Wednesday, February 20, 2008

Trading Psychology - Stage 2. Acknowledgement.

So, our trader comes to realization that his inner mind a) greatly influences his trading performance and b) isn't always under his, trader's, control. Naturally, he wants to take control over himself - and this is what it is about, self-control.

You can view it in the same terms as you do in life in general. We all found ourselves in a number of situations where the right way to act was not what our emotions dictated. Boss whose thinking doesn not light up the office with knowledge and wisdom? Kid right behind you whose only purpose in life seems to be to pound your seat with his feet during whole flight? Chatty co-worker who doesn't let your button go until he enlightens you about all the plot twists of the soap opera you never knew existed? Leisure-minded driver in front of you who doesn't seem to recognize green as permission to move his foot from brake to gas? Go ahead, list all your gripes with the world, I'll wait couple minutes. OK, an hour.

... Done? Cool, let's continue. What is it that keeps you from giving all the offenders listed above the piece of or your mind (providing you do keep yourself in check)? Or, let's say, from grabbing the ice cream from the passerby when you happen to want it and he happens to have your favorite kind? Discipline does, reinforced by society customs that serve as limitations on our behavior. "Freedom of your fist ends where the freedom of my nose starts." Now, imagine all those limitations being removed and all reinforcements gone; and imagine that any negative outcomes of your action are limited to you only so no moral or ethical brakes either. Are you guaranteed to stay as disciplined and restrained? Heck, some can't even with all those restraining factors in force. Are you more likely now to give in to temptation and act your emotions out?

Probably yes. But that's exactly what we have in trading environment. There are no external factors keeping you from causing harm to your account. If you allow your emotions to take over and start governing your actions, no one stops to tell you "hey mister, what the heck do you think you are doing?". No one calls 911. Do as ya please and may it do ya fine - that's the psychological backdrop we deal with in the markets. With this realization comes understanding that in absence of external restraints we need much stronger self-discipline and self-control in order to continue following the rules.

Next question is, naturally, how? It starts with right understanding of the very nature of the market as an uncertain environment. Such understanding creates a foundation for the proper mindset. It continues with some strategies and tricks helping a trader form strong set of rules and motivations. My favorite are "Model Trader" and "If I Were Smarter" described in The Master Profit Plan . The process takes a while usually. How successful you are in creating the proper mindset and strict self-discipline will actually define how successful you are in trading.

Let's move on to the description of the third stage so you have a clear idea what you need to arrive to.
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