Midjourney prompt: a brain and neural net, psychology
1346 words
We do not trade the market, we trade our beliefs about the market. - Mark Douglas, Trading in the Zone
Many times I knew the correct course of action, but hesitated, unable to take the next step? This is trading psychology in action. Even the most seasoned professionals wrestle with their beliefs. If unmanaged, they can lead to negative trading psychology. Limiting beliefs can interfere with your decision-making process. The journey to overcoming this begins by identifying and eliminating limiting beliefs.
The Importance of Beliefs
Every belief we hold, whether we are aware of it or not, impacts our trading decisions. Some of these beliefs can act as invisible barriers. And lead to fear, greed, regret or overconfidence. Yet, other beliefs can serve as powerful stepping stones. They propel us towards success. And foster analysis, adherence to rules, discipline, and collaboration. The distinguishing feature lies in whether our beliefs limit us or empower us. Understanding this distinction is the first step to harness the power of our mind.
Types of Traders
In trading three distinct types of decision makers emerge:
1. The Optimistic Analyst takes a deep dive into research and analysis. This often leads to over-optimistism, clouding objective-decision makeing.
2. The Defensive Accountant priortizes risk management above all else. This conservatism is beneficial, but extreme defensiveness, can lead to missed opportunities.
3. The Neutral Professional adheres to a rule-based process. Maintaining a balanced approach avoids the pitfalls of both excessive optimism and defensiveness.
Which type of decision maker are you? The goal is to remove the limiting beliefs of the analyst or accountant. Next, we’ll learn to combat limiting beliefs and foster empowering ones.
Identify Your Limiting Belief
Limiting belief are ideas believed to be true, but are false. They keep us from acting at the right moment. We hold them because they give us false comfort. They appease our short-term fears, but often create long term negative consequences. The problem with limiting beliefs is they often appear to be correct. But when wrong they are more costly. Often the loss is greater than the earlier benefit. The problem is inaction. Limiting beliefs allow us to avoid or postpone the fear of being wrong.
A few examples of common limiting beliefs:
“My stop loss, it always gets triggered.”- This belief can make you avoid setting stop losses. And lead to huge risks.
“I must make a certain amount every day/week/month.” - This can push a trader to overtrade or take unnecessary trades, leading to potential losses.
“Trading is gambling.” - This can lead to a careless attitude, where the trade isn’t analysed and is instead left up to ‘luck’.
“Losses are a reflection of my abilities.” - This belief can cause overconfidence when experiencing wins. And severe self-doubt during losses. Both cloud your judgement.
“More trades equal more opportunity.”- This leads to overtrading, higher transaction costs.
“Once I lose money, I need to make it back immediately.” - This often results in taking higher risk trades to ‘earn back’ lost money.
Remember, the first step in combating limiting beliefs is recognizing them. Once you are aware of these beliefs, you can replace them with more empowering beliefs.
The Value of Empowering Beliefs
Empowering beliefs are reality-based. They avoid wishful thinking and fear-based assumptions. Empowering beliefs help us make informed decisions. In the midst of chaos and confusion, they help us to remain composed.
A few examples of empowering beliefs:
“Every trade is a learning opportunity.” - This belief instills a growth mindset, reduces the fear, and enhances your potential.
“Risk management is key to long-term success.” - This encourages the use of stop losses, position sizing, and other risk management strategies.
“I am not my trades.” - This belief separates self-worth from trading outcomes. Thus reducing overconfidence after winning streaks and despair after losses.
“Markets are unpredictable, but my rules gives me an edge.” - By accepting the unpredictable nature of the market we improve our resilience. A rule-based strategy can maintain focus.
“Consistent progress is more important than immediate gains.” - A rule-based process creates repeatable success.
“Emotional control is more important than skill.”- Your psychology impacts your results.
See my earlier article Three Trading Psychology Traps That Professionals Need to Avoid for further examples.
Assessment and Modification of Beliefs
Professionals know the necessity of assessing their beliefs. This helps root out limiting beliefs. It begins with a belief analysis.
Belief Analysis
Make a list of your beliefs about the market or trading. As many as possible. This will be an onging list. They can be positive or negative. Include any belief that you feel may have caused a problem in the past and ones that brought you great success.
Then ask the following questions:
Source: Who or what gave you this belief? - It is important to identify the source. Some sources over time loose their value, or your opinion of their value may have changed.
Action: What does this belief get you into or out of? - Most beliefs either get you into trouble or protect you from a problem.
Limit: How does this belief limit or empower you? - Make an honest assessment the value of this belief.
Now that you better understand the belief, ask:
Value: Is this a belief true? Is it one I want to keep? Does it empower me? Or does it limit me?
Useful: If this belief is empowering, it is useful and we want to keep it. If the belief is limiting, it is not useful and we want to replace it with something more useful.
Sort: Place each belief into either a stack titled Empowering or one labeled Limiting.
Replace Limiting Belief with Enabling Belief
After identifying your limiting beliefs, it’s essential to replace them with empowering beliefs.
Here are a few ways to replace a limiting belief:
Ask yourself what other belief can I replace this with that is empowering?
Reverse the limiting belief, turn it 180 degrees, see if that works.
What new belief is true and empowering?
Note: there may be an emotional charge holding a limiting belief in place. This may need greater effort to dislodge.
This is a continuous process of introspection and learning. Professionals examine their beliefs on a regular basis. This constant review confirms whether a belief serves or hinders them. Enabling belief help us make rational decisions. Or they discourage the loop of emotional trading?
If a belief is limiting, change or replaced with a more empowering belief.
Seven Beliefs of Consistency
These are excellent examples of empowering beliefs from Trading in the Zone by Mark Douglas.
I objectively identify my edges.
I predefine the risk of every trade.
I completely accept the risk or I am willing to let go of the trade.
I act on my edge without reservation or hesitation.
I pay myself as the market makes money available to me
I continually monitor my susceptibility for making errors.
I understand the absolute necessity of these principles of success and never violate them.
After you identify your empowering beliefs, read them daily. Find a time while you are doing a habitual activity. Example: while brushing your teeth in the morning. Tape a list of your empowering beliefs on the mirror and read them daily while brushing your teeth.
Then throughout the day act on them. Over time they will become habitual.
”To integrate these principles into your mental system at a functional level requires that you purposely create a series of experiences that are consistent with them” - Mark Douglas - Trading in the Zone
Lesson Learned
In conclusion, trading psychology is a vital aspect of the investment process. Your beliefs drive and influence your investment decisions. The key is to understanding your beliefs. Then, remove those that limit you and cultivate those that empower. This requires conscious effort and practice. As with all skills, mastery comes with practice. Know your beliefs, reassess them, and remove those that do not empower you.