Does the Trader’s State of Mind really matter?
I have heard this argued both ways. It is been argued that the trader’s state of mind, or more formally, the psychology of a trader, is less critical for success in a world of algorithmic trading. It is also been argued that a trader’s state of mind is the most critical factor in a trader success…period.
Can we can know reality? One model of perception is that we see reality pretty much as it is, and as a result, it is our job to create systems, strategies or indicators that will give us a clue as to reality’s next move. Many traders come to trading from an engineering or mathematical background where they have been rewarded by understanding direct causes and effects, and they view trading much the same way.
Algo traders think it is the algo that matters. When I ask them in surveys what impact their own state of mind has on their trading, they most often say it is very little. They believe that in order to improve their trading they just need to fix their algorithms. When their trading results do not match their expectations, they double down on fixing their strategies and algorithms.
Discretionary traders rely on their intuition. On the other hand there are traders that are very emotionally connected to the markets and feel directly the impact of their emotional state on their profits and losses. These traders, when answering the same survey, indicate that the trader’s state of mind has a big impact on their results.
I would argue that the trader’s state of mind is critical for both the system and the more discretionary trader. It turns out that if the emotional connections in our brain are either damaged or temporarily disconnected, we are unable to make any decisions at all. With this type of brain damage, a person can look at a blue pen and a black pen on their desk and take a half an hour to decide which pen they are going to pick up.
FMRI can predict your decisions. With modern FMRI machines, (functional magnetic resonance imaging) neuroscientists are able to predict simple decisions that the patient is making before the patient himself is aware of what they have decided. It feels like our conscious brain is making the decision. In order to perpetrate this experience, our brain does a wonderful thing so that we can feel like our rational thought is in charge of our decisions; it adjusts the time frame, which make it feel like our conscious brain is making the decisions in the present moment. This is in spite of the fact that they are made before we are consciously aware of them.
Let’s recognize our emotional biases. There are millions of micro decisions that are made from this emotional state even in the most mechanistic of trading systems. Thus I would argue that understanding the trader’s state of mind, no matter what approach we take to trading, is a significant factor in our trading success. Thus I invite all traders who want to master their craft, to move their state of mind out of the closet and into a prominent place on the road to trading mastery.
However, as traders we want to see immediate results. Thus the exercise of actually becoming aware of our own internal landscape seems so far removed from our trading goals, that we avoid self-awareness like the plague. Without this awareness, our subconscious brain patterns then go on “automatic” and repeat trading behaviors that no longer serve us. As a trading coach, I see these areas of mental patterns as a foundation for repeated trading mistakes that costs traders billions of dollars in aggregate.
Do you believe that your trader’s state of mind impacts your trading? Probably not, until a series of losses mount up and you realize that it’s not the markets, it’s not the strategies, it’s not the algorithms and it’s not the indicators. At some point every trader comes to the realization that the biggest contributor to their current P&L is their own state of mind.
Mind Muscles™ training starts with this premise that our emotional state drives trading decisions. If we are making decisions that are driven from states out of our normal awareness, let’s put this up front. We do this by training our traders to expand their awareness with our S.E.T process (Sensations / Emotions / Thoughts), real time coaching while trading and our “Golden Keys” of Awareness / Acceptance / Action. This foundation is built into all aspects of our training. You can also build this for yourself and we are happy to support you on this expanded journey of self-awareness.
A veteran broker and floor trader, Rich went from the "worst trainee trader ever", to building one of the most consistently profitable options trading firms on the Pacific Exchange by training his traders using neuroscience. Rich also holds a Masters Degree in Clinical Psychology, a B.A. in Philosophy, and is a graduate of the Gestalt Institute in San Francisco along with Master’s training in Neuro Linguistic Programming (NLP).
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