Monday, March 31, 2008

Trading Psychology - Stage 3. Clarity

Finally. Painful process of hatching is over, and a trader is born. You are no longer a slave of your emotions, you are your own person. You are in full control of your own actions. You don't jump in the middle of action or out of it on a whim - rather you are capable of pausing and weighing your options and making your decisions in a cold blood. You can see the crowd's emotions on a chart clearly, and you are no longer a part of that crowd nor you are affected by their emotions. You can evaluate those emotions and utilize them. This is an amazing state of clarity, and it's very liberating. These two words (clarity and liberation) probably constitute the essence of this stage of a trader's development. Ability to see clearly the reality of what happens and the freedom of making your own choices as to how to react - this is what makes you a master of your trading vs. being part of the crowd.

You are but detached observer of the market, never involved emotionally yet constantly evaluating the emotions of other participants, waiting patiently for the moment when the opportunity presents itself and the odds are the most favorable; entrenching yourself where you anticipate the action to unfold; pouncing when the right moment comes; having no problem to retreat if proven wrong; having no emotional baggage over any outcome and ready to act again.

All above is the description of this stage and how it feels. Let's talk a bit of how you arrive to it. The transition from stage 2 to stage 3 is not a single moment of epiphany. It's a gradual process of many small clicks, each being another piece of the puzzle falling in its place. Realization of how market's logic is different from conventional Aristotle type of logic - click. Understanding how Smart Money acts vs. how Crowd acts - click. Understanding how a chart reflects emotions - click. Realization that you don't have to participate in any market event and are free to choose your battles - click. Each click comes as a result of another lesson taught by the market - and a good teacher it is for rarely does it miss a chance to put you through another lecture or test. If you are an avid student of the market, you will listen carefully and take notes, collecting knowledge and experience. Ore comes in, steel comes out. This process takes time but it's so worth it, as all the sinter is being discarded and the final result is extremely rewarding - Clarity and Liberation.

A little sidenote is in order: when you arrive at this point in your trading career, you find out that this whole transformation has changed you not only as a trader - it changed you as a person, reflecting in other aspects of your life, making you more disciplined and in control of yourself, giving you the clarity in seeing "behind-the-curtain" happenings, better understanding people and events around you, better ability to deal with them. This comes as a side effect and is an icing on a cake... or maybe it's an ultimate achievement in and of itself, and better trading performance is merely a side effect?

Now, all above sounds so good, I just have to throw a spoon of tar in all that honey. The bad news is, this state of mind once being achieved is not necessary going to stay with you once and for all. Now and then you are going to have unpleasant lapses of sanity when old habits seem to return. We touched on this earlier in this post. The process of kicking nasty habits is not a single event, it's a process. There are sound reasons for those temporary setbacks. When we succeed we tend to stop doing what made us success in a first place. Complacency, letting your guard down, overconfidence, feeling that we became so good rules don't apply to us anymore... However, as frustrating as it can be, there is a good news, too. As you move along, overcoming another drawback and returning to the right path, your skill of dealing with this phenomenon becomes better. Relapses become less frequent, you learn to recognize them sooner and eliminate them faster and easier. They will finally stop altogether when the right way to act in the markets becomes your second nature. Or first.

So, is this all there is to the stages of psychological transformation from the sheep to be slaughtered to the money extractor, aka trader? Almost... there is just one little twist left, and that twist will constitute stage 4. Next post will go over it and conclude this mini-series on trading psychology.

1 comment:

Ron Sen, MD, FCCP said...

This may be the single greatest encapsulation of trading that I have ever read...and I've spent way too much and money getting here.