I love to read, and find myself reading quite a bit about trading. It seems to me that most of the advice focuses on the Holy Grail type thinking, where you are sold the method. There are numerous fundamental and technical methods that claim a secret way of making money. Good advice shows you that you need some reliable methodology, but without good money management it will be much more difficult to be consistently successful. Then, there are those that write about the psychological aspects of trading, claiming that no matter how good your methodology and money management is, if you stray emotionally from your game plan it can cause problems.
So why is it that traders, like those turtles, who pay strict attention to their money management and understand the psychology still fail? I think it’s because of a fourth dynamic that goes beyond the above three. Understanding trading psychology and making it part of your attitude are two distinct challenges.
This fourth dynamic, or the defining factor, that separates consistently good traders from the rest is actually your attitude towards trading. As Douglas states in his book “Trading in the Zone,” “The winners have attained a mind set- a unique set of attitudes - that allows them to remain disciplined, focused, and above all, confident in spite of adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else.”
Hypothetically speaking, two traders are trading the same game plan with respect to method and management. They are also both aware of the discipline needed to follow the plan. Now, as all approaches do, the plan gets under water. Trader one who has not fully developed the mind set, will tend to drift away from trader two emotionally. He may begin to question the method, starting to take personal responsibility for the adverse conditions. This may manifest itself in many ways including taking trades off or changing leverage.
What’s happening here is beyond the method, management, and discipline model. This is about the perception of the situation. It’s about how we are thinking, and trader one is now thinking differently than trader two, even though they are in identical situations. Trader one is in essence putting his self esteem on the line, where being right is more important than making money. He is losing confidence and trader two is not, making trader two less likely to make mistakes.
Ed Seykota also talks about it a bit in the original “Market Wizards” when he said, “Psychology motivates the quality of analysis and puts it to use. Psychology is the driver and analysis is the road map.” This is true of all games. The golfer who finally gets down a great swing will soon realize that attitude, the way he looks at his game and his ability to stay confident during the adverse times, will determine his/her success.
So, my conclusion is that good traders can not be taught. You can’t teach somebody to be a winner. That’s all on the individual. You can teach a person great method and great money management strategies. You can even teach a person good discipline to execute the plan if you threaten their job. But what happens when they leave the controlled environment? How will they act on their own? My guess is the winners will continue to win.
“What can a losing trader do to transform himself into a winning trader?” Seykota was once asked, “A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.”
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