Essentials Of Winning Psychology
is my belief that successful trading is a function of:
written trading plan with an edge
Money Management and
this essay I shall:
Identify the essential element of winning psychology.
Identify the personal attributes required.
Show the belief structure necessary to achieve and maintain
Identify the blocks to winning psychology, and
Mention some tools I found useful in this context.
are two concepts I should like to explore before beginning the article. The
first has to do with the way I believe humans acquire knowledge.
is an objective reality which humans perceive through the filters of their
values, beliefs and rules. This perception can and usually distorts our
sense of reality. The extent to which we reduce or eliminate the distortion
is the extent to which we will be successful in life. This is especially
true for traders.
second idea I want to introduce is that of the evolution of a trader. For
me the natural progression is:
The Rule Based Trader: "There is one rule: never break your
The Subjective Trader: "There are two rules:
The first is never break your rules.
The second is know when to break the first".
The Intuitive Trader: "There are no rules. Whatever my
intuition tells me is the right action on this trade is the correct action
in the circumstances.
belief accords with reality more often than not".
types of traders can make money as long as they conform to the rules of
that stage. e.g. a trader at the Rule Based Stage is more than likely to
lose money in the long run if he breaks his rules. Finally, before I begin
I should like to briefly explore what I consider the necessary empowering
motivation to succeed.
is success is simple to achieve but not easy. It is simple because the
roadmap for success has been clearly laid out in all the three areas -
written trading plan etc; it is not easy because following that roadmap is
motivation is necessary to get us through the rough patches?
some level we traders are attracted to this game because of the money we
can earn. But, I have found that money alone is an insufficient motive. All
good traders I know LOVE the game for itself. The fact that we get paid for
it is merely a bonus. This love for the game is incorporated into the
vision we want to achieve as a result of our trading and that vision is the
zing that gets us through the rough patches. It goes without saying that
for successful traders, trading is fun.
The Essential Element of Winning Psychology
its core, winning psychology has as its base the "acceptance of the
outcome of a trade".
acceptance I mean the ability of being aware of an emotion without
"buying into" its content; some may call this 'mindfulness'. e.g.
you have just entered a trade and the very next bar is a big range bar
against your position:
God here I go again! Can't I do anything right! What will my wife say if I
take yet another losing trade!
I should move my stop? No I can't do that - the last time it cost me my
bank! But what about the other day when I got stopped out only to have it
go my way? This is just too hard!!!!" etc, etc. With:
you have just entered a trade and the very next bar is a big range bar
against your position:
market is approaching my stop. I feel uncomfortable with the price action
and I can live with the discomfort".
first trader may think he has accepted the outcome but in fact he has
failed to do so at the emotional level; the second trader has accepted the
outcome at all levels.
idea of acceptance applies not only to loses but to profits as well. The
trader that "accepts" an outcome realizes that on an individual
trade basis a positive outcome on one trade does not translate into a
future of unlimited profits.
its core "acceptance" realizes that trading is based on
probabilities, as such every trade is unique. In other words, the past does
not equal the future. More on this in the section dealing with beliefs.
Identify the Personal Attributes Required
we are to acquire "Acceptance", then certain personal attributes
- the ability to step outside ourselves and observe. The more
effectively we can do this, the easier our progress to
- the ability to seek to perceive reality in spite of our filters.
- the willingness to bear the pain brought about by our awareness and
- the willingness to do whatever is necessary to achieve our goals.
the words of Chin-Ning Chu author of "Thick Face, Black Heart":
though most people think they are trying to succeed, they are simply going
through the motions. The last thing in the world they want is to get off
the familiar treadmill and actually get somewhere".
cannot succeed in our journey to "Acceptance" unless we acquire
these attributes. To the extent that we have them is the extent to which we
will experience fulfillment.
The Belief Structure Necessary to Achieve and Maintain
to succeed, we, as traders, need to adopt two apparently contradictory
the market is uncertain and unpredictable and that the market is relatively
certain and predictable".
resolution of this apparent conflict is found in the timeframes that we
hold the beliefs. At the trade-by-trade level, what Mark Douglas, calls the
micro level, we hold the first belief. Because the market can and will
probably do anything, we seek first to protect our capital in the execution
of our trading plan. In other words, we must always have an exit strategy.
the level of a "large sample size" (the macro level), we hold the
second belief. To the extent our trading plan has an edge, will be the
extent to which the market will be predictable and certain. In short we
accept that with trading we are dealing with probabilities and not
certainties. It is of imperative importance we hold these beliefs not only
at an intellectual level but also at every level of our being - especially
the emotional level.
a trading coach I have seen, time and again, lip service acceptance to the
idea of probability; but when it comes to actually trading, the traders
behave as if each and every trade must be a winner - they have a need for
certainty. How else can we explain the popularity of services advertising
90% hit rates? If the ads were not drawing an adequate response, they would
thinking leads to a host of other states and beliefs:
Because we know that we will succeed in the long run and because we
know we will protect ourselves no matter what the market does, we acquire
the state of "self trust" and the state of being
"carefree". In turn these states allow us to remain....
Focused, confident and carefree when we are experiencing the
inevitable prolonged drawdown.
Because at the micro level we know that the market is random, we
will not allow euphoria to set in and lead us to reckless trades. Each
trade will only be one in a series of probabilities.
We will view market information not as a source of pleasure/pain but
merely as data providing us with opportunities.
is not to say trading should not be fun; indeed not only should it be but
for most traders it MUST be. However, the fun comes from the flawless
execution of the rules appropriate to our stage of evolution and not from
trade by trade results.
Identify the Blocks to Winning Psychology
main enemy to "Acceptance" is Fear.
universal fears are:
fear of being abandoned and
fear of losing control.
we reflect for a moment, we'll see how the fear of being abandoned comes
about. As young children, we are totally dependent on our parents. Very
quickly we come to realize that if they ever abandon us, we shall be unable
to care for ourselves. Most of us fail to confront this fear as we grow
into adulthood. As a result we automatically deal with it by attempting to
control our environment - the people, conditions and events that surround
tendency to control may or may not be appropriate in other areas of life
but as a strategy for trading the markets it is a bust. Most of us are
incapable of influencing the market even for the shortest moment, let alone
Douglas's four fears are but an outgrowth of the two universal fears:
Fear of loss
Fear of being wrong
Fear of missing out
Fear of leaving money on the table.
may be more familiar to the trader.
first gained an insight into effects of fear some years ago. At that time,
I was trading futures through Jackson Futures. The company provided a
trading room and I met a quiet chap. He came in a few minutes after the US
Bonds opened and left just after the close. Given that trading opened
(Aussie time) 12:30 am and closed 5:00 am, this was no mean effort. One
morning I noticed he looked very distressed and I struck up a conversation
with him. He told me he had bet the farm shorting a strong bull market. As
his red- rimmed eyes stared off in the distance he said:
don't know why I just didn't cut the position earlier; anyone would have
seen the strength - why didn't I?
never saw him again.
is the effect of fear - it drives out knowledge; it leads to myopia; it
immobilizes us and leads to inaction.
mirror image of fear is euphoria - the feeling that we can do no wrong. As
much as fear, euphoria will ultimately lead to trading failure. Since
trading is a game of probabilities, we will experience times when we can do
no wrong. But these times will come to an end. The trader caught in the
euphoric trance will not recognize this and taking one risk too many will
eventually get caught in a heavy loss. If he is lucky, the loss will not be
a catastrophic loss.
and Euphoria can catch not only newbies but also the most experienced and
successful trader. Witness the demise of (Trader) Vic Sperandeo. Vic
started trading public funds in 1972 and for over 25 years had a very
successful career. His view on trading can best be summarized by the
a market professional....and I am very good at what I do.... I never gamble
more than I can afford to lose.... I think my unique strength is in my
consistency.. I pride myself in my ability to successfully stay in the
Vic - Methods of a Wall Street Master page ix)
year Vic went bankrupt as a result of one trade.
doesn't matter. Whatever the reason, Vic lost a reputed US$50 million and
is now out of the game. Two other factors impact on our fear or euphoria:
Our expectations. Rather than accept market information in its pure form,
we impose our expectations. In turn these expectations impact on our fear
Our own psychosis. Each of us grows into adulthood with our psychosis -
what Stephen Wolinsky calls "trances". Thus many times our
responses to market information are not a response to present information
but to past events. In other words, we are not trading in the NOW or with
PRESENT TENSE INFORMATION.
Some Tools I Have Found Useful
achieve "Acceptance", we need to manage "Fear and
Euphoria". For me the decisive tool was learning strategies to be
aware, acknowledge, and manage the twin emotions of fear and euphoria. This
meant starting with small pains and slowly becoming comfortable with my
feelings. When I first started trading successfully, I used discipline as
my main weapon. But when I started fund management in 1991, I found it
inadequate. Dr George Lianos helped me discover the way of managing
emotions - not eliminating, MANAGING. George taught me that a step-by-step
approach was the best way for me. Learning to manage small fears, I slowly
learnt to handle FEAR and EUPHORIA in my trading. I have developed a
process based on the works of S. Wolinsky (Tao of Chaos) and C. Andreas
tools I have found useful are:
Meditation and/or mindfulness. These techniques taught me how to
remain unruffled and centered during the hurly-burly of real-time trading.
More than any other tool I use, they teach me that AWARENESS is everything.
They re long-term tools.
The ideas and distinctions of Mark Douglas. Another long-term
Neuro Linguistic (NLP) techniques. Useful for absorbing pain. A
medium term technique.
Breathe work and Posture. Learning to breathe, stand and/or sit
properly are effective short-term tools to remain calm in periods of
succeed a trader must have a vision about where he is heading and must
internalise that Winning Psychology rests on Acceptance of the trading
outcome. This means managing Fear and Euphoria. To do this, we need to
ACCEPT, with every fibre of our body the belief that at the micro level the
market is uncertain and unpredictable and at the macro level is relatively
certain and predictable.
Ray Barros. Website: www.adest.com.au