The Psychology of Trading : Tools and Techniques for Minding the Markets

THE PSYCHOLOGY OF TRADING : Tools and Techniques for Minding the Markets by Brett N. Steenbarger pdf THE PSYCHOLOGY OF TRADING : Tools and Techniques for Minding the Markets by Brett N. Steenbarger 

In our debts to others, we find the true measure of our wealth.

“If there is a single theme to this book, it is this: Trading is a microcosm of life. In trading as in life, we pursue values. In both trading and life, we manage the risks of those pursuits: lost opportunities and realized losses. How we seek values and manage the associated risks will determine our personal and professional success.

Many times, our responses to the uncertainty of outcomes interfere with the achievement of our goals. In careers, romantic relationships, and trading, we find ourselves enacting self-defeating patterns: cutting promising situations short and lingering in unprofitable ones. It doesn’t matter that we are virtuous people, hardworking and otherwise successful.

It doesn’t matter that we have attended all the latest seminars, read the hottest books, and purchased all the best trading tools. If our coping with risk distorts our efforts at pursuing values, we will fail to attain the stature that can be ours —as traders and as human beings.
For the past 20 years, I have provided counseling and therapy services  approximately 130 people a year.

Almost all of these people have been high-functioning individuals tackling demanding career fields. I learned during these years of practice that the problem patterns of physicians, executives, students, and traders arc surprisingly similar. i’hcse patterns arise when strategies for emotional risk management—efforts to minimize pain and maximize pleasure—fail to make it possible to successfully navigate lifes matrix of risks and rewards.

Every problem pattern we experience is a once-successful coping effort that has outlived its value. Conversely, newly created patterns that meet life’s present challenges lead to success. We are best positioned to achieve our goals when we can extract ourselves from the mindless repetition of the past and fashion fresh life solutions.

The purpose of this book is to help you identify your patterns of success and failure and exercise greater control over these. My deepest hope is that the case studies, the research, and the ideas contained in these pages will provide you with the intellectual and emotional ammunition to face yourself and to transform your approach to life’s risks and rewards.
The following pages can help you cultivate new ways of thinking, feeling, and acting; but they cannot perform magic.

For the trader, no amount of psychological assistance can substitute for concrete trading plans that have been rested across a variety of markets. As Robert Krausz neatly stated in his New Market Wizards interview’ with Jack Schwager, self-help methods by themselves can no more make you a great trader than they can make you a great chess player or baseball star. You can only learn to master the markets by immersing yourself in the markets.

Indeed, there is a sense in which the process of developing and testing your market strategies is the best of all methods for cultivating a positive trading psychology. Many traders fail with mechanical systems simply because they cannot tolerate the inevitable periods ol drawdowns or flat performance. When you create and test your own approaches to the market, you develop an inner knowledge of how those methods work.

During periods when the market throws a curve ball, your confusion is more readily replaced by the sense of “been there, done that.” Nothing substitutes for the confidence born of experience. Still, it is difficult to underestimate the degree to which traders can utilize identical trading methods and arrive at wildly different results. Possessing the right tools is necessary, but not sufficient, for success. As Kraus/ observed, traders have an uncanny knack for acting out their repetitive and destructive emotional patterns in their trading. Such enactments will derail even the most carefully constructed and rested systems.

An important goal of this book is to help you approach trading the way a psychologist approaches his or her clients. I call this “trading from the couch,” which means learning to utilize your thoughts, feelings, impulses, and behavioral patterns as market data. Trading from rhe couch entails an important shift from traditional thinking. Instead of trying to overcome or eliminate your emotions, this self-aware trading calls on you to learn from your reactions. Your goal is to turn yourself into a finely calibrated instrument for detecting and acting on the patterns of both the trader and the trading.

Note that cultivating such sensitivity does not mean simply going with your feelings in placing orders! As you will see in the coming pages, it often means the opposite: learning to use excess confidence and risk aversion as valuable contrary indicators. Surprisingly often—for the trader, as for rhe therapist— acting counter to ones initial impulses is the winning move.

In trading from the couch, you become your own psychologist. That is not an easy task in the markets or in everyday life. The rewards, however, are considerable. Trading, like competitive sports, is a powerful crucible for cultivating the emotional skills crucial to life success. In few arenas are the pursuit of values and the management of risk so tangible and immediate. Nothing so drives home lessons in self-understanding as brutal hits to ones bottom line.

Self-aware trading also presumes a vital symmetry: In mastering the markets, you can further yourself as a human being; and in developing yourself as a person, you can enhance your trading success. Once you are able to extract the information contained within your emotional, cognitive, and behavioral patterns. you will he better equipped to identify and to exploit the patterns that appear in the financial markets—and vice versa.”

Brett N. Steenbarger

Language: English
Pages: 343
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