TRADING PSYCHOLOGY 2.0

 TRADING PSYCHOLOGY 2.0

Successful efforts to master markets lead us down paths of self-mastery.

This book is one guide to those paths.

Market participants have traditionally defined self-mastery as

discipline—controlling the emotions that all too often distort information

processing and trigger impulsive behavior. To be sure, discipline is

required for any great undertaking, whether it is pursuing an Olympic

medal, a business startup, or a medical breakthrough. But discipline,

while necessary for success, is never sufficient. Discipline does not

substitute for skill, talent, and insight. Strict, disciplined adherence to

mediocre plans can only lock in mediocre results. If it were otherwise,

there would be no losing automated trading systems.

I’ve followed and traded markets since the late 1970s. During the past

decade, I have served as a full-time performance coach at two trading

firms—Kingstree Trading in Chicago and Tudor Investment Corp.

in Greenwich, Connecticut—and worked with many other trading

organizations on a consultative basis. Through the TraderFeed blog

and three prior trading books, I’ve had the honor of interacting with

thousands of traders around the world. If there’s one thing this whirlwind

of experience has taught me, it’s that there is far more to market mastery

than controlling emotions and impulses. Sustained success requires

the cultivation of a host of positive performance elements: creativity,

productivity, adaptation to change, and psychological well-being. The

good news is that recent research in psychology and related fields has

profoundly deepened our understanding of these contributors to human

performance. The bad news is that most of us in the money management

world, immersed in the day-to-day challenges of keeping up with news

flows and market movements, have little opportunity to sift through and

apply this knowledge. As a consequence, we tend to work hard, but

not smart. From the organization of our daily routines to our reviews

of performance, we rarely optimize learning, independent thought, and

productivity.

The unfortunate tendency to substitute quantity of effort for quality

ensures that we will face a yawning gap between our real and ideal

selves: between who we are and who we’re capable of becoming. Trading

Psychology 2.0 seeks to bridge that gap by breaking trading success down

to four essential processes. In the coming pages, you will learn a simple

ABCD:

A How to dynamically Adapt to changing market conditions

B How to identify and Build on your distinctive trading strengths

C How to Cultivate creative processes and generate fresh market

perspectives

D How to Develop best practices that help you sustain productivity

and effectiveness in your work routines

Most of all, this book is about taking best practices—the ingredients of

your trading success—and weaving them into best processes. The goal is

not to change you but to help you more consistently tap into the drivers

of your success.

In hindsight, it’s not difficult to see that Trading Psychology 2.0 is a

natural extension of my previous books. The first of these, The Psychology

of Trading, focused on the emotional problems faced by traders and how

these mirror common life challenges. It introduced a solution-focused

framework to trading: identifying the patterns that underlie our success

and becoming more consistent in enacting those. My second book,

Enhancing Trader Performance, adopted a developmental view of trading

success, emphasizing expertise development as an ongoing process

of deliberate practice that matches skills, talents, and challenges. An

important implication of that work was that there are many forms of

trading, each requiring unique skills and learning processes. I continue

to find that many of the emotional problems faced by developing traders

are the result of bolting generic learning processes onto very specific

performance domains, creating frustration and suboptimal performance.

Finally, my most recent text, The Daily Trading Coach, created a cookbook

of psychological techniques and approaches to help traders overcome

common performance challenges. An overarching theme of that book is

that a primary goal of trading psychology is self-coaching. By becoming

better self-observers and catching best and worst practices as they occur,

we can overcome market noise with enhanced self-determination.

Trading Psychology 2.0 differs from these books in one key respect:

It breaks trading success down into those four ABCD processes and

explores research-based ways of maximizing them in our personal and

professional lives. The book’s aim is to move trading psychology beyond

the usual focus on discipline, emotional control, and trading one’s plans

to the broader context of sustaining peak performance. Most important,

the book aims to nudge traders toward what might be called meta-

processes: robust routines for changing our routines and adapting trading

to ever-changing market conditions.

It is not enough to find an ‘‘edge’’ in financial markets; as any tech

entrepreneur can attest, competitive advantages are perishable commodi-

ties. Those who sustain success continually renew themselves, uncovering

fresh sources of competitive advantage. That requires processes for assess-

ing and challenging our most basic assumptions and practices. It takes

a good trader to create success, a great one to recreate it. Nothing is

quite as difficult—and rewarding—as letting go of what once worked,

returning to the humble status of student, and arising phoenix-like from

performance ashes.

What makes any performance domain worthy is that none of us will

ever completely master it. There is always room for improvement in

dance or golf; chess players, brewmasters, woodworkers, and racecar

teams can always hone their craft. For that reason, performance

activities are the consummate psychological crucible, moving us ever

closer to self-mastery. This is particularly the case with trading, where

the rules of the game continually evolve. What other field demands the

utmost of conviction and risk-taking, but also the greatest of flexibility

and prudence? In adapting to change, we embrace change, we become

change. We cannot rest on individual best practices; we need best processes

that yield ever-improved practice. There will always be a gap between

real and ideal: between who we are and who we can become. If this book

can be a resource in bridging your gap, it truly will have fulfilled its aim.

Of course, no performance journey is traveled solo. Life is a team

sport and success crucially depends on surrounding yourself with the

right teammates. I owe many debts of gratitude to colleagues at Graham

Capital, Tudor Investment Corp., Kingstree Trading, and SMB Capital;

the ever-resourceful editorial staff at Wiley; Victor Niederhoffer and

the Spec Listers; and Howard Lindzon and the supportive crew at Stock

Twits. The book wouldn’t be possible without the many talented traders

who contributed best practices and inspired the case studies. As in my

prior books, the names and identities of the traders in those case studies

have been changed to preserve privacy, but I want my debt to the many

fine people I work with to be as publicly voiced as possible. The greatest

debt, however, is to the family that has offered constant love and support

through all the not-so-constant financial markets: Debi, Steve, Laura,

Devon, and Macrae; their families; and most of all to my wife, Margie.

She, not markets, has been the love of my life, and that has kept me

sane through many ups and downs in the business. Finally, to the many

readers of the TraderFeed blog a hearty thank-you for your support and

all you’ve taught me. I think you’ll find many of those lessons in the pages

that follow.