Sunday, September 03, 2006

The Most Important Psychological Skill for Traders - Part Two

My last post explained how psychological disruptions of trading are linked to state shifts that manifest themselves emotionally, cognitively, and physiologically. Very often these shifts involve states of heightened arousal due to frustration, fear, and anger. The previous post explained how these states can be defused by combining focused concentration with deepened, slowed breathing. With consistent practice, traders can become quite adept at calming their minds and bodies and interrupting processes that interfere with good decision making.

A related skill that I describe in The Psychology of Trading is "taking your emotional temperature." This simply means that you periodically stand outside yourself as an observer and notice your thoughts, feelings, and physical state. By making this self-observation a regular practice, you can become skilled at catching state shifts as they are occurring. This enables you to utilize the focusing and breathing exercises proactively, before emotional triggers can disrupt trading decisions.

Such a proactive use of the focus and breathing is especially effective when combined with cognitive techniques. Here's how to do it:

First off, I recommend that anyone trying these methods reduce their trading size significantly. By taking P/L off the table temporarily, it allows you to focus on developing your self-control. Then, with your success in the exercises, you can gradually build back to a normal trading size. (Note that if reducing your trading size by itself eliminates your emotional disruptions, that in itself may be your problem: you may be trading too large for your account size and your personal risk tolerance.)

Second, before adding cognitive components, it's necessary to truly master the focusing and breathing from the previous post. I generally have people practicing those methods at least twice a day for a full week before adding new components. The goal is to be able to calm yourself significantly with just a focused mind and a few deep, slow breaths. This takes consistent practice.

Once you can focus and relax yourself on demand, you're ready to add a cognitive module to your self-mentoring. Before you start trading, sit comfortably and vividly imagine market situations that would normally lead you to become fearful or frustrated. For example, you can "play a movie in your head" of the market moving against you and hitting your stop-loss point. The key is imagining the market action and your stop in vivid detail--while you are doing your deep, slow breathing. Then continue your "movie" by vividly imagining yourself taking the right course of action in that situation. Imagine how you would talk to yourself in that situation and what actions you'd take in the market--again, all the while keeping yourself calm and focused, breathing deeply and slowly.

You may need to repeat your "movies" several times with variations. In all, I recommend spending at least 15 minutes with this exercise prior to the market open. What you're doing is literally training yourself to stay calm and focused (and to do the right things) in situations that used to take you out of your game. By repeating these situations in your head many, many times, you normalize them (and your response to them) and make them familiar and non-threatening. Facing a situation again and again successfully in your mind prepares you to do the right things when those situations actually occur.

Notice that this method will work, not only for trading problems, but any situation that tends to trigger you and lead to unwanted reactions. Mental rehearsals under conditions of self control are a method for extending our free will, our ability to respond to events as we wish. This is not only helpful in trading, but in all of life.


Globetrader said...

thank's for a great article, which was right on spot to make me realize a trading problem, which was silently creeping in my daily trading. I tried to discuss it in an article written today in my Blog and only time will tell, if I put the finger on the right spot or if something different was responsible.


Brett Steenbarger, Ph.D. said...

Hi Chris,

Thanks for your feedback and the link to your recent article. I've enjoyed your blog--many good trading psychology insights there!