There are countless traders who, after sustaining a series of losses, are too quick to claim “trading psychology” as an area in which they suffer significant weakness. They would often state their lack of discipline–due to fear, anxiety, doubt, uncertainty, etc.–as the root cause of their poor performance.
Confusing Cause with Effect (or Effect with Cause)
On the surface, it seems clear that their inability to trade in a disciplined manner contributed significantly to their poor performance. But I would argue that such a view is often a misidentification of the real issue.
“Bad trading psychology” is not necessarily a cause for poor trading, but rather an effect that stems from an uncritical and flawed bias in a trader’s self-evaluation (of his/her knowledge, system, and capabilities).
Aside from plain “bad luck,” which can happen, poor trading performance is often unwittingly invited; a weakness in one’s performance that is symptomatic of an even greater weakness in one’s thinking.
Yes, trading discipline is important. But in many cases, the critical issue is not discipline, nor is it the trading plan, trading preparation, execution, etc. The critical issue is the unquestioned assumption that one has the necessary knowledge and/or experience, to begin with, to adequately develop, assess, and/or implement a trading plan.
This is particularly true for new traders. When such an assumption is accompanied by poor risk management practices, the entire trading process—from planning to execution—becomes highly flawed, to say the least, and vulnerable to multiple errors and potentially disastrous financial results.
Driving a Lemon Through a Perilous Road
Although the road to acquiring trading knowledge and experience is perilous, many traders pay too much attention to the dangers of the road without considering the reliability of the vehicle in which they travel.
For example, beginning traders will energetically, and often too hastily, strive to acquire the necessary knowledge and skills to practice their craft in a live market. At this stage, however, not only will a large majority of these traders fail to assess the quality of the knowledge and skills they have learned, they often do not contemplate whether they even have the necessary capabilities to make that kind of an assessment.
The difference between evaluating ideas within a paradigm and questioning the soundness or validity of that paradigm can be immense, as the latter can generally lead to creative insight while the former can lead to staleness and disaster, particularly when market conditions are no longer favorable to a paradigm’s parameters and design.
On Becoming a Seasoned Trader
How much knowledge and experience does one need to trade successfully? There is no adequate answer to this question. Trading is a lifelong learning process. And every successful trader, at some point in time, lacked the experience, and/or the knowledge that s/he would eventually have.
However, for an experienced trader to have had the longevity in the markets to gain the necessary knowledge and experience needed to become successful, that trader required not only adequate capital resources, basic knowledge of risk management practices, and perhaps some “luck,” but also an insatiable hunger to learn and self-correct, a willingness to question (in order to uphold or debunk) one’s knowledge, a capacity to assess and adapt to broad shifts in market dynamics, and a deep respect for risk and randomness.
Conclusion: Should I Think Critically About the Markets or Psychologize the Process?
Trading psychology has its place and value in the trading world. Unfortunately, its misuse has become so common, particularly in the retail trading community, that it tends to replace the laborious thought-work critical to responsible speculation.
When analyzing one’s trading performance, it is best to perceive the matter as objectively and critically as possible. This entails not only a hard assessment of one’s overall approach to trading, but also an assessment (or meta-assessment) of that assessment; a critical eye toward questioning the certainty of what one learns, the soundness of one’s process in learning, and the fundamental assumptions behind the source of knowledge.