The Trading Magic Bullet. Psych!
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There’s a common theme amongst traders once they pass a certain point in their trading education. Once they’ve accepted that there are no magic indicators that will tell them the perfect place to buy or sell, they begin to look inwards. And this is a really important thing – they should look inwards! Unfortunately they tend to just apply this “magic bullet” thinking in the same way, only now they think that “mastering their trading psychology” is the ultimate solution to all their troubles.

Your own personal psychology is of course an essential thing to understand as well as you possibly can. This is true simply of life but triply true of trading. But it’s not something that you can just study, understand, and conquer. We humans have an awful lot going on “upstairs” as compared to other animals, and much of it is very counterproductive when we’re trying to extract money from the markets.

There’s no “one weird trick” or fancy convoluted method that will deliver ultimate psychological mastery to you. But there are a whole lot of things, some obvious and some less so, that you can work on to improve your chances of not getting rekt by your own grey matter.

  • Recognize that you are not your emotions. The fact is that what we consider to be “emotions” are actually just chemicals in our blood stream. The brain releases them, and they cause all sorts of physiological responses, from pleasure, to fear, to pain, to elation, and more. And in that moment of emotion we tend to attribute the emotion to some external factor.
    The truth however, is that the external factor (say, a huge winning trade) has merely triggered the brain to release a chemical, that is now coursing through our veins. And it will eventually work its way through our system, and fade away. When that happens, we can feel deflated, and it’s possible to start taking too much risk in order to try and get back to that great feeling again. Taken to the extremes, this can lead to addictive behaviors in order to keep getting the “high”.
    On the plus side however, this means that we can recognize when we’re in a heightened emotional state, and understand that we just need to step away, and let it run through us until it passes. This requires self awareness of course, but it becomes really quite easy to keep ourselves from things like revenge trading after a loss, overtrading because we think we’re on a hot streak, reversing direction suddenly because we’re confused that our stop was just hit, etc. We can step away from the trading platform, and nobody’s account will get hurt.
  • Nothing changes our physiology faster than our breath. For a great demonstration of this, have a look at this talk from 2012:


As you can see there, just a few seconds even of simple, controlled breathing can immediately change your physiology. You don’t need any fancy, involved, special military-grade breathing techniques or whatever. Just even, measured breathing, in and out, can get you into a state of calm clarity in no time at all. It’s easy, requires no tools, devices, software, etc. and you can do it instantly in any situation at all.

  • What we hear can be more powerful than even what we see. As humans we’ve evolved to have sight be our primary sense. And it makes sense evolutionarily, since sight works over a very long distance, is very fast (it functions at the speed of light!), and allows us to recognize something potentially large and dangerous coming towards us, in an instant. But this has meant that most of us don’t pay that much attention to what we’re hearing. We’re very good at consciously filtering out what we hear.
    Imagine being at a crowded party, or concert. Even with a thousand conversations going on all around you, you can zero your hearing in to the person in front of you that you’re talking to. But does that mean you aren’t hearing everyone else? No! You absolutely are hearing them, but subconsciously. And this is the danger. What we hear around us, will impact us even if we don’t realize it. This means beware of having audible inputs around you when you’re trading, that could mess you up subconsciously. Things like having the TV tuned to a financial channel babbling away, or being in a busy, noisy coffee shop, or being in a “trading room” and listening to them as you’re trading. It’s not automatically bad, but you need to be very aware of everything you’re hearing that could wind up impacting you.
  • What you say, matters. A LOT! I’ve written about this before so I won’t repeat it here, but check out that article if you want the details on this point.

I’ll wrap this up there, I’m sure I could keep going with things that can impact our psychology. But by far the most important first step in psychological “mastery” is simply awareness. Acknowledge when you’re experiencing any sort of heightened state, and consider what might have triggered your brain to release those particular chemicals, and you can take steps to mitigate them.

Until next time, good trading!

Jonathan van Clute
Community Manager, Trading Research Group

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