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Re-training the mind for Active Investment Success Part 2

By February 18, 2009January 29th, 2024Active Investor Psychology secrets, Uncategorized

The trading errors I mentioned last week are all the manifestation of poor trading psychology. After making such errors, a trader with this poor trading psychology would typically blame a third party for their trading errors. This may be their broker, a newsletter, the market, their software, their job because they were to busy at the time, their rules, the internet, their computer, and a variety of other poor excuses. They will not take responsibility for their poor trading, choosing instead to justify the loss or distorting why they had the loss. Because they believe it was not their fault and it was therefore out of their control, their view is they need take no further action to improve for the next time this occurs.

Our innate emotional pain avoidance mechanisms cause us to focus too much on individual events and the outcome of each individual event. These events in the market are individual trades. This intense focus on each trade causes undue significance to be put on the outcome of each trade because it’s measured in terms of whether we were right or wrong, succeeded or failed, won or lost to an ‘opponent’ – being the market or some other market participant.

The resulting emotional pain from being proven wrong invokes our defense mechanisms. These include the negative emotions of self criticism, justification, rationalisation, hate or revenge. These will:

• Obstruct our ability to follow rules that might cause a similar occurrence of emotional pain,
• Cause us to make excuses and point blame for the outcome to someone else which means that we need not look to ourselves to improve,
• Make us view the pain deliverer as the opponent that we need to conquer and take out revenge on,
• Blind us to objectively see any other information that might cause the emotional pain to return,
• Cause us to see information that might prevent the emotional pain occurring again.

This causes traders to analyse their edge, that is, analyse their entry and exit signals generated by their methodology. They look at reams of further information outside of their researched edge such as other technical indicators, company information, newsletters, and chat forums seeking non painful information that might justify them not doing the signaled trade or remaining in the trade to exit in an attempt to avoid potential emotional pain.

This further analysis, if driven by revenge, makes the market your enemy or opponent thereby preventing the trader being in sync or empathetic with the markets as it moves to communicate opportunities to the trader in the form of their edge’s entry and exit signals.

The process through which you energise new trading beliefs is called auto-suggestion. Napoleon Hill used this term in his book “Think And Grow Rich” publish in 1937. Modern terminology might call it self-talk conducted aloud or affirmation.

The way that new beliefs become energised is by repeating aloud a set of trading truths to yourself every time that you engage the market. At the same time, you carry out certain actions that re-enforce your new beliefs. Every time that you carry out actions which re-enforce your new beliefs you energise the new beliefs and de-energise your old trading beliefs. Every time you carry out actions, make statements or think thoughts aligned with your old pain avoidance trading beliefs you de-energise your new trading beliefs and energise and re-enforce your old beliefs.

We cannot realistically expect perfection. Therefore we must accept that loss trades will occur and are a natural part of engaging the market. This means that we win less than 100% of the time. When we accept in trading that winning 55% of the time is a high winning rate and that 40% can actually be sufficient to outperform the market, we start on the road to re-training our minds.

It is at this stage that we can start thinking in terms of probabilities rather than certainties. When we start thinking in terms of probabilities we start realising that each trade has an uncertain outcome over which we have no control but that can result in large portfolio profits. This is the stage that we start overcoming the stock picking mindset and start thinking in terms of equity curve and accept the drawdown and loss trades are part of the game. We no longer put undue significance on individual trades. We simply follow our trading rules which provide us with our edge in the market.

Our aim, therefore, is not perfection or being right or avoiding being wrong or avoiding missing out. Our aim is to be consistent.

So what are the new beliefs that we must energise to operate in a consistent manner in the market?

Your new thinking patterns can be the Five Fundamental Truths that are found on page 121 in Mark Douglas’s book “Trading in the Zone”. Your actions must subscribe to Mark Douglas’s Seven Principles of Consistency found on page 185 of the same book. If you haven’t read “Trading in the Zone” it is a must for your education. Unfortunately we are bound by copyright not to reproduce these in this text.

The Five Fundamental Truths should be repeated aloud, thereby using auto-suggestion, each time you engage the market until they have become your new energised beliefs. These beliefs will become your new paradigm for trading which will overcome the trading errors discussed in last week’s blog.

Each time you conduct actions according to the Seven Principles of Consistency you will be re-enforcing your new trading paradigm – that of a consistently successful trader. You will now be empathetic and in sync with the market, not it’s opponent, as it communicates opportunities to you through your trading methodology’s edge.

When you start reducing trading errors and they eventually cease, you will have re-trained your mind for ongoing successful active investment. Pain avoidance will no longer be your automatic motivator when engaging the market.

Achieve flawless mechanical trading and you will be ready to move onto discretionary trading using your intuition and empathetic feel for the market. But you may find that profit wise you need never take this step.

It is strongly recommended that you study Mark Douglas’s work “Trading in the Zone” which describes the above discussion in far greater detail. SPA3 compliments Mark Douglas’s message (and vice versa) and provides you with a mechanical methodology to complete his trading exercise in the final chapter of his book.

Do this and start overcoming:
• your fears,
• your doubts,
• uncertainty,
• unrealistic expectations,
• emotional pain,
• inconsistency,
• subjectivity,
• market noise,
• your biases.

Become an overcomer!

• trust,
• surrender by following, rather than trying to control by leading,
• neutrality,
• consistency,
• confidence,
• commitment,
• processes focus,
• objectivity.


  • Henry G says:

    Fear and uncertainty is a problem for many to overcome,however it doesn’t help when the advise is still bad. I am amazed at what i hear from so-called experts who still tell their clients to hold, average down, should be prepared to lose 50% of your position and it’s a good time to borrow to buy blue chips now.This is all coming from stockbrockers and financial planners who along with economists should take a long holiday and return when the bull market returns so their methodology might have some merit and the very inexperienced can stop being disheartened.

  • KEVIN DUDSON says:

    Yes overcoming bad habits and affirming consistently winning methods is my MAJOR goal right now. Too often i am falling prey to fear and over reaction attempting to beat the markets next move.

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