The Importance of Self-Reflection In Trading Psychology

· 11 min read
The Importance of Self-Reflection In Trading Psychology

How Can we Know What we Don't Know

I was in the middle of writing an article on 'Simple Trading Patterns' and had to stop dead in my tracks. I am honestly sick and tired of posts about patterns, techniques and strategies to give people the impression that trading is some mechanical rinse and repeat operation, without even referencing the importance of good trading psychology hygiene.

The industry in general preys on the weak or impressionable with the promise of overnight riches and makes trading seem easy. Nothing could be further from the truth! If someone pitches this to you, run in the opposite direction.

Even with Experience

Another day had gone by and I did not fill in my trading diary. In fact, I missed populating my journal all week. A habit that I preach about all the time and I totally avoided it. Thankfully, this time I felt a real cognitive dissonance and forced myself to do it. The constant fluctuation between guilt and regret totally overcame me forcing me into action. Feeling bad is okay but not correcting it is unacceptable.

It was a great feeling to capture the moment, reflect on why I didn't fill it in and subsequently got some very deep insights into my trading psychology, I sat down and started running the numbers with some phenomenal insights:

  1. I was trading too small - so my win loss ratio was good but didn't count for shit
  2. Trades were being choked off too soon
  3. News was driving impulse decisions and scaring me out of some amazing positions that were objectively acting very well indeed.
  4. If I had traded totally in line with  my strategy, I would had had a cracking start to the year.

The message was clear, my trades had the potential to be awesome but I was letting emotion, fear and uncertainty take the wheel. Instead of being up 17% this year, I am up 3%. Although everything is clear in hindsight, that doesn't mean you can't build habits and systems to avoid these situations.

Even after years of trading and doing any repetitive task (correctly or incorrectly), it can be hard to change gears from autopilot to becoming self-aware. This really hit me as I noticed similar patterns in other aspects of my life, all falling into an off-center rhythm loop. Drinking once or twice during the week, not eating well and falling off the wagon overall.

It is terribly convenient to ignore these signals as we sink into comfort and compare ourselves to others. As I wrote about in 'To be Accountable is to be Free' - the things we avoid hold the key to our personal success.

It's The Things We Avoid That Defer Self-Discovery

Introspection is usually driven by strong emotions that overwhelm us and we need to make sense of it all or at the very least rationalize it. In the stock market, I find it funny that introspection seldom comes when we win, as in life when things are good, but boy oh boy does it hurt when we lose. "How did this happen" - we engage in victimization and lose our self-control. The psychology of trading is much more than just the trading.

This in itself is crazy as we focus on losing behavior and avoid congratulating ourselves when we get it right, just like a terrible teacher or poor coach. The drama and victim-hood triangle ensues and it's never our fault. Deflection vs reflection is the modus operandi.

A dichotomy occurs as we beat ourselves up, feel like absolute shit and then continue trading or repeating poor behavior. Without looking at the hard evidence we habituate failure and are shocked to see it showing up at our doorstep with:

  1. Selling winners too soon
  2. Buying stocks because we don't want to miss out
  3. Taking low quality setups to win back money
  4. Making all of the exact same mistakes over and over again

How can you know you are even doing this unless you look back at the trades, activities or events? Life itself is a mirror and we decide what we perceive within it's reflection. All of our actions, habits and systems are giving us constant feedback to make changes day in and day out.

If not well managed, we create a sado-masochistic cycle of beating our-self up and avoiding constructive feedback or self-talk. You only see traders on social media with stacks of bills, never in tears because of the confusion and emotional pain that trading can inflict on one's psyche.

This is how market behavior is formed and why people give up. The only way around this is to confront discomfort constructively and systematically. The market and trading psychology are intertwined. To truly 'Know Thyself', saying deep axioms to validate yourself is not enough, it takes work, real work. And it needs to be systematic and objective and repeatable within the context of your life.

You've Read it All Before

There are hundreds of books about these behaviors. Thinking Fast and Slow, Why do i do That, Emotional Intelligence, Mastery, Mindset, Deep work, Awareness... I can go on, I have read a small library on the subject. All of them however simmer down to some very fundamental behaviors of why we don't confront mistakes.

Some Hardwired Conditions

  1. Amygdala and primitive responses - our brain is 'protecting' us from pain by avoiding it. This makes sense when fleeing from tigers but not so while trying to make money.
  2. Social conditioning - we are so used to stimulus responses (think Pavlovs dog) that we only respond to something that inflates our self-worth
  3. Ego - if we question our self-image and can't relate to it in a healthy way, it calls into question all of our constructs of reality
  4. Belief - if you truly are not convinced that you are capable of great things, how can you anticipate greatness?
  5. Low Self-awareness - not knowing what we don't know or even considering that there is something we need to know.

Trading is philosophical, deep and incredibly rewarding if you can see past these constructs and view things objectively or at least for what they are. It does mean however, that you have to dig through years of conditioning and act in a way that is counter-intuitive.

To develop comfort around counter-intuitive behavior requires reflection and letting go of what we think we know. The truth is, most of us don't know much in the first place, but the ego may beg to disagree. These lyrics from Nas and Damien Marley really encapsulate these thoughts:

The Earth was flat, if you went too far, you would fall off
Now the Earth is round, if the shape change again, everybody would start laugh
The average man can't prove of most of the things that he chooses to speak of
And still won't research and find out the root of the truth that you seek of
Scholars teach in universities and claim that they're smart and cunning
Tell them find a cure when we sneeze and that's when their nose start running

You can read all the books in the world on these subjects but at the end of the day, you're in control of your thoughts and actions. It's very empowering. Nobody can make you change, that is determined by you and you alone. Truth, as it is canned and marketed to us is in fact an illusion, as it's the fear based decisions we consume to fuel our trading accounts. This infects your trading psychology to line the pockets of the enlightened.

If you do not create a self-image that aligns with your trading system and sync up with your beliefs, trading will always just be a hobby.  In Buddhas own words:

All we are is the result of what we have thought. the mind is everything. What we think we shall become

So What do I do?

If this scares you it is highly ironic as it's the very fear we are talking about right now.

You may have been confronted with the ACTUAL work needed to make money in stock trading. Who would have thought! So knowing this now, are you going to sit down behind your laptop, open Twitter and buy something on third hand information?

Probably! but that is okay! Making mistakes is okay, trading like an idiot happens to everyone, including the people who make millions and manage money for others. Think about that! Now what is the difference between them and you? - absolutely nothing. They are human as are you. Stop for a moment and contemplate what this means:

Someone has had the very same issues as you but overcame them. How did they do this? Like any athlete, surgeon, CEO or monk - practicing the right behavior, reflecting and creating habits and processes to rewire your perceived beliefs and become the author of your own life.

They have had to create and fall in love with a process and system that works for them. I will share with you what has worked for me.

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My Trading Psychology ToolBox

I use a number of tools to systematically train my mind and form permanent habits that I enjoy. Whatever tools and resources you use for reflection they have to contain some measurable parameters . You need a trading diary, it's an absolute must need for any trader. So what do I track:

  1. I write down habits I need to do every day that bring me closer to self-awareness and trading mastery (see ray example below)
  2. I have a self affirmation that I read every day and physically shake my body to burn it in and make it emotional - "I am the best trader that ever lived"
  3. There are diagrams and decision trees for both buying and selling with simple Yes/No clear criteria e.g Does the stock conform to my rules -No - Don't do anything... these decisions trees need to be filed out in Excel before I can trade.
  4. The ultimate weapon - a trading journal which should include a number of data points you can use to reflect on your behavior.
  5. Meditation and gratitude done every morning or at least before market open
  6. Exercising and maintaining physical fitness with a large whiteboard in my office to track and maintain these goals daily
  7. Being hyper-vigilant on the awareness that trading psychology is core to trading

Having the tools is one thing, doing them is another. In time however, by combining tools, knowing how you behave and reflecting on these decisions, you create a healthy mix of repetitive tasks (re-enforcement), feedback - where did I go wrong? If you are open to the initial pain of looking at the objective truth in this, the money flows in right behind you.

If you are familiar of the concept of Flow coined by Mihaly Csikszentmihalyi - when your habits, behaviors and efforts are in sync, it creates a self-fulfilling prophecy of success. It happens so naturally that you are barely aware of it.

Write it Down

All of these processes, ideas and feedback mechanisms are pointless unless written down and properly recorded. Don't just read this and be like 'oh yeah nice article' - write that shit down! Put it in a big obvious place that forces itself into your awareness. It is important that you know what you want, it's written down and you have a plan to get there. Put in steps, use a piggy bank to track progress, make it work.

It means you have to wake up from autopilot and try to author your own life with conscious and focused determination. Example of tracking habits:

Don't Cheat on Yourself

A side note on writing things down and entering trades into your journal; We have all been there where we massage the numbers and look away the odd time from a loss and pretend everything is okay. This takes you back to square one. These are fine examples of infantile and learned behavior. They serve no purpose other than to avoid pain and keep you 'safe' from making money. If something feels hard or uncomfortable, it's usually the thing you should do.

I can think of a number of these examples outside of trading:

  1. Skipping leg day - guilty in the past, not anymore
  2. Not doing admin for work (I hope my work colleague reads this)
  3. Pushing out difficult decisions

The absolute paradox of life itself is that the uncomfortable things bring tremendous growth. How we act or react in these circumstances very much determines our outcomes in life. It is not important to lean into discomfort - it is the very nature of success itself in any endeavor. Trading psychology, life, relationships and how we relate to our self.

Going Deeper

Think of a time you perceived something as painful and totally deconstruct your illusion of it. Reconfigure these challenging times to work for you, harness that energy and fuel your habits and self-image. Yes, that sounds like bullshit, read it slowly if you have to, it should resonate with you because you because we are all the same, these are immutable universal truths.

Some of my own examples:

  1. Being a fat kid and not getting a girlfriend until 18 - all of the rejection and pain in high school became feedback for me to get stronger, grow confidence and overcome what people thought. I got fit and found the girl of my dreams - literally.
  2. Painful divorces and family feuds - taught me about the things I don't want in my life and helped me rewire my values towards really caring for others, even if I can be a dick.
  3. Being scammed for a large some of money by an alleged "trading instructor" - this taught me about intuition, trust and taught me how to really trade for myself.

There are hidden feedback mechanisms everywhere, you just need to be awake to see the signals. This is very easy to articulate on paper but in practice these ups and downs can be challenging. Trading Psychology seeps into your everyday life.

This re-iterates my point that you need good resources, clear decision trees and metrics to give you this feedback BEFORE it ends in divorce, bust trading accounts, bad trading psychology etc. These rules are not just trading tips, the same frameworks can be applied to relationships, eating habits, meditation, trading psychology and life.

Good trading is a challenge to be unlocked. That's why we love it after all. The real challenge of trading is unlocking your own potential and figuring out the world is far more than it appears to be on the surface - the world is simply in your head. You created it by feeding it these habits.

Writing things down and switching from autopilot to being awake is so, so important that it is everything.

Reflecting and Hacking your Trading Psychology

I've dropped some pretty 'real' experiences here that have taken me from losing money to making money trading and speculating. I hope you have found them useful and perhaps they can lay the foundation for you to:

  1. Decide to be accountable
  2. Realize just how subtle and powerful heuristics are
  3. Create a basic framework for you to consider and form for yourself.
  4. Understand that Trading Psychology isn't just about trading.
  5. Be aware of some tools that can help you get here

I sincerely hope this has been useful and impactful for you to read. I always love comments and feedback on this so please feel free to comment.

Kind but Accountable

I will leave on one final point. Trading is a long process and takes time. Make sure to be kind to yourself in how you give feedback and reflect. Losing money and going into the 'doom loop' only serves to hurt you. If you'd like to read more on this I did a write up on Stress and Trading - this could be good read if your 'going through it'.

Stay safe out there, author your next trade and do it on your terms. The ultimate trading weapon is you. Write down your systems, test them and make sure they work. Be honest with where you are at and where you want to be.

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