In This Episode
- Martin Seligman – Positive Psychology
- How to overcome catastrophic thinking
- Is blowing out better than having a winning streak?
How to Persevere in Trading and Build Mental Toughness
The mechanics of trading is actually quite easy. Psychology is the hard part.
Are you going to stick it out when things get tough, or are you going quit?
In this episode we talk about how to stick with trading, even during losing streaks…and why almost anyone can succeed at trading.
But it's not easy…
Read the Transcript:
Hugh: Hi, Walter. What do you do to cultivate mental toughness which is necessary for trading?
Walter: I call it resilience. There's a guy named Martin Seligman — I’ll put the links in below — he's known as being one of the modern day fathers; not the original creator of Positive Psychology but he talks a lot about resilience.
I saw him at a talk; he came out here to Sydney a couple years ago. You can ask him a question if you bring your book up and have him sign it. He's got tons of books but he talks about resilience. So what I would say is, what I would equate to mental toughness is resilience.
I think it's probably the reason why, it is the reason why some traders keep going. If you keep going long enough you're eventually going to figure it out. I mean, it's not that trading is difficult; it's just the actual mechanics of profitable trading aren't difficult, it's actually all the stuff around it, all the psychology.
Hugh: It’s against your nature basically.
Walter: It's against your nature exactly. We have all these cognitive biases working against us. So resilience I think is key. If you get into resilience, you can read Martin Seligman; there's other people who've written a lot about this. A big one is, I'll give you an example. So what they talk about in the resilience research is catastrophic thinking.
So I've had two weeks of losing trades; I'm down nine percent of my account and so I start to wonder what's going on. Is my system broken? Have the markets changed? Am I going to lose all of my money? This is never going to work for me; how am I going to be able to pay my mortgage? That's catastrophic thinking.
It's just taking a little, tiny thing and blowing it up out of proportion because the reality is if I shift my focus and say, “Hang on, two weeks of losing trades. How many trades is that? Six. Okay, what are the probabilities that I'm going to have six losing trades according to my rule? Well, it's actually eighty-five percent.”
So actually what I'm talking about here is something that's actually quite likely to happen and that it happened. It is not a big deal because it's predicted given the parameters of my system. You're just trying to shift the way of seeing it and instead of allowing yourself to snowball and get really hyper negative, that's catastrophic thinking.
So that's like one tool for resilience. The trader who wants to be resilient is to shift that catastrophic thinking into another. How can I state what I’ve just said: I’ve had two losing weeks? How can I state that in another way?
Instead of saying, “I've had two losing streaks, two losing weeks, I'm going to lose all my money. I'm never going to make it as a trader. I'm never going to be able to pay the mortgage” or whatever. Instead I can say, “Wait a minute. I've had six losing trades. Is that normal?” The answer is quite logically yes. It is normal because I know the probability of that happening.
So for me that's how I view mental toughness. It is sort of building up your resilience so that you're able to withstand those terrible moments that we're presented with as traders; that's really what we get paid for. Other people don't want to deal with these sorts of things and we have to deal with them face on. So that's what we have to do.
Hugh: For sure. Would you say that people who've faced some sort of breakdown like that; like blowing out an account or several accounts, develop that quicker than people who are more risk averse and don't take a lot of risk or blow out an account early on? Do you think that they’re maybe have less toughness or resilience just because of that?
Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.
At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.
So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.
Walter: That's a good question. I don't know. I think if you read the Market Wizards and the New Market Wizards almost to a trader they all talk about how they blew up their account and they basically swore to never do it again; or, they blew up their account and then their second and their third and they sort of never do it again sort of thing.
It's a tough question. I often wonder like are you better off just totally blowing up in the beginning or you know getting on a lucky streak in the beginning. I think that it's blowing up but I'm not sure you know. I'm not sure. I think there are probably tons of traders that we never hear about who started trading; blew up their account and then just never went back to trading.
They went on to selling you know multi-level marketing vitamins or whatever. Do you know what I mean? I don't know. I'm not sure. They went to go flipping houses or whatever the next thing is you know. I really don't know. It's just crazy though when you read the interviews of traders.
It is amazing how many traders have the same sort of basic story which is, “I started trading. Things are going well and then boom I lost all my money and I swore to never do that again so I decided that my risk would be blah, blah,blah”. It's amazing. It really is a common thread.
Hugh: I don't know if the people who didn't blow out would want to tell their story. I don't think they're the type of person who would tell the story or maybe the people telling the story wouldn't think that's interesting. So they wouldn't write a book about them or interview them. So maybe it's just some sort of like filtering bias or something.
Walter: You bring up a good point because I think I would argue that there are some traders that just want to tell stories. They don't want to make money. They just want to go, “Oh man, I was in that Euro trade and then you know the interest rate came out and blah, blah, blah” That's what they get you know like Ed Seykota says everyone gets what they want from the markets. Some people get these stories that they get to tell like that's their thing.
Hugh: War stories.
Walter: Exactly, war stories; that's exactly right.
Hugh: Okay, cool. Thanks, Walter.
Walter: Thank you.
Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.
Show Notes:
Enter the Monthly Contest
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You can win by doing one or more of the following:
Each action counts for one entry in the month that it was posted. We will pick a winner at random from the entries that month.
The giveaways can include books, coaching sessions, trading tools, or surprise gifts.
It will usually be something that will help you improve your trading psychology.
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