One of the more interesting interviews in the first Market Wizards book is that with Dr Van K Tharp. For many, his interview was their first exposure to concepts such as modelling, anchoring and other aspects of trading psychology. This area is now receiving far more attention than say 20 or 30 years ago thanks to practitioners like Van Tharp, Ari Kiev, Brett Steenbarger etc., but it is still not given as much coverage as entries and exits, or even risk management.
If you have read this blog for long enough you know that I refer to the three elements of successful trading. You need to use:
- a proven strategy that has a positive expectancy;
- proper risk management controls;
- the correct mindset that allows you to execute your trading plan.
Inexperienced traders spend endless hours concentrating on system development, thinking that success is dependent on the entry and exit signal a system generates. More experienced traders will concentrate on risk control (possibly learning from past mistakes). However, how many traders spend time honing and training their minds to work correctly?
That is a difficult question to answer. Think of those traders you may follow on social media. How many state they have undergone mind or psychological training, to maximise whatever edge they may have? The answer is very few. Sure, they may talk about how important psychology is, and it is quite possible they may have been able to develop the right mindset on their own. For a lot of people though, this area can be the missing link to achieving success - the mind is a powerful tool, and how you use it can make or break you as a trader.
A while back, I undertook a series of sessions with a practitioner who is based near to me, who uses Neuro Linguistic Programming (NLP) as part of his techniques. To say I found it useful was an understatement. Not only could I see how it would benefit both myself and other traders, but by talking through the various elements it has helped me deal with non-trading issues going back to my teenage years and early adulthood, which have shaped me and my thoughts and beliefs in later life. All of a sudden, I have been able to clarify or put into context past events. By thinking in a different manner, this has helped me resolve some internal issues, which had led to years of anger, hurt and frustration. I am sure that resolving these issues will help me going forward, not only as a trader, but as a husband and father.
Past events and thoughts can shape how you act or think in the future - for better or worse. The good thing to remember is that opinions or beliefs only reflect your thoughts at that point in time - they can be changed. In trading terms, for example, you may have some form of limiting belief, which may prevent you from getting (and keeping) profits made. Do you feel that you truly deserve your success (profits)? Is there some issue or event in your past, that has created this limiting belief?
Were you ever told as a child "You will never be half the man your father is!"? Hearing that, and storing that in your mind, can subconsciously start to create a limiting belief.
At school or at home as a child, you are forever being told you can't or mustn't do do certain things.
Van Tharp talks in his Market Wizards interview about a trader who had an internal conflict relating to his father, who was an alcoholic. That trader ended up creating a thought pattern to protect them from being like one of their parents in later life. This element stopped him from becoming too successful. After sorting out the issue, he was able to break the glass ceiling or barrier he had imposed upon himself, and was able to make significantly more profits.
All these instances can lead to issues dealing with your self esteem, your locus of control, self sabotage - any number of things.
More recently, I have started looking into mindfulness, which is becoming more popular. Again, I can see the potential benefits it offers to traders, and have started using this myself as part of my daily routine, as well as when in time of stress, or when emotions start to run high (both trading and non-trading!).
The curious thing is, when you start talking to other traders about this, then its almost like a barrier has been pulled down, and people suddenly talk quite openly about it, and their own experiences. Quite a number have looked into this area, may have defined issues related to psychology that have held them back in the past, and had some training. Quite a few have embarked on using mindfulness techniques, and have noticed the benefit, both within themselves but also their ability to trade effectively and profitability. As Ed Seykota would say, identifying, confronting and rectifying these issues can be classed as an "A-ha!" moment.
I suspect that the proportion of successful traders who have employed some form of mind training is far higher than the majority of people think. From what I have observed, this is partly to the fact that, those who have had some form of training and have benefited from it, simply do not talk about it. Why is this? I can only assume that these people have the perception that others would see it as a weakness.
I prefer to look at it as a strength. You have identified an issue that needs addressing, which will make you a better trader, and you go to work on resolving the issue. To me, that's no different to a trader identifying that his risk management is weak, and they go and implement more rigorous risk parameters, for example.
Trading is an odds game. You want to try and tilt those odds in your favour as much as possible. Anything that increases your edge is worth pursuing. Considering ALL of the three elements mentioned at the top of this post, and working on them, will help you achieve your goals.
At the end of the day, to maximise your potential as a trader, or in any walk of life, working on your thought processes and emotions may be the key to unlock your potential.