Everything is Mental
Some people say that trading is 10% system, 30% position sizing, and 60% psychology. While I agreed with that assessment at first, I now believe that trading is 100% psychology -- 100% mental. Here's why?
First, I'm an NLP modeler. To duplication success you have to find a number of successful people and determine what they do in common -- what are the common tasks? And then, in order to teach others to perform the tasks the same way, you need the three ingredients of each task. Those ingredients are the beliefs (isn't that mental), the mental states (isn't that mental), and the mental strategies (also mental).
Let's take the simple task of picking up the phone and acting once you see a trading signal. We're not robots, because we have to process that signal. And this is what happens. First you must see the signal and then you must recognize that is it a familiar signal that you should take. Then, because we act from feelings, we must feel good about it. And then you act. Recongizing that it is familiar and feeling good proven that even the simple task of acting on a signal is psychological/mental in nature.
Bottom line -- trading psychology is very, very important to your success.
Comments
OK so if I have the world's most rock solid psychology how does that aid me on knowing where to buy and sell? Obviously you need a good method too right? Or what if I have terrible money management practices i.e. I take a dollar profit, but use 3 dollar stops? That won't work either. So all 3 are important. I disagree that psychology is 100%.
Posted by: Timothy | November 30, 2006 03:15 PM
My response to Timothy's post is that everything you commented on is psychological anyway.
Part of the psychology of trading is knowing how much research and testing you need to do to be successful as well as confident in your trading. If you were trading with poor money management practices, you'd have to psychologically think that money management wasn't important. Same for risk/reward ratios.
The point is that before you can even start looking at risk/reward or money management, you have to believe they are important to trading. And you have to believe they are important enough to focus on them until you have a high probability of being successful.
Saying trading is 100% psychological is true, in the same way that living is 100% breathing. Without breathing, you can't go about the business of finding food, sleeping, etc. It's the first step to staying alive, but it's not the only step, and there are plenty of other things you can mess up after you master breathing. Or rather, a different way to say it is that breathing (or psychology) is the basis on which you build everything else.
Posted by: Jason G. | December 1, 2006 06:48 PM
Last month I disagreed with you that trading was 100% psychological. Yesterday I read Brett Steenbarger's article on trading myths which basically supports that. Perhaps you might be interested: http://traderfeed.blogspot.com/2006/12/three-pervasive-myths-of-trading.html
Posted by: Timothy Aldous | December 27, 2006 03:15 PM