructs causes huge anxiety. Not only in trading but in most aspects of our life where we aspire for more. The internal battle stage is set and we need to truly dig deep and prevent the self-sabotage machine from activating.
Whilst this battle rages on, the market keeps ticking away. Dopamine, serotonin, testosterone, estrogen and a host of electro-chemical stimulation occurs in our brain coupled with the need to make informed, rational and quick decisions - easy, right?
The Outcome of Misalignment
The result of being misaligned with 'ideal self' is prime pickings for those who understand the marketing and mass hysteria game. Again, human nature in this regard can be quite predictable. If we face uncertainty, we will gravitate towards some kind of human action to help us become more 'certain'.Our primitive brain is engaged and our strategy, method, diet or skills are thrown out the window.
This is when people start hitting up Google (me included), looking for Sure win trading systems, diet pills or trading gurus. We are in a supercharged emotional state and our insecurity or anxiety will make us believe almost anything. Sprinkle some good reviews in there, couple of celebrity endorsements and a decent website - Boom! You now own a new trading book, are signed up for their signals and decided to go for the 1 year membership - it was cheaper!
The Novice Trader 'Doom' Cycle
"If you stand for nothing, you will fall for everything". - Unknown
Does the below sound familiar during this phase?
- Buying into news stories on so-called hot stocks only to see them dump on the day.
- Jumping into trades from Twitter Gurus with little due diligence
- Following other people's ideas and not knowing their strategy
- Getting overwhelmed with the fear factory that is the news and selling too soon
- Being suckered in to the 'get rich quick' mentality
- Buying a stock to watch it tank and hold onto it for dear life
- Selling a stock to watch it run up 500% in a few weeks (Tilray Grrrrrr.)
- Feeling like shit and beating yourself up for all of the above.
If you aren't confident in who are, what you know or at least the fact that you may not know much, it will be a real challenge to fend off anxiety and doubt. Knowing this however adds tremendous power to the tools you can add to your arsenal in time.
Trading is a psychological battle and this is where the big money is won. It's not the trading system, it's how you trade it. You can hand someone the best system in the world - if it does not align with what they believe then it's pointless.
The Symptoms of Anxiety Roll in Like Clouds
Anxiety, a topic that we will only touch on, is pervasive in amateur traders. The paradox is that most people trade because they think it will make them rich - it then becomes the thing that makes them poorer than ever before. Roll this up with frustration, feelings of failure, misinformation and money - anxiety is sure to follow.
In our instant gratification age, everyone wants the cars, money and the huge houses. If I had a penny for every fake, misleading or bullshit Instagram site about trading - I would never need to trade again.
Anxiety is crippling for traders. Not being able to execute a plan or feeling depressed because of money is not a long term solution with trading nor should it be. I have had massive issues with anxiety that stemmed from a combination of trading before I knew how to trade (gambling) and lacking the maturity to assess why I was making poor decisions in succession.
It takes great emotional awareness and courage to confront what it means to really trade. Building a system is easy, managing yourself is more challenging.
Realizing It's Not That Easy
Once amateurs realize it's not that easy to be a trader millionaire overnight or have a few wins followed by a massive loss, it is easy to spiral into chaos. All of the below happened (and still happens just less frequently) throughout my trading career.
Trading whilst being in an anxious state, just as any of life's endeavors can be crippling. I am not talking about being a little stressed from trading. I mean full blown pre-hypertension blood pressure from the constant stress. If you've gone through this and come out the other side then congrats. If not, I suggest you read on.
The Ultimate Revelation
After having my first series of panic attacks which were all stress related (from trading and working), I decided to take a step back and assess the main reasons I got caught up in emotion when trading. A series of patterns emerged which I documented and reflected on to find out why I feel like I feel. Here are some of the patterns I noticed.
- I was focused on the money and winning as opposed to executing my plan - my perception on winning was the profit and loss amount, not the process.
- Losing made me feel like the fat kid at school again, bullied, unwanted and a failure. I felt the market had it out for me. I made all of my losses personal.
- My time horizons were short, why isn't anything working! Forget my daily charts, I am going to day trade this one!
- Trading unraveled my true nature regarding discipline - it needed major work.
- I was completely tied to the result and took wins or losses personally.
- The more time I was burning behind a screen, the less time I was spending doing the real work - introspection, analysis and planning.
- I was impulse trading almost 70% of all my trades!
It all made perfect sense. With the primitive parts of my brain triggered I was acting like an animal in fight or flight mode.
Buying and selling at will with very little respect for my plan and less so for my account. Combining the sense of 'no control' with losing money is a pure recipe for pain. Trading should not be a painful and brutal experience. If this is how it feels, it is time to step back, re-asses and focus on the most important trading tool there is - you!
Curing Trading Anxiety
Before I give you my formula, I must admit that I still face anxiety. Not only in trading but in life. The below steps are a small part of the overall picture, dealing with stress is an ongoing battle and will require a lot of deep work and personal development. I strongly suggest being your own best friend. Make sure you self-talk is positive. Weed out the negative thoughts and make positive thinking a habit just like any other.
My Trading Anxiety Rules
- Realize that trading is only part of what should be a multi-faceted and fulfilling life. Don't make trading the only thing you do. Everything has a price.
- Make sure that your trading plan has easy to follow rules and low risk setups. You need to fully understand your trading or just step aside.
- Never place a trade in a heightened emotional state. If you feel that you are overly bullish or bearish on a stock, look at the charts, revise your game plan and make a rational cool decision
- Do not change your trading size based on gut feels
- Switch off the financial news!
- Don't trade on any tips unless they conform to your rules
- Make sure that you write down and journal every trade
- Focus on developing discipline as opposed to making money
- Make trading a constant learning experience that will build your character
- Ensure you really believe in and understand the trading system
- Expand your time horizons and make sure you are realistic about wanting to trade for a living
Managing anxiety in trading and in life is a never ending improvement process. If you've never heard of the Japanese philosophy of Kaizen I would highly suggest looking it up. The ultimate goal is to control your reactive and explosive impulses and mitigate the risk of emotional self harm. To do this will ultimately require knowing yourself on a deep level and being open to positive change.
Change takes time and effort. Confronting the truth, re-wiring thought patterns and confronting existing sticking points can be a real challenge. Just remember that without the contrast of pain and challenge, we can never truly appreciate the beauty of fulfillment and reward. Everything has it's opposite which is the thing that gives it meaning.
Know what you want
If you live in a constant state of cognitive dissonance, trading (and life) will always be a struggle that is not worthwhile and the money will be secondary when you feel confused, lost and emotionally unstable around what should be a methodical, process driven and statistically sound plan.
The cure lies within you and the decisions you make not only in trading but with everything in life.
This is a broad and never ending subject. I've read easily 100 books on psychology, cognitive behavioral therapy, philosophy and meditation. I highly suggest peeling back the layers of your mind and making a point of knowing yourself. The rewards are far more important than money. Knowing yourself opens doors to relationships, situations, insights and freedom like no other. Being an independent thinker and authoring your own life is the ultimate investment.
Below is a shortlist of books that helped me develop my thinking:
Trading Psychology Books
- The Disciplined Trader - Mark Douglas: Very deep, talks about belief systems and reality, one of my favorites.
- Emotional Intelligence - Daniel Goleman: About self-knowledge and awareness
- Neurosis and Human Growth - Karen Horney: About feeling you HAVE to be successful when you really just need to be happy
- Meditations - Marcus Aurelius: About knowing how to manage yourself and how to reflect
There are tons more on positive psychology. I'll leave these for another article. I am also aware of a new book coming our by Mark Minervini which I think will be stellar so keep an eye out for it! As always, comment below or get in touch if you have any questions.