How Do Professional Traders Think?

This is the message one of my students wrote to me before taking our Trading Course

“I don’t get it. I know there is good money to be made in trading (I see people doing it) and I’ve known success before. It’s not like I don’t know what a winning mindset is. I’ve proven myself before. Yet trading success still eludes me after a number of years, and I don’t know why. I’ve made success happen in other areas of my life, I work hard, I’m goal-oriented, I’m motivated, have a great attitude, have a good analytical mind, I’m a proven leader, and I know how to win. So, what’s wrong? What is it I am missing?”

SUCCESS IN OTHER FIELDS DOES NOT TRANSLATE INTO TRADING PERFORMANCE

If you hang around traders talking shop very long (and being honest), you will hear this story repeated endlessly. Many people who have devoted themselves to becoming a professional trader have experienced success in other fields before they came to trading. They know how to trade when the pressure of risking capital is not part of the equation of trading success.

In fact, one of the first flaws they bring to their new (or not so new) career in trading is that they assume the same psychological skills that aided them in their past career could also be leveraged to produce the same kind of success in trading without modification for the rigors of trading.

This is a misguided, and often an account damaging, flaw. Somehow this aspect of risking capital in real time makes for a completely different calculus of performance. Success in many other fields is rooted in pushing your will upon the world and, by sheer hard work, will power, and ignoring fear, conquering the world “out there.” The skills of setting goals and assertively making those goals happen by taking personal control of fear are honed into powerful tools for shaping the future. And with this kind of thinking, if you don’t succeed, you just push even harder to make things happen. Additionally, you must be in control of the factors that bring forth the envisioned reality.

Success, you are taught in this paradigm, comes by aggressively acting upon the world and making it happen according to your will. This formula for success is at the root of many a successful business and career. And out of that success comes the assumption that the same principles, applied to trading, will continue to produce success.

 This is like comparing Newtonian physics with quantum mechanics – the belief that there is a world “out there” that can be known with certainty and manipulated vs. a world “in there” where belief is fluid and is projected upon and shapes the world the observer experiences. At the core of this paradigm is a belief in the certainty that a person can control outcome in the external world. And this is where the struggling trader stays stuck in beliefs that do not function effectively in trading, where there is no certainty.

THE TRADING MINDSET

Trading requires a very different mindset. Trading is more about managing the internal world in your mind than controlling an external world. In trading, the trader has to let go of his or her beliefs about being able to control external outcome by force of will and hard work. And the evolving trader has to let go of his or her illusion of certainty and embrace the management of uncertainty and probability as a way of seeing the world. This is the “quantum leap” that a trader has to make in order to move from the certainty thinking found in the life before trading to the management of probability found in trading.

RE-DEVELOPING THE PSYCHOLOGY OF WORK FOR SUCCESSFUL TRADING

Much of the discipline and confidence that traders bring to the management of trading is based on a history of being certain they are able to control outcome by employing the same aggressive hard work habits that created success in the past. Then they get into trading and discover they cannot control the markets by working hard. This goes against the very grain of the beliefs that created success before trading. And this is the mindset that they bring into trading.

Now in trading, the only control they have is over themselves and the mind they bring to the performance of a trade. This is a huge shock to the historical understanding of both the confidence and discipline that the trader brought to trading. And why not bring this attitude of success into trading? With it, they have been able to force their will onto the stage of the world and “make it happen” by sheer hard work.

The very notion of work ethic that the trader brings to the performance of trading has to be re-examined and reconstructed. Success before trading entailed “doing” something with a sense of urgency. Yet, in generalizing this mindset into trading, traders discover that they are sucked into over-trading and revenge trading. Then they get traumatized by giving back all they won and more, creating a hyper-vigilence leading to hesitation in even acting on good set ups or being able to stay with a trade that is becoming profitable.

The work of trading has to be transformed from the notion of “doing, doing, doing” to the work of observing. This is a shift in the belief that you need to be “doing something” to make money in trading. (After all, this belief holds that you cannot be making money if you are not trading, right?). Thinking that you have to be in the act of physically trading is at the core of much of the pain found in trading. The trader ends up in many trades that a successful professional trader would pass on.

To be Continued…