Change your trading results using neuroscience and trading psychology to up your trading game

Circle of Confidence

“An awareness of the Confidence Cycle in and of itself makes the journey faster and easier.”

-Richard Friesen

I started my career in the financial market as a futures broker at Merrill Lynch. I had walked into a job that I knew nothing about. In college, I was a philosophy major and had a master’s degree in clinical psychology. The financial markets with all those numbers that wouldn’t hold still were overwhelming. But I persisted. In three years as a broker, I learned as much as I could, and then it was time to move on. My college buddy, Joe Ritchie, who you can read about in the Market Wizards book, hired me to be a floor trader on the Chicago Mercantile Exchange.

And the numbers did not hold still there, either. It was still overwhelming. My supervisor told me I was the worst trainee he had ever had! But I persisted and opened a trading desk for the firm on the options floor of the Pacific Exchange in San Francisco.

The advantage of being on the options floor was that it was more of a cerebral challenge. Options were complex and I was able to see larger patterns in the market through the lens of option implied volatility.

With that skill-building, I was able to go on my own and become an independent market maker. Once I broke through my own internal limitations, I was able to generate enough money to build my own options trading firm. By hiring other traders, and watching them develop, I was able to see more clearly the path that I took, and the challenges they had on their own path to trading mastery. My skill as a former therapist and even my training in philosophy allowed me to define and clarify the psychological stages that lead to trading mastery.

Imagine what it feels like to be a master trader.

Imagine the path that has taken you there.

Imagine the changes you have made in your beliefs and behaviors.

Imagine overcoming the obstacles and arriving at confidence in yourself.

The purpose of this article is to invite you to that path for yourself and make it a reality. To help visualize this process, I created a graphic that I call the “Circle of Confidence.”

Image showing the Confidence Circle process for traders

Cocky Confidence and Magical Thinking

When we start trading most of us believe as I did, that we are special. We all believe we are superman/superwoman. When we start trading, and I know this sounds a bit arrogant, but almost all traders who come to the marketplace don’t come there with the feeling that oh I’m just average and will struggle through it. Almost all traders believe they have a special talent that can outsmart the market.

In this state, trading isn’t a skill… But a magical way to fulfill a dream. It’s a way to:

Get respect from our parents
Become popular
Become wealthy
Be happy
Prove we are worthwhile human beings
Get revenge on the school bully
Get laid more often
Give our family financial security
Become a philanthropist
Build a retirement account
Feel like a hero
Show the market who is boss
Show everyone how smart we are
OR whatever the dream is.

The positive: the positive aspect of cocky confidence is that without it we would never start difficult ventures. If I didn’t have my own cocky confidence I never would have developed the many successful ventures that have enriched my life.

The negative: The negative is if we remain in this state. As long as we believe we are superior to the market, we can’t learn from it. As a result, we stay in this struggle with the market for years and can lose several accounts.

Winning trade confidence

The next stage is winning trade confidence. What happens is with time, we gain some skills. And there are times the market has repeated consistent patterns. We see those patterns and by George, our strategy works! These winning trades give us the confidence to continue. These winning trades tell us that our dream is going to become a reality. This leads to euphoria, especially after losing periods. Every tick that goes in our direction is exciting. Every tick against us is depressing. We need winning trades to be okay.

The positive: The positive is this stage gives us the energy to move forward. When we are in the flow of the market, we make several winning trades it confirms our decision to become traders.

The negative: When we have a series of losses, we become deflated. Often we are self-critical and beat ourselves up.

Strategy confidence

The numbers show the truth. If we keep track of all the trades we made according to our strategy and we subtract the impulsive, revenge, boredom, and other off strategy trades, then we find that we are profitable. It becomes obvious that if we follow our strategy we would be immediately profitable!

This is an exciting discovery, and we learn to follow our strategy. It is immediately rewarding to see our equity curve on the upslope. Then it happens. Something terrible happens and our strategy falls apart. We followed it and it worked for a time, but now it doesn’t. We tweaked the strategy, we add intuition, we make exceptions, and still, nothing works.

All strategies eventually fail. They have to. If they didn’t everyone would figure them out and we would all be rich. But of course, if every trader executed the same strategy, there is nobody on the other side and that obviously doesn’t work. The players change, monetary policy changes, politics change, taxes change, the emotional mood of the country changes, beliefs about the future, and hopes for the future change. All these cultural and psychological changes create different market structures and patterns. And when these changes occur, we lose confidence in our strategy.

The positive: By creating and testing multiple strategies and executing them, our brain absorbs market patterns and behaviors. These become foundational for later trading.

The negative: A strategy that works creates false confidence and as a result when it stops, this can lead to a psychological crash.

Market Mood Confidence

Then next, the lightbulb goes off. It is obvious that if we had a trending strategy in a trending market it’s going to make money. If we have a mean reversal strategy in a market with heavy support and resistance it will make money. So we moved from confidence in our strategy to learning about the shape of the markets. We learn about how the different players impact the market and the patterns and footprints they create. We then learn to apply the strategy that works for that market mode and again we are consistently profitable. Then, of course, something happens. The market mood is not clear. Our confidence in our ability to determine the market mood gets shaken to its core.

The positive: By examining all market moods, and learning about the different patterns and footprints of different players and how market moods shift, this gives the powerful pattern recognition part of our brain the data it needs to create a subconscious understanding of the market moods. This subconscious understanding reflects itself in what feels like intuition.

The negative: Learning about market moods and the transition from one market mood or another is a big challenge for traders, but it is the right challenge. Many traders prefer to keep tweaking their strategies and as a result, will not attempt to move to this stage. It is easier to tweak a strategy than to face the complexity of market moods.

Delight In All Outcomes

Now, something magical really happens. We’ve watched every tick for many months. We watched our moods shift with every dollar made or lost. We have created tested and executed more than one strategy and we have learned a lot from that testing process. We now understand the footprints of the market and the different moods and patterns that it creates.

And all of a sudden we move from needing external support for confidence to being confident in ourselves and delight with all market activity. We become curious and feel pleasure at seeing the market the way it is. We are not attached to any outcomes strategies or beliefs. Winning or losing trades no longer is a referendum on our dream. Because of this, we can now stay with the market and be in the flow of what it is telling us. This provides deep pleasure and satisfaction.

As a result, profits are not the goal, and we are pleasantly surprised to see our equity curve growing.

The positive: Traders experience a lot of stress going through each stage of their development. There can be times of depression, hopelessness, self-judgment and criticism, and repeated patterns of behaviors. When a trader learns to become self-aware, accept what they discover without judgment then the stress is removed. Trading becomes a delightful experience being eager to discover what the market has to say. There is no pressure, no force, but just delight with whatever the market does. From this mindset, the state of flow with the market becomes possible.

And even more positive, the lessons learned in self-development start to migrate to other areas of the trader’s life and allow him or her to create beliefs and behaviors that serve them better in all aspects of their life.

Because trading gives immediate feedback on our behaviors, it is a transformational tool for us to move from a reactive self to a higher level self that is able to take agency for ourselves and make a difference in the world.

This is a video I made on the subject, for one of the Mind Muscles Academy courses: