Two Parts to Trading Psychology That Lead to Better Trading Decisions

There are two parts to trading psychology that when understood lead to better trading decisions: the inside and the outside.

First let’s look at the outside. The market itself is not an objective, rational Spock ­like machine. The markets are made up of the emotional decisions and inputs from an aggregation of millions of humans. Ultimately, reality rules. But… the human condition with all its biases, mind traps and fell abilities create a volatile wave that runs back and forth across the discipline of reality.

We are trading human biases. The good news about this is that the human brain operates much the same way for most humans. The processes and patterns that it generates can be seen in charts of most asset classes. So to be clear, what we are really trading is not the reality of the underlying asset class, but patterns of human decision ­making that are skewed by the the brain biases.

The more emotional the participants who are driving market prices, the greater the opportunity. So what we are really doing as traders is gaining trading psychology skills as a way to elicit brain patterns of our fellow fallible humans in order to create a predictive edge.

The more we understand the markets as a reflection of trading psychology, the more we are able to view the patterns that it creates in a proper context. We are able to connect that context with the reality of the market drivers, the human condition.

That said, the more critical piece in successful trading is to understand the inside, or our own psychological state of mind. It is been argued that our own state of mind is anywhere from a 25% to 100% contributor to trading success. In my model of trading psychology and the effectiveness of our approach confirms that our own internal state of mind approaches  100% of our results.

We have to distort reality to live day to day. In order to survive in the world, our brains need to take an immense amount of information filter, categorize, compress, and take shortcuts to be able to manage the information. Because survival depends on making decisions, we can’t make decisions with an infinite amount of information. Thus before we even start the decision process our reflection of reality is already significantly distorted.

Depending on our degree of self-awareness, our own psychological state becomes a significant impediment or a powerful tool. It is possible to learn self-awareness in real time and improve our own decision processes in order to improve our trading results.

To arrive at a Master Trader’s mindset is a life journey. Using a real time super awareness starts us down the most effective path to trading mastery. Yes this is a challenge, however it is much better to work on the right challenge than to work on the wrong challenge as most traders who fail do.

You can start this journey today by setting an alarm for every 15-30 minutes while trading. When it goes off, ask these questions:

  1. What is the state of my current physiology? (heart rate, posture, breathing, muscles tension, temperature, sweat)
  2. What am I currently feeling? (boredom, fear, panic, anxiety, stress, pressure, joy, exuberance, cockiness, focused, in the flow)
  3. What are the quality of my current thoughts? (critical, soothing, stories of failure, reviewing past trades, conflicting)

This is the start of internal awareness. As you improve your ability to be aware, in real time, you will improve your decision process.