Psychology has become a hot topic in trading in recent years, with the driver possibly being the success of Mark Douglas’ book Trading in the Zone. Retail traders are often told that they are being held back by their mindset and as a result they are spending increasing time and money exploring this avenue.
But while reviewing Anders Ericsson’s book Peak for the Norden Method members recently, one point in particular jumped out to me regarding the influence or otherwise of mindset/psychology in success.
Ericsson
Anders Ericsson is a world-renowned expert in how to achieve success. He has studied athletes, chess players, musicians etc over decades. The now, widely known idea of ten-thousand practice hours is based on Ericsson’s work (btw 10,000 hours is an average and the real number can be less or more depending on a range of factors). I would encourage you to read Peak as it truly sheds light on what it takes to become successful and contains more good ideas than I have ever heard or read from any trading psychologist.
Psychology or Technique?
The following is a direct quote from Peak on one aspect of what it takes to move from being unsuccessful to success:
“Generally the solution is not ‘try harder’ but ‘try differently’. IT IS A TECHNIQUE ISSUE (my capitals)”
Ericsson goes on to explain how the idea of ‘willpower’ is also not true. There is no such thing as willpower.
Ericsson explains that success across all disciplines is driven by process and practice not by psychology or mindset.
Is psychology holding back my golf pro career?
A few years ago during an interview I was asked about trading psychology and whether I thought this was an important area for retail traders to focus on. I answered by referring to my lack of success as a golfer.
I am a recreational golfer. The lowest handicap I achieved was around 12 and I currently play off 17/18.
Would an improved mindset or psychology help me to become a golf pro or to lower my handicap? Of course not.
To become a better golfer I need to improve my swing and my game. I’ll need to drive straighter and putt better. These are technique issues.
Ask yourself this, if you had a great mindset and rubbish golf swing could you become a great golfer?
As Ericsson says, it is a technique thing. You cannot become great at something without good skills/technique.
It’s technique stupid!
For most retail traders it isn’t their mindset that is holding them back, it is their skill-set.
The majority use some form of technical analysis which we know is extremely unreliable and has been failing traders for decades (I will follow up on the link between trading psychologists and technical analysis in a future newsletter)
If you use poor trading techniques; if you have no edge; if you have a lack of understanding of how markets work, then improving your psychology is unlikely to help you to succeed.
Psychology or process?
I read a post by a trading psychologist about a client who lost money on a trade after not sticking to their trade set-up (in fact many posts by psychologists are of similar situations).
The solution according to the psychologist was to analyse why the trader did this with the typical self-sabotage type analysis. There was quite a complex psychological analysis and the trader would require a number of sessions to iron out these issues.
I’m calling bullshit on this type of analysis.
The solution isn’t to be found in psychology. It is to be found in process.
If you have a problem sticking to your rules, create a process e.g automation, outsource execution etc to ensure that trade rules are followed. This is exactly how true professionals would solve such an issue. Systematic and quantitative style traders have been doing this for decades.
Another expert on success, Matthew Syed, has also written about the use and need for good processes. Successful organizations and business people build good processes.
Psychology is an excuse not a reason
I would argue that many traders are using psychology as an excuse for their failure and there is a growing and lucrative industry of people willing to indulge them.
Again, most retail traders struggle because they use poor techniques and don’t have the right skills and knowledge to succeed.
I have worked with traders who struggle to take losses. This is often seen as a classic psychology issue and in some ways I can understand that. However, the solution is almost always to create a process (such as a stop loss order).
Psychologists in sport
You may say at this point ‘but don’t pro athletes engage the help of sports psychologists?’. While the answer is sometimes ‘yes’ (not all of them do) the point is that they are already professional standard in their ability. They know their skills are at least as good as their opponents so they are exploring other, generally small areas of potential edge.
Their main coach remains a skills-type coach because technique is always the most important aspect.
I will add that I don’t know any professional traders who use psychologists. Instead they focus on their knowledge, skills and designing stronger trades and processes.
Can we all become successful?
You may well ask ‘if it is a technique thing then can everyone or anyone become a successful trader?’ My answer would still be ‘no’.
While I think you can certainly improve, there is no evidence that everyone can become a successful trader. It is not necessarily about psychology rather it’s about ability, application and time. My golf pro may teach 50 people but we will all apply the information differently and not all of us will have the attributes or application to practice properly.
Conclusion
It has become accepted wisdom that psychology is a huge part of becoming a successful trader. But then again, it has become accepted wisdom that technical analysis is useful despite huge evidence to the contrary. I have previously called bullshit on t/a and now I will call bullshit on a lot of trading psychology.
For the record, I study behavioural finance and am extremely interested in psychology and how it affects our decision making. It’s just that for most traders I don’t see this as being their main problem.
If my golf swing is poor I will not be able to become a successful golfer no matter how good my mindset.
If my serve is terrible, my dreams of becoming Wimbledon champion cannot be realised.
If I have poor trading techniques I cannot become a successful trader, no matter what my mindset is or how much I work on my psychology.
I am not saying that traders don’t face psychological issues. All decision makers face these. What I am saying is that process, knowledge and skills are likely to be the way to overcome them and build a more robust trading career.
The focus for struggling traders should be improving technique and knowledge not employing a psychologist.
