Stock trading: How to imbibe right kind of trading psychology for investing success


Even the most successful man on earth would have weaknesses and behavioural traits that are not conducive for best investing behaviour. Yet, they manage to overcome those and achieve success in investing. And how!

Noted clinical psychologist and investor Dr Brett Steenbarger says the idea should be to identify, interrupt and deal with the problems that interfere with successful trading and look for effective strategies for coping with the stumbling blocks that one often faces on a day-to-day basis.

Brett N Steenbarger is a professional psychologist as well as an active investor. He has written many books in the field of trading psychology, including some best sellers like
The Psychology of Trading. Decision Tools and Techniques and
The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist.

Break the problem patterns to achieve success

Steenbarger says daily routines and patterns are responsible for the results that traders achieve while trading. It is not only past conflicts that interfere with a trader’s present functioning, but also their ability to cope with past conflicts.

He feels if traders experience conflict in the financial markets and when things are not going according to plan, then most traders make the mistake of avoiding and withdrawing rather than managing the risk properly.

“When we fail to consciously acknowledge and come to terms with the past, we unconsciously fall back upon outmoded ways of dealing with those,” he said in an interview.

Steenbarger believes traders can break these patterns of repetition through mindful, conscious awareness and by recognizing the current situation as part of a larger life pattern.

To change these patterns, traders need to clear their mind and stand apart from them and observe them carefully. “The first step in breaking any habit is to become exquisitely aware of its presence,” he says.

It is generally seen that traders repeat patterns of success as well as the ones of conflict. Repetition of problem patterns is triggered by anxiety, which brings out emotionally-encoded past coping, whereas repetition of success is triggered by a very different state called ‘flow’.

“When we immerse ourselves in a meaningful and fulfilling experience, we enter a state of hyper-focus. In that zone, time can pass without our awareness and we experience heightened joy, creativity and productivity. What is triggered by the new state is also our coping, but in this case, it’s the coping based on our strengths,” says he.

Why you need to have right trading psychology?
Explaining the concept of trading psychology Steenbarger says it enables traders to shift from a focus on market patterns to an awareness of their own problem and solution patterns.

“Trading psychology boils down to a setting of tools and developing understandings for avoiding thought/feeling/behaviour patterns based upon past coping with conflict and enacting patterns associated with our successes. Much of trading psychology can be described as a means for recognizing anxiety, frustration and uncertainty in real time; stepping back and recognizing maladaptive behaviour patterns associated with past coping and then making efforts to enter a zone in which we are able to access strengths,” he says.

Steenbarger said from a trading psychology perspective, investors run into two problems:-

  • First is the one in which market events trigger problem patterns, leading to poor trading decisions
  • The second problem occurs when due to some distraction, boredom or lack of energy, traders fall out of the ‘zone’ in which they are able to perceive and act upon the patterns of risk and reward.

Steenbarger believes the challenges faced by a trader are not restricted to just an excess of emotion, but also the absence of the flow state because of which many traders have resorted to the use of meditation in their daily routine preparations to maintain focus.

“Traders recognise that peak performance requires not only the control of negative emotions, but also enhancement of attention and our capacity to sustain functioning in the zone,” he points out.

Concrete principles to guide trading actions

Steenbarger says besides the ability to avoid problem patterns and maximise mindsets associated with optimal functioning, traders need to incorporate a third dimension in their trading psychology.

This third dimension, he says, is the trader’s ability to translate the patterns of failure and success into concrete principles that can guide their actions.

An effective trading psychology, says he, can enable traders to live a more principled life, which doesn’t over-react to the day-to-day events and is able to navigate meaningfully and purposefully.

Steenbarger says if one can attain this kind of a mindset, then such a trading psychology can be an opportunity to cultivate patterns of success and avoid patterns of failure. “Life itself, thus, becomes a kind of spiritual gymnasium, in which we move from station to station – across career, relationship, and personal contexts – to expand our capacity to live intentionally, by principles,” he says.

How can traders maximise their strengths?
Steenbarger says even the most successful investors are not without weaknesses, it is their ability to maximise distinctive cognitive and personality strengths that separate them from the rest of the pack.

Sharing his experience of dealing with traders who seek help as a psychologist, Steenbarger says most investors come to him to find a way to correct or eliminate weaknesses.

He says traders find themselves unduly influenced by fear, greed and impatience and want to eliminate these emotions from their trading decisions.

Steenbarger says the greatest problems in managing risk and uncertainty come from the minimal deployment of strengths, and not necessarily because of any weaknesses or emotional problems that require remedy.

He lists out a few principles based on his years of research and observation of many investors and their performance in financial markets:-

  • Distinctive strengths lead to long-term success: Steenbarger says market participants who have enjoyed long-term success are unusually strong in one or more of the character strengths. He believes investors who have enjoyed consistent success for well over a decade across very different market conditions have distinctive wisdom/knowledge strengths that enable them to generate unique ideas for investment.

Also, they practise a lot of restraint, which helps them manage trading positions with consistent risk management and careful maximisation of rewards relative to risk. “Wherever we see great performance, we encounter great strength,” he says.

  • Inability to utilise strength leads to poor performance in markets: Steenbarger is of the view that many traders who have great potential and display particular interpersonal strengths sometimes cannot channel these strengths into daily work processes. This leads to a lot of frustration, which influences their decision making in the wrong direction.

“Our work environments such as the configurations of traditional trading floors or the inflexible structure of business meetings can unwittingly frustrate the exercise of our strengths, leading to subpar performance,” says he.

  • Overdependence on a strength leads to poor market performance: Steenbarger says when traders have an overdependence on a particular strength, it can bring unwanted consequences.

“The trader who pushes to increase risk taking and achieve higher and higher profitability goals, taking the virtue of courage to an extreme can become an underperformer when markets make a radical shift in their behaviour,” says he.

Also, he feels managers who are over-supportive and grounded in the virtue of humanity may find it difficult to enforce productivity goals. This happens very often when a particular strength dominates to the such an extent that it interferes with the expression of other strengths.

  • Cultivation of ‘latent’ strengths leads to successful trading: Steenbarger says the development of successful traders and investors hinges on the cultivation of ‘latent’ strengths, which is a very important concept, and not one that is well-appreciated.

Steenbarger says every individual possesses ‘latent’ strengths or capacities but for some strange reasons, they are not particularly aware of it. He feels these hidden strengths can be harnessed and cultivated and that can bring in unique gains in the performance of a trader.

A great way to identify these latent strengths is to listen to the opinion of someone who is close to an individual – whether it is a friend or a colleague and who knows about an individual’s strength that he is not aware of.

  • Integration of strengths leads to a unique trading performance: Steenbarger says successful styles of trading and investment are expressions of clusters of strengths. He says unique performance reflects intersections and integrations of strengths.

Sharing an example, he says, “One successful portfolio manager I have worked with combines the virtues of knowledge, humanity, justice and transcendence to create a team culture that emphasizes the growth of each of its members, inspiring them to continually cultivate and share new areas of expertise. This cluster of strengths creates a dynamic team culture that has been instrumental in recruiting high quality team members. Similarly, the integration of courage and temperance is a cluster common to managers who achieve high risk-adjusted returns.”

  • Focus on strengths not flaws: Steenbarger says day after day focusing on flaws inevitably reinforces the sense of being flawed. So he instead advises traders to assess their strengths in their best performances, which can then enhance their development as individuals.

“Too often I have seen that the result of intensive work on weaknesses is an internalised sense of being weak. The way to avoid this pitfall is to ground our performance reviews in our successes as well as our shortcomings. When we study our successes, we discover signature and latent strengths in action, pointing the way to the solutions best able to fuel our development. There is no better way to assess our strengths — and clusters of strengths — than to observe how they manifest themselves in our best performance. Our successes point the way to our greatness,” he says.

(Disclaimer: This article is based on Brett Steenbarger’s
The Psychology of Trading. Decision Tools and Techniques and some of his interviews).





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