Psychology

The Brain on Trading: Emotional Intelligence and the Trader’s Mind


The Brain on Trading: Emotional Intelligence and the Trader’s

Posted By: Rande Howell


An Emotional Braking System Failure
“I left money on the table yesterday, and I’m not going to leave money on the table this time!” Harry silently declared, “I’ve missed out too many times – I’m going to ride this one and clean up.” Harry could feel the excitement pulsing in his veins – he could hardly contain himself. He pushed beyond his exit point, knowing that this one was going up. What a rush! Harry could feel the surge of energy. He almost became giddy as he saw the numbers climb even higher. That triggered even more excitement as he thought, “I’ve hooked a big one – I’ll show them who’s a trader!”
In the blink of an eye, without explanation, the trade went against him. Harry kept waiting for the downward spiral to right itself. It didn’t. Harry moved the stop because he knew in his gut that it would go back up again. It didn’t. Finally Harry pulled the trigger and accepted that he had another draw down on his trading account. He felt frustrated because, in his irrational exuberance (some would call it greed), and he let a perfectly good trade go bad. He had sabotaged himself yet again. Now Harry felt shame and wondered, “What made me think that I could trade for a living?”
You Trade Your Psychology
What happened to Harry? How did he get suckered into bad trading practices? From the sidelines, it is easy to say that Harry neglected to trade his plan. This assertion misses one big point about humans (and particularly the ones who trade) – emotions rule mind. Out of your emotional states comes the kind and quality of the thinking of which you are capable. In Harry’s case the state of mind that he needed to trade effectively was swept away by a fear of missing out. Once this fear triggered and accelerated, his thinking became clouded and his rational evaluation process was blown out of the water.
Like many traders, Harry did not have the skill sets to keep his emotions regulated as he entered the trade. Consequently, a guy who had diligently done his charting and was ready for the trading day got ambushed by unseen forces. His trading plan did not also include a psychological plan for managing emotions. This was a big mistake for Harry and for many traders. And until he learns how to make visible the unseen forces that hijacked his rational mind, his trading will suffer.
The problem is age old. Since the rise of Descartes’ rationalism, people (traders included) have attempted to separate body (emotions) and mind. Today, even Western medical science is concluding that this separation is impossible. The mind and the body (emotions) are woven together life a garment. They are inseparable. Maintaining awareness of your emotional nature as a trader is, in fact, the first step to developing a peak performance state of mind specifically for trading. Before this is explored, let’s take a look at what just happened to Harry.
The Anatomy of a State of Mind Hijacking
Harry experienced the trap of an undisciplined trader’s mind. As he moved into the trade, he was not attuned to what his hardwired and primitive emotional brain was biased to sense – nor how to manage the impulse. He did not notice the excitement of emotional arousal of the hunt that evolution had programmed into him. The thrill of the hunt (and its companion – the fear of missing out) was mobilizing Harry to pursue the prey before it could get away.
From a resting place where a calm, observant state of mind prevailed, Harry began to pursue the “hunt”, not noticing that his thinking was being compromised. (Remember, thinking is emotional state dependent.) The arousal of conquest or greed came to dominate his mind. He could no longer think rationally. Then he pursued his “prey”, consumed by the passion of taking no prisoners.
In this emotional stupor, Harry overtraded and lost. This trait of Harry’s (a single minded pursuit of winning big and being the best) had served Harry well in many areas of his life. It had helped him achieve many goals in his life, particularly in his career before trading. What he was beginning to recognize was that it did not serve him well as a trader though. What is different about trading?
Peak Performance and States of Arousal
In this discussion we are focusing on the component of an emotion called arousal. Arousal is preparation for action that happens in your body as an emotion prepares us for action. Powerful levels of adrenaline and cortisol are pumped into Harry’s body as he becomes excited by the trade. That excitement, as the arousal increases, becomes fixated on the object of pursuit – bringing down the home run trade.
This is called a high arousal and is a great component to some peak performance states of mind – particularly ones that more physical exertion and less cognitive functioning. Foot ball would be a good example of where peak performance demands high levels of arousal and reliance on instinct that has been trained into the athlete.
A peak performance trading state of mind requires low arousal. Impartiality, discernment, dispassion, and calm states of mind are the emotional components sought after for trading success. This is because cognitive functioning is what is necessary for trading peak performance, rather than physical exertion. The moment that high arousal states become apparent in trading, the trading has lost his capacity to take a step back emotionally and think impartially. You can be passionate about trading, but you cannot be passionate while trading.
Managing Arousal
Until a trader learns how to manage their emotional arousal levels, trying to use the mind to manage emotions often creates more (not less) stress and fixation. As an example imagine a chocoholic attempting to talk themselves out of wanting the warm fudge just coming out of the aromatic oven. The more you try to talk yourself out of the fixation, the more you want the chocolate. The arousal has already kicked started the desire to acquire.
Fortunately our breathing is both automatic and volitional – this is key to emotional regulation. If let on automatic, your breathing style will accelerate the arousal of an emotion as it triggers. In Harry’s case, his fear of missing out lead to the arousal of pursuit based on greed. He both held his breath and he then would breathe rapidly and shallowly. This excited breathing style accelerated his heart to beat faster adding to the excitement. The emotion greed and its motivation to grab all the profit he could, then took over Harry’s capacity to think impartially. And out of this emotional state, his thinking became compromised which lead to his over trading. It did not have to be this way.
Breathing is both automatic and volitional. With training, Harry has learned how to stay in a calm, impartial state of mind, in part, by managing the kind of breathing he does throughout a trading day. Once he understood that peak performance trading requires low arousal state of mind, he began using diaphragmatic breathing to manage his emotions while trading. He has much better control of his overtrading. He does not wait to feel arousal kick in. Instead, Harry using diaphragmatic breathing to help kept his emotions in check.
The moment he senses the triggering of arousal, he volitionally uses his breathing to cut off the gasoline supply to the fire of the aroused emotion. Rather than fear of missing out, greed, or a desire to pursue hijacking his mental faculties, he now is consciously able to calm the excitatory process of the emotional brain. Having learned how to manage the levels of adrenaline and cortisol in his body by managing breathing style, he is much less reactive in the management of his trading days. Harry now maintains a calm, impartial, and disciplined state of mind from which to trade.
In the process, Harry has learned how to change himself. His focus is on developing the skills and tools that allow him to trade at peak performance levels. And to let go of habitual historical practices that hinder his progress. His first step was becoming aware of the power that breathing has over emotional nature to influence states of mind.
Rande Howell MEd, LPC
www.tradersstateofmind.com

Taking Back Your Edge From the Jaws of Fear

Taking Back Your Edge From the Jaws of Fear: What You Need to Know About Emotions and Trading

By: Rande Howell


In the course of their evolution, every trader (if they are honest with themselves) has experienced disabling fear. How it happened – and why it continues to happen – often remain a mystery to the trader. Before the trader knows it, all reason has been hijacked and fear takes its toll on the trader’s state of mind, his capacity to trade effectively, and finally his trading account.
To the trader, it often appears that the fear came out of nowhere. Otherwise the trader’s problem with fear (or its cousin, greed) would be easily resolved. If not addressed, the fear stays in place and constricts the trader’s capacity to trade effectively. However there is an emotional process involved (common to all emotional states) that, with training, could have been successfully interrupted. Unfortunately, the trader is not aware of this process of emotional hijacking. The emotion has already seized him and he finds himself in hesitation, distraction, revenge trading, or impulsivity. And he begins to doubt that he is cut out for trading.
The good news is that there is a defined process to an emotional hijacking. Any emotional process has a signature that is associated with it. There would have been tell tale signs of the emotional hijacking, and a way to disrupt it, if the trader had known what to look for and had developed the awareness to be mindful of how fear triggers, accelerates, and overwhelms the calm disciplined mind required to trade effectively. You cannot get rid of emotions, but you can be trained to better understand them and manage them. It is out of this training that effective trading springs.
Case Example:
Jim has been trading for seven years. He has learned his methodology and was trading well until about two years ago. Since then his trading has been problematic. Fear began to surge as he traded and he found himself hesitating while evaluating set ups until emotional pressure built up. He would then jump into a trade impulsively. This flip-flop behavior continued until Jim decided to move back to paper trading – so he could refocus his trading and get his edge back. Of course, in paper trading, risk is removed from the equation of his edge.
Jim explains, “The challenge is that I haven’t been able to simulate the same emotional feelings when paper trading as when I’m trading live. I can’t seem to build up the fear I experience when live trading. But, you know, something weird happened when I recently went to a casino with my wife. I sat down at a slot machine next to her and slipped in $20. I thought I was just entertaining myself since I don’t gamble. After a couple of minutes of playing the machine I could feel the exact same feelings I get when I’m evaluating set ups. My heart rate started to increase, my palms started to sweat and I could actually feel small beads of sweat slowly dripping down from my armpits! There I was, triggered back to my trading room looking at set ups and trying to pull the trigger. I was frozen. This is the exact same emotional feelings I’ve been plagued by in my trading the past few months.
When I first started trading (7 years ago) I was never like this. Then about 2 years ago I lost a chunk of my capital and was basically wiped out until I was able to build my trading account up again. And I’ve had a couple of much smaller losses in the last 6 months also. I started going down hill after that. Now I doubt myself. I don’t understand why I can’t get my trading edge back. I see a connection between the experience I had at the slot machine and what’s happening in my trading – but I don’t understand it.
Threat, Brain, and Mind Meet in the Trading Room
Jim has just experienced a conditioned response that has generalized from one domain of experience to a broader context. He had been trading successfully for a number of years until he experienced a sudden loss of significant capital while trading two years ago. It is this sudden loss and the pain in the memory of that loss that Jim’s brain is programmed to avoid. To the survival brain, this sudden loss of capital represented a threat to the existence of the trader. And the brain’s mandate is to build a pattern of avoidance to the pain that became associated with this loss of capital. This part of the trader’s brain does not discern between loss of life and loss of capital. To it, any and all emotional painful losses constitute a threat to life.
Then the brain develops a fear response to the actual threat – the significant loss of capital – as a way to avoid loss in the future. This is the basis of traumatic memory and adaptation as part of a conditioned response. At this point the problem is as much a biological problem as it is a psychological problem. And they have to be handled together. It is the same process that a child experiences when he learns to never touch a hot stove top again… after traumatic pain. And for Jim the sudden loss of significant capital was traumatic to him. Imagine him having to tell his wife about the loss and the negative impact on his ability to survive in the world of no money. This is the set up for an automatic, reactive stress response.
The brain then builds an avoidant neural pattern as a solution to this problem. It becomes embedded in the pattern making and pattern recognition machinery of the brain. This is the conditioned response and pattern recognition that the brain orchestrates. And Jim does not help his cause. After the traumatic loss of capital and its fear response, Jim attempts to ignore his fear based on emotional pain and to push through the deeply embedded fear response to threat by sheer brut force – not a good idea. This only exaggerates the strength of the embedded pattern. As he keeps exposing himself to perceived threat, the survival brain generalizes the fear response from the specific environment where the pain actually occurred to any stimuli that risked capital. This is how he triggered to the fear response in the casino while risking only $20. In his mindlessness, he saw this as a form of entertainment. That is not how his survival brain was conditioned to react when risking capital and incurring emotional pain.
Significant pain has been hardwired to be associated with risk now – and will hijack state of mind if not disrupted. Not knowing how else to deal with it because he does not understand how the emotional brain and the psychological mind are intertwined, the triggering to fear becomes so great that Jim has to retreat back to paper trading in an attempt to “refocus” his mind. Unfortunately the brain was never designed to distinguish between biological fear and management of uncertainty. And Jim, like many traders, is clueless about how to deal with it. Until Jim incurred a traumatic capital loss, he never activated the level of primal fear that overwhelms the rational mind. But much like a person develops an irrational fear of all dogs after being bitten by one dangerous dog, now Jim’s mind has developed a self limiting fear of loss that taints the edge he used to have in trading. This is where neural-circuitry meets mind.
Calming the Raging Sea of Emotion
Before he gets to change his newly minted fear of loss which now corrupts the trading edge he used to have, Jim is going to have to learn to manage the arousal of the emotion of fear and its avoidance response to threat. Fortunately he has a clue as to how to do this.
In the casino he actually becomes witness to the arousal of his fear. This is a part of the emotion of fear that you can be trained to disrupt as part of emotional regulation. The arousal occurs before the emotion of fear takes over the mind of the trader. Here is Jim’s description of the arousal of the emotion of fear: “After a couple of minutes of playing the machine I could feel the exact same feelings I get when I evaluate set ups. My heart rate started to increase, my palms started to sweat and I could actually feel small beads of sweat slowly dripping down from my armpits!”
What he does not mention is that his breathing becomes shallow and rapid. The breathing actually started before the rest of the fear’s arousal. This is important because breathing can be used to regulate the arousal of an emotion – not control it, but manage it from overwhelming the trader’s mind. This is because breathing is the tool that can cool the body’s excitatory escalation of the fear reaction to perceived threat. Remember that his large capital loss got associated with loss of life in his primitive emotional brain. Because fear will have a breathing signature that is part of the emotion, breathing can also be used to manage and disrupt the power of the fear response.
By developing bellows breathing as part of managing his fear, Jim is able to calm his fear down. It is still there, but it is now workable and a very different mindset is now possible for him. It is through the calming affect of breathing and relaxation that Jim begins to work with this traumatically constructed self limiting belief embedded into his fear of loss. Now he can do the emotional labor required to deconstruct self limiting beliefs that have gripped his trading in the last 2 years and reclaim his belief in his trading edge. Emotional regulation is not the Holy Grail that changes self limiting patterns and beliefs. What breath training will do give you a tool that allows you to calm the fury of an emotional hijacking down so that you can begin to develop the psychology of peak performance. Before fear is tamed and re-understood, it will block your potential as a trader.
The Take Away
The purpose of this article is to show you how fear creates predictable patterns that govern a trader’s emotional nature (and hence his performances). And by understanding it, the trader learns how to manage the fear response. He now has begun to develop valuable tools and skills to change his relationship to fear and uncertainty. Learning this is an important step toward mastering your emotions and the inner game of trading. You have to equip yourself to build a peak performance state of mind. The first step in this process is emotional state management. Only then do get access to the mind. And it is in the mind that your self limiting beliefs and patterns dwell. This is also where many traders fail because they do not have the tool and skills to work with their emotional storms and hijackings. Effective trading is the pay off. Developing the skills and tools is the emotional labor you will need to invest in to achieve this aim.
Rande Howell, MEd, LPC
www.tradersstateofmind.com

Trading

Do not sit down and enter a position right away- see what is going on first

Do not fight the trend- wait for indicators of a reversal such as increase in volume, technical indicators- double top or bottom,

After a successful trade and the stock settles down- wait for it to show you something before entering into the same position as before because you think you are going to miss the “real move”

Do not initiate a position at the resistance or support- instead wait for it to break the level then get involved ( do not buy hole numbers or other such levels unless you are adding to a position)

If the market is quiet be more selective about trades to enter because you will get jigged out and end up paying spreads and not being confident enough to hold the position even if you are right

Make each trade count- do not enter a position without knowing why you are involved- have a reason: market movement, tops, bottoms, increase in volume, levels

Do not chase a stock as it is moving unless you are adding to an established position; instead, wait for the pullback and when the stock settles down and it looks like a promising trade then get in

Do not get frustrated and try to fight a trend and keep shorting into an up move or vise versa and then decide to flip especially when nothing is going on- be selective, keep your cool

Try to choose one way and stick with it instead of going back and forth, but if you are wrong do not hesitate to rethink your strategy

If you are playing a stock based on hidden buying and selling- not in the book then be more patient. Take one long position from a good entry point and hold onto it rather than constantly getting in and out- churning

Do not trade if you are in the wrong frame of mind

If you start off the month on a bad note do not try to make it back in one day…have one solid day and build off that

Identify a trend in the market and the sector and stick with it until you see a real reversal- use the pullback as entry points of following the trend instead of thinking every small move up or down is the beginning of a reversal

When choosing tops or bottoms, be quicker to hit out when things go against you because the trend is still holding

Use the 50 day EMA to identify trends in the stock- it will act as support or resistance and once it breaks to the other side the stock should start to move

Stock selection is key- do not get hung up on one stock if you are unable to make money in it

After making a nice push in the morning do not be afraid to stop trading- and if you do decide to trade- pick your spots better and have a real plan instead of doing random trades

If you are going to trade a volatile stock like PD, do not protect your PL when you trade or else the risk your taking on is greater than your reward

Do not base your trades on news that you read. If the stock shows you otherwise then trade the stock accordingly instead of sticking with a bias. Use the news as a guide but do not base trades on it unless it is confirmed by the stock itself

Resist the urge to trade stocks that you have not been carefully watching

If you make a good trade in one direction and get out successfully, then try to get back in on the same side and it doesn't work- do not continue to do it- instead, wait for the stock to show you that the trend is continuing and then get involved

Use volume as an indicator of overall market activity

When volume is lower than usual it means that institutions are not active and stock moves will trend less and have little follow through

When volume is lower be quicker to scalp and do not get involved as much because although the futures may be swinging the stocks will not react and it will cause you to write tickets and lose money by paying the spread only causing frustration

Track the volume of the stocks you follow for periods of the day- such as how many shares until 11, until 12, etc.

On slow days, be quicker to switch to another stock/sector. Don't let pride hurt your trading

On slow days, if you get off to a bad start and then make half of it back- take that as a positive and stop trading...However, if the market is active and you get burned early, refocus and carry on trading normally

If you lose on your first few trades take a step back and understand what you are doing wrong instead of repeating the same thing over and over

Do not flip in between stocks- if you are trading poorly in one, then switch- if you succeed in the new stock do not go back to the other one unless you think you have reevaluated it enough to be able to trade it successfully

Do not make trades hoping for a miracle by getting into massive size for no reason

The Cycle of "It"

Written By: Sam Seiden


I have been in the trading and trading education world for many years. This has allowed me to watch traders grow at different levels and reach different levels of success, and failure. I have often wondered and speculated on the difference between those who achieve success and those who fail. For me, the answer lies in the proper definition of success when it comes to trading, or any occupation for that matter.

Let me explain a scenario that I have experienced hundreds of times with individuals going through trading education. There was a gentleman back in 1999 that I met at a trading seminar. He walked up to me before it started and introduced himself. He had been reading my daily trading advisory letters and was very excited to meet the face behind the letter and take the seminar that I was giving. He explained that he had a family and that trading was going to be "IT" for him. He wanted to make lots of money at it and do it for a career. After the seminar, he thanked me and could not wait to get home and get started on his quest for "IT". A couple weeks after the seminar, he sent me an email and said he was doing well but he said "Sam, if I could only take all my stop losses according to plan, I would really make IT". Time went by and I contacted him and asked him if he made "IT"? He said yes. I said, "How is IT"? He said "IT" was good. He then said that if he adjusted his rules a bit and added a moving average for a trail stop, he could hold on for larger gains and really make "IT"! More than a year went by before I heard from him again and when I did, I asked him the same question, "Did you make IT"? He said he did. I asked him how "IT" was and he said, "IT was good". He also added that his marriage was falling apart and he did not know where things were going in his personal life. He said that he only needed to make a little more money from trading than he did from his day job to quit the day job and that this would be "IT", this would save his marriage, his family.

Let me let you in on something I realized long ago: "IT" is never "IT". The "IT" cycle will have you chasing an illusion of happiness your whole life in many forms if you let it. If you are looking for "IT", it only exists in a much grander vision. This grander vision will meet all your needs and become "IT" for you. I want to invite you into a simple reality that most consistently profitable market speculators share. They are not looking for trading to be "IT" for them. They have a much grander vision. The best traders I know spend very little time trading and spend less time talking about trading. They make plenty of money trading and they use that money to feed the grander vision. One person I know has done very well in trading and has bought three vacation homes on a lake all next to each other. He has a family with many kids and invites families who would not be able to afford to do this to stay at these vacation homes in the summers. His life is all about his family, which has always been his grander vision. Because of this, he is not looking to change or improve his trading strategy, he does fine. In fact, he never talks about his strategy; he would never waste the time as he is too busy with his grander vision. I know his strategy and let me tell you, I see many people come out of the Online Trading Academy classes with better strategies that don't make money because they are always looking to improve the strategy so they can really make "IT". People who keep changing their trading strategy and keep taking more and more seminars never make it in trading. They are always looking for "IT". From what I see, the successful people at Online Trading Academy become passport members, take the classes, and then go and run the strategy they have developed from the education. They don't rush off to take more and more seminars and courses. The group that has taken every trading course around the world and has read every trading book written is not the group that makes money trading. This is the group that typically pays those who have a grander vision.

In trading, the best outcome each day is more money in your account. If you keep striving for more money, you will never be happy because you will never have all the worlds' money. How many times do men and women get into relationships because they think that partner is "it" for them? They are counting on that partner to make them happy and fill all their needs and voids. These relationships always fail because the other partner will never meet these expectations. So much pressure is put on that partner to be "it" for that person. Trading is not all that different. The pressure people put on themselves with unrealistic expectations is simply setting you up for failure.

Why do I trade? The focus for me is the grander vision, not attempting to attain all the worlds' money. THIS is what allows me to run a simple and successful trading strategy year after year after year. I have not changed one thing about how I trade in many years. The income from trading allows me to feed my grander vision. I have played hockey all my life and still play in the most competitive leagues around. I also coach kid's hockey and that has been great for me. Many of these kids can't afford to do certain things that will benefit them. Trading allows me to dive into these kids' lives and expose them to things most of them could not afford to do on their own. I don't have an I-Pod. I felt much better buying these kids one-year family memberships to the fantastic museums in Chicago. Hhmm, loud music in my ears or exposing a child to some of the best science, art, and history museums in the world? If I wanted the I-POD, I would also want the I-Phone, and the I-Car, and the I-life… You see, "IT" never ends and in the trading world, this thought process will drain your account. Instead of buying the latest power computer, my grander vision had me buy the Dr. Seuss series of books for a local school in the area that didn't have a budget for new books. My grander vision is making a difference in the life of children that will end up making a positive difference in the world. That is what I spend most of my free time doing. This just so happens to also allow a successful trading strategy to run, there is no pressure of better numbers and more dollars.

The next time you have a few minutes and you are about to tweak that trading strategy because your strategy, while profitable, may not be allowing you to really make "IT", understand that "IT" is never "IT". You are likely chasing something that does not exist. You're walking east and west trying to find the North Pole. Instead, open your mind to the possibility of a much grander vision that has nothing to do with trading. In doing this, you may just find that the grander vision is what will finally allow you to execute your successful strategy with disciplined precision for the rest of your life. More importantly, this grander vision is likely where you will find "IT".

Traders Ask: How Do You Detect Overconfidence?

SMBtraining.com/blog


Hi guys
After a rotten 12 months I’ve had a cracker of a month not just with the recent bull run but with the preceding drop also. This has occurred after stepping back, refining a trading entry methodology based around volume (exit and money management are already in place) and focusing on this play. Obviously I’m proud of myself, but pride comes before a fall as they say.
Past success runs have often been burnt with a bad run straight after. Can you tell me what techniques you offer your traders to identify signs of overconfidence and over-trading and to keep it (especially overconfidence) in check?
Bella
Great job asking the right questions.  Terrific work recognizing a pattern in your past that needs work.
Volatile swings in your P&L can be a danger signal of trading overconfidence.  Going from down much more than normal to flat is a very dangerous signal.  A big rip is likely coming.
Starting your pre-game preparation later than normal is something to watch. I am doing well I do not need to get in early.   There is a fine line between doing very well and underperforming.  A slight change in your start time can start a downtrend.
What are some warning signs for you that indicate overconfidence?
Mike Bellafiore

Trading and Poker: Reaching the Next Level of Success

By: 

Well, that's another way poker might be like trading: It's easy to participate, difficult to sustain success. Many just play for the thrills of winning and losing; relatively few systematically learn from experience and build skills over time. 

One reason online poker is particularly promising is that players can play so many hands at one time. This allows for the possibility of accelerated learning; the online poker participant can gain years of live tournament experience in a matter of weeks. But this is only possible if the experience is structured in such a way as to generate frequent, timely feedback and goal-focused efforts at improvement.

Imagine a training program for traders in which there is daily observation of leading traders making decisions, frequent interaction with those traders to understand what they are doing and why, and supervision of students' trading decisions by those traders. It would be like having world-class poker champions sitting behind your shoulder as you play, offering immediate observations and coaching. Expertise development that normally might require many years of effort could now occur in a fraction of that time.

That is the vision.

The key is recognizing that it is the structure--and not just the content--of a learning experience that accounts for its success. Most learning efforts fail because there are too few cycles of performance-feedback-goal setting-corrective effort per unit of time and no clear curricular progression guiding the content of those cycles.

Interested in reading more about enhanced learning and developing elite trading skills? Here are a few sources worth checking out:

* Enhancing Trader Performance - This is the book that I wrote to capture the progression of successful traders from novice status to competence to expertise. 

* The Talent Code - Dan Coyle's book nicely draws upon research to show that elite levels of performance are as much a function of training as inborn ability.

* Talent is Overrated - Excellent book by Geoff Colvin that documents how the structure of practice is a major contributor to successful performance.

The core concept is that, whether you are a poker player, trader, or something else, you can become much better at what you do by creating more and better learning cycles. For the real champions, nothing less will suffice.
.

The Traders Mindset


By Bennett McDowell
Developing “The Trader’s Mindset” is a must for trading success and this can take some time. This is not an area where you can take a short cut or learn a formula. You usually develop it by actually trading and the experiences you gain from trading. We will help guide you towards developing “The Trader’s Mindset” and help you handle account draw-downs, losses, and profits. Yes, profits can actually cause you stress!
You can see how powerful psychology in trading is, if you show the same successful trading approach to one hundred different traders. No two of them will trade it exactly the same way. Why? Because each trader has a unique belief system and their beliefs will determine their trading style. That is why even with a profitable and proven trading approach, many traders will fail. They do not have the proper belief system to enable them to trade well. In other words, they lack “The Trader’s Mindset.”
When you encounter psychological issues it is best to recognize the issue, just be aware of it, don’t deny it. In order to “fix” psychological issues we as human beings must first become aware of the problem and issues causing the problem in order to heal and “fix” the problem. This is much of what psychoanalysis is all about. The psychologist or psycho- therapist tries to let the patient first see the problem and then the patient must believe that these issues are causing the problem in order for the patient to heal. The reason this process can take so long, perhaps even years is because the patient needs to not only recognize their problems, but must accept that there truly is a problem. They must take responsibility for their problems to heal.
Success in trading is a direct result of a sound trading system, sound money management, proper capitalization, and sound psychology. All of these must be in sync to be successful in your trading. The “ART” system is designed to focus on all of these areas. The only area where you may need additional help once you have mastered your trading skills, is your psychology.
Psychology is the one area that you may need additional help and can take up to a year or so to resolve personal issues attaining trading success. Our consultation services focus on this aspect and if you find yourself struggling with psychological issues, you owe it to yourself to get help in this area.
Here is a list of common psychological trading issues and their causes:
Fear Of Being Stopped Out Or Fear Of Taking A Loss: The usual reason for this is that the trader fears failure and feels like he or she cannot take another loss. The trader’s ego is at stake.
Getting Out Of Trades Too Early: Relieving anxiety by closing a position. Fear of position reversing and then feeling let down. Need for instant gratification.
Adding On To A Losing Position (Doubling Down): Not wanting to admit your trade is wrong. Hoping it will come back. Again, ego is at stake.
Wishing And Hoping: Not wanting to take control or take responsibility for the trade. Inability to accept the present reality of the market place.
Compulsive Trading: Drawn to the excitement of the markets. Addiction and Gambling issues are present. Needing to feel you are in the game.
Anger After A Losing Trade: The feeling of being a victim of the markets. Unrealistic expectations. Caring too much about a specific trade. Tying your self-worth to your success in the markets. Needing approval from the markets.
Excessive Joy After A Winning Trade: Tying your self-worth to the markets. Feeling unrealistically “in control” of the markets.
Limiting Profits: You don’t deserve to be successful. You don’t deserve money or profits. Usually psychological issues such as poor self-esteem.
Not Following Your Proven Trading System: You don’t believe it really works. You did not test it well. It does not match your personality. You want more excitement in your trading. You don’t trust your own ability to chose a successful system.
Over Thinking The Trade, Second Guessing Your Trading Signals: Fear of loss or being wrong. Wanting a sure thing where sure things don’t exist. Not understanding that loss is a part of trading and the outcome of each trade is unknown. Not accepting there is risk in trading. Not accepting the unknown.
Not Trading The Correct Position Size: Dreaming the trade will be only profitable. Not fully recognizing the risk and not
understanding the importance of money management. Refusing to take responsibility for managing your risk.
Trading Too Much: Need to conquer the market. Greed. Trying to get even with the market for a previous loss. The
excitement of trading (similar to Compulsive Trading).
Afraid To Trade: No trading system in place. Not comfortable with risk and the unknown. Fear of total loss. Fear of ridicule.
Need for control.
Irritable after the Trading Day: Emotional roller coaster due to anger, fear, and greed. Putting too much attention on trading
results and not enough on the process and learning the skill of trading. Focusing on the money too much. Unrealistic trading expectations.
Trading With Money You Cannot Afford To Lose Or Trading
With Borrowed Money: Last hope at success. Trying to be successful at something. Fear of losing your chance at
opportunity. No discipline. Greed. Desperation.
These are by no means all the psychological issues but these are the most common. They usually center around the fact that for one reason or another, the trader is not following their chosen trading approach or system. And instead prefers to wing it or trade their emotions which in trading will always get you in trouble. So, I think you can see how psychology is all important in trading.
Our goal as traders in regards to psychology is to maintain an even keel so to speak when trading. Our winning trades and losing trades should not affect us. Obviously we are trading better when we are winning, but emotionally we should strive to maintain an even balance emotionally in regards to our wins and our losses.
It will happen when it happens and when you achieve this level of mental ability; it will come after working long and hard on your problems, but will come without you knowing it. It usually happens when you least expect it.
Below is a list of what one feels after acquiring “The Trader’s Mindset.”
-Sense of calmness
-Ability to focus on the present reality
-Not caring which way the market breaks or moves
-Always aligning trades in the direction of the market, flowing
with the market
-Not caring about the money
-Always looking to improve your skills
-Profits now accumulating and flowing in as your skills improve
-Keeping an open mind, keeping opinions to a minimum
-Accepting the risk in trading
-No Anger
-Learning from every trade
-Winning and losing trades accepted equally from an emotional
standpoint
-Enjoying the process
-Trading your chosen approach or system and not being
influenced by the market or others
-Not feeling a need to conquer or control the “market”
-Feeling confident and feeling in control of “yourself”
-A sense of not forcing the markets or yourself
-Trading with money you can afford to risk
-No feeling of ever being victimized by the markets
-Taking full responsibility for your trading
When you can read the list above and genuinely say that’s me, you have arrived!
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Ten Lessons I Have Learned in Working With Traders


By Brett N. Steenbarger, Ph.D.
When I sat down to write this article, I thought it would be challenging—but useful—to distill over 20 years of trading experience—and 25 years of specializing in brief therapy—into ten lessons that I have learned while working with traders (including myself!). In that time, I’ve written two books on trading and worked with dozens of professional traders at a proprietary trading firm. What has this taught me? Let’s break it down:
1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.
2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.
3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.
4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.
5. Training is the path to expertise – Think of every performance field out there—sports, music, chess, acting—and you will find that practice builds skills. Trading, in some ways, is harder than other performance fields because there are no college teams or minor leagues for development. From day one, we’re up against the pros. Without training and practice, we will lack the skills to survive such competition.
6. Successful traders possess rich mental maps – All successful trading boils down to pattern recognition and the development of mental maps that help us translate our perceptions of patterns into concrete trading behaviors. Without such mental maps, traders become lost in complexity.
7. Markets change – Patterns of volatility and trending are always shifting, and they change across multiple time frames. Because of this, no single trading method will be successful across the board for a given market. The successful trader not only masters markets, but masters the changes in those markets.
8. Even the best traders have periods of drawdown – As markets change, the best traders go through a process of relearning. The ones who succeed are the ones who save their money during the good times so that they can financially survive the lean periods.
9. The market you’re in counts as much toward performance as your trading method – Some markets are more volatile and trendy than others; some have more distinct patterns than others. Finding the right fit between trader, trading method, and market is key.
10. Execution and trade management count – A surprising degree of long-term trading success comes from getting good prices on entry and exit. The single best predictor of trading failure is when the average P/L of losing trades exceeds the average P/L of winners.
Well, I’ve already hit ten and I have at least ten more I could jot down. Number 11 would be that successful performance mentors have content expertise in their particular domain. What I mean by that is that teachers of concert musicians themselves have experience as musicians; basketball coaches invariably have played the sport themselves. You learn trading by seeing your mentor trade and by having your mentor observe your trading. The right mentorship goes a long way toward shortening learning curves.
Figure it out: what proportion of baseball players, golfers, actresses, chess players, singers, or bicyclists can make a consistent living from their performance activities? Is trading really so much easier than those activities? The stark reality is that expertise in any performance field is the exception, not the rule, requiring dedicated practice and training. If you are emotionally prepared for the learning curve—and excited by the challenge—you are well ahead of the game. Start with finding the Three M’s: right methods, markets, and mentors. Those are the foundation of success, upon which you build skills and experience. Enjoy the journey!

The Mental Aspect of Trading


By: Linda Bradford Raschke


Many traders quickly come to acknowledge that despite being familiar with winning strategies, systems, and money management techniques, trading success is dependent on your psychological state of mind. If you’re a trader just starting out, where do you find the initial confidence to pull the trigger? How do you deal with the down times without digging yourself deeper into the hole? If you are in a hole, how do you work your way back out? How do experienced traders push through the ceiling of profitability that caps their initial trading years and make a truly fabulous living?
Trading is a performance-oriented discipline. Stress and mental pressures can affect your ability to function and impact your bottom line. Much of what has been learned about achieving peak performance in both business and sports can be applied to trading. But before looking at some of these factors, let’s first examine the ways that trading differs from other businesses.
  1. Intellect has nothing to do with your ability as a trader. Success is not a function of how smart you are or how much you have applied yourself academically. This is hard to accept in a society that puts a premium on intellect.
  2. There is no customer or client good will built up each day in your business. Customer relationships, traditionally important in American businesses, have little to do with a trader’s profitability. Each day is a clean slate.
  3. The traditionally 8-5 work ethic doesn’t apply in this business! A trader could sit in front of a screen all day waiting for a recognizable pattern to occur and have nothing happen. There is a temptation to take marginal trades just so a trader can feel like he’s doing something. There’s also the dilemma of putting in constant hours of research, having nothing to show for it, and not getting paid for the work done. Yet if a trader works too hard, he risks burn- out. And what about those months where 19 out of 20 days are profitable, but the trader gives it all back in one or two bad days? How can a trader account for his productivity in these situations?
  4. If you were to invest time, energy, and emotion into developing a business venture and backed out at the last minute, it would be considered a failure. However, you should be able to invest time and energy into researching a trading idea, and yet still be able to change your mind at the last minute. Market conditions change, and we cannot be expected to predict all the variables with foresight. Getting out of a bad trade with only a small loss should be considered a big success!
    What IS the definition of a successful trader? He should feel good about himself and enjoy playing the game. You can make a few small trades a year as a hobby, generate some very modest profits, and be quite successful because you had fun. There are also aggressive traders who have had big years, but ultimately blow-out, ruin their health or lead miserable lives from all the stress they put themselves under.
Principles of Peak Performance
The first principle of peak performance is to put fun and passion first. Get the performance pressures out of your head. Forget about statistics, percentage returns, win/loss ratios, etc. Floor-traders scratch dozens of trades during the course of a day, but all that matters is whether they’re up at the end of the month.
Don’t think about TRYING to win the game – that goes for any sport or performance-oriented discipline. Stay involved in the process, the technique, the moment, the proverbial here and now.! A trader must concentrate on the present price action of the market. A good analogy is a professional tennis player who focuses only on the point at hand. He’ll probably lose half the points he plays, but he doesn’t allow himself to worry about whether or not he’s down a set. He must have confidence that by concentrating on the techniques he’s worked on in practice, the strengths in his game will prevail and he will be able to outlast his opponent.
The second principle of peak performance is confidence. in yourself, your methodology, and your ability to succeed. Some people are naturally born confident. Other people are able to translate success from another area in their life. Perhaps they were good in sports, music, or academics growing up. There’s also the old-fashioned “hard work” way of getting confidence. Begin by researching and developing different systems or methodologies. Put in the hours of backtesting. Tweak and modify the systems so as to make them your own. Study the charts until you’ve memorized every significant swing high or low. Self-confidence comes from developing a methodology that YOU believe in.
Concentrate on the technical conditions. Have a clear game plan. Don’t listen to CNBC, your broker, or a friend. You must do your own analysis and have confidence in your game plan to be a successful trader.
Analyze the markets when they are closed. Your job during the day is to monitor markets, execute trades and manage positions. Traders should be like fighter pilots – make quick decisions and have quick reflexes. Their plan of attack is already predetermined, yet they must be ready to abort their mission at any stage of the game.
Just as you should put winning out of your mind, so should you put losing out of your mind – quickly. A bad trade doesn’t mean you’ve blown your day. Get rid of the problem quickly and start making the money back. It’s like cheating on a diet. You can’t undo the damage that’s been done. However, it doesn’t mean you’ve blown your whole diet. Get back on track and you’ll do fine.
For that matter, the better you are able to eliminate emotions from your day, the better off you will be. A certain amount of detachment adds a healthy dose of objectivity.
Trading is a great business because the markets close at the end of the day (at least some of them). This gives you a zero point from which to begin the next day – a clean slate. Each day is a new day. Forget about how you did the week before. What counts is how you do today!
Sometimes what will happen during the day comes down to knowing yourself. Are you relaxed or distracted? Are you prepared or not? If you can’t trade that day, don’t! – and don’t overanalyze the reasons why or why not. Is psychoanalyzing your childhood going to help your trading? Nonsense!
The third important ingredient for achieving peak performance is attitude. Attitude is how you deal with the inevitable adverse situations that occur in the markets. Attitude is also how you handle the daily grind, the constant 2 steps forward and 2 steps back. Every professional has gone through long flat times. Slumps are inevitable for it’s impossible to stay on top of your game 100% of the time. Once you’ve dug yourself out of a hole, no matter how long it takes, you know that you can do it again. If you’ve done something once, it is a repeatable act. That knowledge is a powerful weapon and can make you a much stronger trader.
Good trades don’t always work out. A good trade is one that has the probabilities in its favor, but that doesn’t mean that it will always work out. People who have a background in game theory understand this well. The statistics are only meaningful when looking at a string of numbers. For example, in professional football, not every play is going to gain yardage. What percentage of games do you need to win in order to make the playoffs? It’s a number much smaller than most of us are willing to accept in our own win/loss ratios!
Here is an interesting question: should you look at a trade logically or psychologically? In other words, should every trade stand on its own merits? Theoretically, yes, but in real life it doesn’t always work that way. A trader is likely to manage a position differently depending on whether the previous trade was a winner or a loser.
How does one know when to take profits on a good trade? You must ask yourself first how greedy do you want to be, or, how much money do you want to make? And also, does your pattern have a “perceived profit” or objective level? Why is it that we hear successful winning traders complain far more about getting out of good trades too soon than not getting out of bad trades soon enough? There’s an old expression: “Profits are like eels, they slip away.”
Successful traders are very defensive of their capital. They are far more likely to exit a trade that doesn’t work right away than to give it the benefit of the doubt. The best trades work right away!
OK. Realistically, every trader has made a stubborn, big losing trade. What do you do if you’re really caught in a pickle? The first thing is to offer a “prayer to the Gods”. This means, immediately get rid of half your position. Cut down the size. Right off the bat you are taking action instead of freezing up. You are reducing your risk, and you have shifted the psychological balance to a win-win situation. If the market turns around, you still have part of your position on. If it continues against you, your loss will be more manageable. Usually, you will find that you wished you exited the whole position on the first order, but not everyone is able to do this.
At an annual Market Technician’s conference, a famous trader was speaking and someone in the audience asked him what he did when he had terrible losing trades. He replied that when his stomach began to hurt, he’d “puke them at the lows along with everyone else.” The point is, everyone makes mistakes but sooner or later you’re going to have to exit that nasty losing position.
“Feel good” trades help get one back in the game. It’s nice to start the day with a winning scalp. It tends to give you more breathing room on the next trade. The day’s psychology is shifted in your favor right away. This is also why it’s so important to get rid of losing trades the day before. so you don’t have to deal with them first thing in the morning. This is usually when the choice opportunity is and you want to be ready to take advantage of it.
A small profitable scalp is the easiest trade to make. The whole secret is to get in and get out of the market as quickly as possible. Enter in the direction of the market’s last thrust or impulse. The shorter the period of time you are is the marketplace, the easier it is to make a winning trade. Of course, this strategy of making a small scalp is not substantial enough to make a living, but remember the object is to start the day out on the right foot.
If you are following a methodology consistently (key word), and making money, how do you make more money? You must build up the number of units traded without increasing the leverage. In other words, don’t try going for the bigger trade, instead, trade more contracts. It just takes awhile to build up your account or the amount of capital under management. Proper leverage can be the key to your success and longevity in this business. Most traders who run into trouble have too big a trade on. Size influences your objectivity. Your main object should be to stay in the game.
Most people react differently when they’re under pressure. They tend to be more emotional or reactive. They tense up and judgement is often impaired. Many talented athletes can’t cut it because they choke when the pressure’s on. You could be a brilliant analyst but a lousy trader. Consistency is far more important than brilliance. Just strive for consistency in what you do and let go of the performance expectations.
Master the Game
The last key to achieving mental mastery over the game is believing that you can actually do it. Everyone is capable of being a successful trader if they truly believe they can be. You must believe in the power of belief. If you’re a recluse skeptic or self-doubter, begin by pretending to believe you can make it. Keep telling yourself that you’ll make it even if it takes you five years. If a person’s will is strong enough, they will always find a way.
If you admit to yourself that you truly don’t have the will to win at this game, don’t try to trade. It is too easy to lose too much money. Many people think that they’ll enjoy trading when they really don’t. It’s boring at times, lonely during the day, mentally trying, with little structure or security. The markets are not a logical or fair playing ground. But there are numerous inefficiencies and patterns ready to be exploited, and there always will be.

Winners Make Their Own Good Luck


To reap the gains and windfalls of a successful business, entrepreneurs must look to a set of attitudes they will find only within themselves
We once heard a mathematics professor state, "The parameters of luck are unknown to us." In other words, luck can't be explained by any specific factor, it's a matter of chance. We thought the statement made a lot of sense, but we were intrigued by the notion that what we call "luck" could be explained by a set of variables or elements that had not yet been studied. So we decided to carry out our
What we did was relatively easy: We spoke at length with people who thought their lives had been blessed by good fortune, our goal being to try and figure out what factors they had in common. After four years of interviews and research, we could clearly identify a list of shared traits, ones we will shortly examine in greater depth.

WHOM FORTUNE FAVORS.  But first, an additional word of explanation: When undertaking our project, we decided to study of biographies of "prosperous" personalities ("prosperous" understood in its broadest sense). We studied not only individuals enjoying good marriages or financial wealth, but also those who have made valuable contributions to society and who see their own lives as being filled with creativity, self-fulfillment, and meaning. By taking this tack, we were able to include artists, scientists, and athletes in our sample.

What our research revealed can be summarized in a single simple sentence: We make our own good luck.

What these creators of good luck have in common can be summarized in the following five main principles:

• Responsibility
If there is a common factor that is evident among all the creators of good luck, it is that they know themselves to be responsible for their own actions. In other words, when things go wrong or the outcome of any given situation is other than intended, they never point the finger of blame at external factors or other individuals. Instead, they look to themselves and ask, "What have I done for this to occur?"

Free of any kind of "victimism," when they run into personal or professional difficulties, they ask themselves how and to what extent they are responsible for the situation in which they find themselves? Then they act accordingly to solve whatever adverse circumstance they have encountered. This is where the second principle comes in.

• Learning from Mistakes
Creators of good luck don't see a mistake as a failure. Instead, a mistake is an opportunity for learning. Thomas Edison is the classic example. History tells us that the inventor made more than 1,000 attempts before inventing the first long-lasting electric light bulb. Until then, all his trials and experiments led to durations of no more than a few minutes before air would filter into the glass bulb, supplying the oxygen that led to the combustion of the various filaments he tried.

The story goes that one of Edison's colleagues asked him, "Mr. Edison, don't you feel you are a failure?" Lacking any sense of vanity, the great man answered, "Not at all. Now, I definitely know more than a thousand ways how NOT to make a light bulb."

Sure enough, just a few days later, the man whose brainstorms would remake the world finally turned his inspiration into a practical concept. By the way, the very first light bulb was invented by Sir Joseph Wilson Swan, who demonstrated the theoretical concept but gave up trying to develop a practical application after only three attempts. By contrast, Edison made his own good luck and designed a working light bulb. This takes us to our third principle.

• Perseverance
Creators of good luck don't give up. They don't postpone. They don't "leave it for another day." The formula is quite simple: When a problem or situation arises that requires attention, they act immediately. And what they do is one of the following three things: they either solve it without delay, delegate, or forget about it.

In other words, they don't carry a list of "things to do" in their brain. Instead, they resolve problems and situations as quickly as possible. This enables their energy to be fully focused on their work and avoid conscious or unconscious distractions, which only generate inefficiency.
• Confidence
This is one of the most overlooked principles, yet one of the most powerful. Confidence is divided into two parts: confidence in yourself and confidence in the others
Confidence in yourself is essential, and those who create their own good luck are remarkable for their high degrees of assertiveness and self-esteem. These qualities allow them to keep to their purpose, to persevere, and to work to create the conditions that ultimately do so much to achieve objectives. Also, they are great visualizers. They use their imaginations -- specifically, their visualizing techniques -- to form mental images of their goals. Without the confidence to pursue this vision, visualizing would make no sense.

Furthermore, and closely linked to assertiveness and self-esteem, the people we studied exhibit both trust in others and respect for them, seeing people they know, people they work with, those who surround them as major sources of opportunity. This doesn't mean that one must be naive and trust anybody and everybody who makes a proposal. Instead, it speaks to the trait of seeing others as sources of opportunity for achievement.

Without confidence there is no way to "give yourself" to the situation. If there is no intimacy -- if it is ruled out by paranoia or rampant suspicion, for example -- there can be no opening up to others. Hence, there can be no room for dialogue or for the genuine and sincere exchange of opinions. Without this, any initiative proceeds more slowly until, eventually, it simply withers and dies. Confidence is a fundamental variable, and this takes us to the last principle.

• Cooperation
The term "synergy" is one we heard often when interviewing those who create their own good luck. Trust in others leads to solid a network of work colleagues and friends, which, in turn, brings into play substantially more resources to carry out projects than if they were managed alone. The logic is based on cooperation rather than competitiveness. Such people are aware of the fact that, at the most basic level, any project or undertaking takes place in the context of the broader group, and that all parties must have a realistic prospect of emerging as winners if all concerned are to produce their best efforts.

As we have seen, whether or not one can create good luck basically depends on an attitude towards oneself, towards others, and towards life. It is also tied to the perception that the individual is much more of a cause than an effect. And above all, to the realization that one must make oneself the creator of the conditions that foster success and the achievement of specific, visualized goals.

LUCK OR GOOD LUCK?  Think of luck -- the sort that wins lotteries -- as the end result of a random game of chance: It can be favorable or not, but whatever shape it takes, its presence will always be occasional, brief, and impermanent. We have found that of the people who have won big sweepstakes prizes, many lose everything they gained, typically within four years to seven years of hitting the jackpot. Furthermore, their personal relationships with family, friends, and colleagues often have been seriously affected because of problems stemming from avarice, jealousy, and greed.

On the other hand, since those who create their own good luck owe success only to themselves and their own initiatives, not just to a random roll of the dice, they are acutely aware of the origins of their good fortune. Moreover, having seen it work before, they know and understand the process that produces it, and know the same principles can be put to work again and again.

The problem is that we often seem to forget old principles based on common sense, which basically say that we must work, be aware of our actions, and take responsibility for correcting them when the need arises. The person who grasps that wisdom is lucky indeed.