As in so many other paths of our lives - success in the markets is heavily dependent on mindset and emotional control.
Trading is such a personal journey over many years that if you do not have a strong mindset ready to take on any challenge, it will be very difficult to keep getting back up after getting knocked down. And believe me, you will be knocked down several times throughout your career - but the beauty of it comes in the satisfaction of overcoming these obstacles and learning from our mistakes to become successful, which is very possible if you have a burning desire within.
It is useless to have flawless technical skills in trading if you are not able to manage your emotions properly while maintaining composure and focus in stressful situations. Fear, greed and others play a role in our trading on a daily basis - it is almost impossible to completely eradicate our natural processing of emotions, and may be unwise to aim for that, the key is being able to recognize triggers associated with these emotions, allowing us to identify which emotions may be present in that moment and what we can do to avoid making mistakes as a result of them.
Many traders, myself included, have struggled in some way or another with processing emotions to a point that it no longer impacts our trading negatively. This is extremely common early on in our trading journeys, but if it is not dealt with, it may be a problem that sticks with us and limits our potential for years. A big part of it may be tied to our own individual personalities - some of us are sore losers or have egos and thus may have trouble letting go of positions and taking losses; others may be greedy and so take on unnecessary risk only regarding potential profit - this shows us why it is important to know ourselves, it helps us understand where our short-comings stem from and even more importantly, how to eradicate them.
I am a big fan of Jared Tendler, a trading psychology coach and author of “The Mental Game of Trading: A System for Solving Problems with Greed, Fear, Anger, Confidence, and Discipline” who has experience with excellent traders all over the world. He has developed a systematic approach for managing emotions while trading, frequently emphasizing the need for awareness and understanding the root of our weaknesses.
I loved his book and definitely learnt a lot from it, I also often re-listen to the audiobook whenever my trading is not going well. In this blog post, we'll dive into Tendler's approach to trading psychology, mindset and explore some key concepts to developing a well-rounded emotional-processing system for trading.
Building a System For Trading Psychology
You start to realize how under-appreciated the mental-side of trading is when you find out that only 20-35% of traders have a concrete system to deal with emotions. Jared Tendler says that the approach to solving problems has been backwards - instead of thinking about controlling emotions, think about solving the problem. Pull the weed out by its root instead of just opting for a short-term solution, this allows you to tap into your intuition more.
You can’t rely on emotional control because:
Emotional control is a mental process and the brain is limited.
It becomes fundamentally impossible to trade to your full potential because part of your brain is pre-occupied by dealing with and processing your emotions. If you deal with your emotions from before through preparation, you will have extra brain-space to dedicate to other areas, allowing you to focus more on your trading execution.
For example - If you can process 7 things at once, and lets say 2 of those are pre-occupied by dealing with emotions, then you will only have 5 more that you are able to dedicate towards executing your trading well.
Emotions are more powerful than the mind - processing your emotions poorly can shut down your ability to control your emotions even further, putting you in a worsening loop.
Many of the mistakes we make are ones we have made several times, some of us would be led to believe that those may be occurring due to a lack of skill - but this is not the case - you know clearly that you should not be making such decisions, otherwise you would not have recognized them as mistakes.
You know what you are doing is wrong but you cannot prevent these mistakes from reoccurring because of an emotional aspect. Repetitive errors are tied to emotions, not skill. Your mistakes happening in repetitive patterns is a good thing - this gives you the ability to recognise when you are approaching such a mindset and see your problems in advanced. Emotions can, and do, cause you to do things that you KNOW you are incorrect.
The 5 Big Psychological Problems
Greed - The desire to make more.
As traders, this is some what of a paradox is if it is our job to make money, and that is how we measure our performance, then why is that a bad thing?
Greed exists in all environments - it lowers our chances of success. The difficulty here as traders is that it is something you must determine for yourself - unlike other professions, no one will be watching you trade and tell you “Hey you are getting greedy now, it would be better to take a step-back and clear your mind”.
Thus, this shows why self-awareness is such an important aspect of successful trading. Greed isn’t a problem in itself, it is very much linked to ambition, but is it going to compel you to cross a line and take on unnecessary risk?
Fear - Jared Tendler says that fear seems to be the biggest psychological obstacle for traders.
It is particularly difficult when compared to other professions and even professional sports, because trading is so accessible - it is very easy for anyone to open a trading account - and since it is a highly competitive environment against the best traders in thee world, it is bound to be intense. You are automatically playing at the highest level in the world no matter how well-defined your system is.
Tilt - Just another term for anger.
Confidence - overconfidence makes you have blind faith in your current skillset, while a lack of confidence can lead to choking.
Confidence should ideally be a direct reflection of your skill as a trader - it is a problem when the perception gets off and causes it to translate to overconfidence or a lack of confidence. You need to detach yourself emotionally and not link your confidence to your P/L - you need to focus on your process and it won’t be such an emotional rollercoaster.
Discipline - this may be a real problem for many, it can be related to boredom, laziness, productivity - but it is mostly caused by any of the above 4 emotions causing you to have a lack of discipline.
So, you must find and solve the hidden problems, “the roots”, which are the hidden flaws, biases and illusions - the real problems.
Examples:
Expecting perfection - This causes lots of the emotions mentioned above to be expressed by any mistake we make, many of us just expect too much from ourselves in the short-term, while ironically, underestimating what we can achieve in the long-term.
The illusion of control - we think we are more in control in the short-term than we actually are. It is hard because even when you follow your process and take losses, you are receiving short-term negative feedback despite following sound risk management and discipline.
Expecting to make money from every trade.
Black and white thinking - if you are someone that defines things and yourself as either garbage or amazing it will make things very difficult. There are lots of grey areas in trading and understanding this makes it easier to understand situations.
Trading Psychology System Guide
4 Steps To Creating A Well-Rounded System:
Mapping your pattern
Getting to the root of your problem
Correcting your problem
Repeat & Adapt - you are learning a system which you continue evolving throughout your career
Collect data around your trading mistakes - this helps you identify when you would be in such situations much more easily:
Tips for collecting data:
Look for early signals.
Set an alarm / timer - ex: every few mins to take a step back and look at yourself.
Understand the intensification of emotion - for example, how people think of frustration and anger as different when they are on the same scale - every emotion has a scale.
So take these emotions and put them into a map so you can see your behaviours at the lower end of the scale of these emotions to catch these signs early on and prevent them getting worsen. Then take the data you gathered and put it in order based on severity, like so:
Mapping your problems allows you to see these triggers in real time and stop yourself in the act.
At the point of high emotion:
You have to recognise your emotion by identifying triggers and associated behaviours.
Take action - disrupt that pattern of emotion, this could be anything from taking a deep breath to getting up and walking away for a few minutes to re-collect yourself.
Inject logic - this is more of a strategy with a pre-determined thought (expecting perfection, hating losing etc) and you should train yourself to understand the causes of these and reduce their consequences by tackling the root of the problem itself.
Strategic reminders - reminding yourself of the technical aspects of your system that suffer during periods of heightened emotion.
A-C Game Concept
Try define your A, B and C-game with both mental and tactical differences.
This is an aggregate of all of your trading system at each level
Your mind needs that feedback to understand at which level you are performing and if you do not get that feedback from yourself, you will soon get it from your P/L - a very emotional form of feedback as it is ultimately how we grade ourselves as traders.
Bottom line is that this requires quite a lot of work and if you are not ready to improve upon your emotional system you cannot expect to achieve great things in the market.
Intuition
There are instances where you can feel that gut instinct coming up but you do not go with it, Jared suggests writing down what you saw in the market in those moments because they usually include some of those elements that are new - if they weren’t they would already be part of your system.
Since you cannot fully articulate it, it becomes hard to trust, but if you document it, you understand that process more. If you do not process it, it would be similar to an outsider giving you advice as you are not familiar with it - Jared says to “become friends with your intuition” and that will allow you to use your intuition as a strength while clearly identifying what is true intuition and what is other emotions masked as fake intuition, for example FOMO or greed.
Trust The Process
I cannot think of many aspect of life that embody the concept of enjoying the process and the grind more than trading - it really is a life-long journey where you are learning everyday - both about the market and even more, about yourself.
Screenshots used are from Jared Tendler’s website which I suggest you checkout as there is lots of helpful material on there!