10 Main Points on Trading Psychology (Part 1)

I just recently finished The Psychology of Trading by Brett Steenbarger, and I have to say, it not only impacted my trading but had a massive impact on my everyday life. I have intensely studied each page and broken it down word for word. I even did a research paper on the subject, focusing on this book specifically. I highly recommend it for any trader. In my opinion psychology is THE single most important and over-looked factor in this game. You need to trade the trader. $$

After finishing the book, I have decided to share these 10 main points on trading psychology. They are also the main themes in Steenbarger’s book. Even just going over these main points can help out your trading game from a mental aspect. Let me know what you think.

1.) Behavior is patterned. Whether you realize it or not, you have patterns as a trader and out side of trading. You observe patterns in the markets, you appreciate themes in music and literature, etc. Human behavior is similarly organized. The key is to change the underline pattern.

2.) Your trading patterns reflect your emotional patterns. The patterns that interfere with trading are usually extensions of patterns that are present in other areas of your life. The field of behavioral finance has identified information-processing biases that systematically skew decision-making, especially under conditions of risk and uncertainty. These biases include overconfidence, endowment effects, and frame-driven biases. These emotional patterns also reflect relationships, such as, if you are having difficulties maintaining a commitment in a relationship, you will more than likely experience that lack of commitment in trading. Much of problem trading is a generalization of the biases and emotional influences that are present in daily life.

3.) Change begins with self-observation. It is impossible to break a pattern unless you can see it happening in real time. Most patterns are automatic, you don’t recognize when they are occurring. Before figuring out what you should do in a positive way, it is important to stop doing what isn’t working. You begin the process of change when you sever your identification with your problem patterns, and you continue that change when you initiate identifications with positive patterns.

4.) Problem patterns tend to be anchored to particular states. People posses multiple streams of information processing, because of the natural division of labor. These streams can be verbal and explicit , or even non-verbal and tactic. The way in which you blend these streams it creates a specific unique state. When you are in that state, you tend to activate the behavioral patterns associated with that state. This results in moving in and out of problem and solution patterns many times throughout the day. These state shifts cause vulnerability and could get to the degree that you cannot sustain your intentions. This could make anyone unlikely to consistently profit from even the best researched trading plans.

5.) Our normal states of mind, which define most of our daily experience, lie within a restricted range of our possibilities. Your immersion in daily routine keeps you locked in a routine mind states. This traps you in problem patterns that are anchored to these states. The psychological techniques that are most powerful in accelerating change create positive traumas, providing new experiences during extraordinary cognitive and emotional processing. Ordinary human consciousness is the enemy of profitable trading.

6.) Most trading occurs in a limited range of states, trapping traders in problem patterns. Traders tend to place greater emphasis on the data they process than on the ways in which they process the data. What you are capable of seeing is determined by your current state. Markets possess the ability to activate patterns associated with emotional arousal and cognitive bias. As a result traders find it especially difficult to stick with trading strategies even when these have been well formulated.


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