How Your Beliefs, Mental States, and Mental Strategies Factor Into Top Trading Performance

The Entry Points

One of the toughest obstacles we will ever encounter on our path to success as traders is our own psychology. We can easily learn about support and resistance, supply and demand, trend lines, reactions, etc. but when it comes to actually executing a trade, the outcome often plays out differently than we imagined. Why? Because, despite learning either a method or about the technical aspects of markets, our own psychology is the thing that will make or break the trade.

This is one of the reasons why we don’t sugarcoat this business and tell you that trading is an an easy way to make a living, and how you can become a millionaire in 36 months if you follow a recipe/method. It simply isn’t true. Because no matter how much you learn from us and how much time we can save you by sharing our knowledge, it is ultimately you who will be the determining factor in your success.

We’ve been wanting to do a post for quite a while on how our beliefs and mental states color our trading decisions, but we ran across the article below which was found on the website of Van K. Tharp, Ph.D. This article really sums it all up. Please take the time to read it, as we believe you’ll find it enlightening and very helpful to you as traders.
From Van Tharp Institute:

Over the past 25 years, Van K. Tharp has modeled traders and the trading process, seeking answers to questions like, “why do some traders make fortunes while others lose their nest egg?” Dr. Tharp is a trading coach with a Ph.D. in psychology and an NLP modeler. To “model” effectively, you have to find out what behaviors and habits highly accomplished people have in common. Once you identify the common tasks that produce excellent behavior, you need to develop the beliefs, mental states and strategies that allow you to perform those tasks.

What does it mean to say we only trade our beliefs about the markets? Let’s look at some statements and see what you believe about them:

-The market is a dangerous place to invest. (You are right.)
-The market is a safe place to invest. (You are right.)
-Wall Street controls the markets and it’s hard for the little guy. (You are right.)
-You can easily make money in the markets. (You are right.)
-It’s hard to make money in the markets. (You are right.)
-You need to have lots of information before you can trade profitably. (You are right.)

Do you see the theme? Your opinion about each one of these statements is correct, whatever it happens to be. There is no real right or wrong answer. Some people will have the same beliefs as you and others won’t, but that’s not important. What is important is that your beliefs about the markets will direct your thinking and your subsequent actions.

What Is a Belief?

Beliefs are a primary way to filter information from the world. Beliefs are judgments, categorizations, meanings or comparisons. They determine how we perceive reality and relationships in reality. What you expect (i.e. your reality) depends upon your beliefs and they are largely unconscious. Every sentence in this document represents one or two beliefs, including this one.

One of the beliefs that is most productive for good trading is the belief that you are totally responsible for your own results as a trader. When you adopt this belief, then you can learn from your mistakes. However, if you tend to blame someone else (your broker, your spouse, the person giving you tips) or even the market for the results that you get, then you will tend to repeat the same mistakes over and over again.

When traders “own their problems” and assume responsibility for the results produced, they then discover that their results come from some sort of mental state, which either allowed them to 1) follow their rules, 2) not follow their rules, or 3) trade without having any rules.

When traders take the time to write down all their beliefs (about themselves, the markets, money etc.), then they can establish a much better idea of what they want to trade, how they want to trade and they can also see flaws in their thinking much easier. It is valuable to know which beliefs support you as a trader and which ones hinder your progress.

What Is a Mental State?

Every task has an optimal mental state that will allow you to accomplish that task effortlessly. For example, to execute a trade you benefit from courage and total commitment. Fear, in contrast, is a big disadvantage as a mental state for executing trades.

Mental states are primarily what most people call discipline or emotional control. Examples include,: being impatient with the markets, being afraid of the markets or being too optimistic about the markets.

Controlling your mental states is just part of the answer, but when you can see that you are the creator of your own results as a trader, then you have come a long way and can really make progress.

What Is a Mental Strategy?

To understand mental strategies, you have to understand how people think. People think in their five sensory modalities, that is, in terms of visual images, sounds, feelings, taste and smell.

A mental strategy is the step- by -step way in which you use these modalities; it is the specific sequence of your thinking. For example, the most effective strategy for the action step of executing a trade is to 1) see the signal; 2) recognize internally that this is the signal you decided you should take; 3) feel good about it; and 4) take action. If you do anything else, you probably won’t be able to take action or you will be very slow to act.

The Psychology of Trading

Once you have a clear understanding of which beliefs, mental states and mental strategies are the core factors in top trading performance, you can then teach the same skills to others and have them perform well too. And when you can see this success duplicated in others, which we have been able to do in most aspects of trading, then you know you have a workable model.

The Key Psychological Traits of Top Traders are:

Personal Responsibility
Their psychological “profile”
Working on personal issues (e.g., self sabotage)

Trading fundamentals include the Top Tasks of Trading

1. Daily Self Analysis
2. Daily Mental Rehearsal
3. Focus and Intention
4. Developing a Low-Risk Idea
5. Stalking
6. Action
7. Monitoring
8. Abort
9. Take Profits
10. Daily Debriefing
11. Be Grateful for What Went Right
12. Periodic Review

Traders need to be reminded of these tasks and to eliminate any self-sabotage that keeps them from following the tasks. Van teaches all of these steps in detail in his various products and workshops.

Van Tharp believes that everything revolves around your beliefs, mental states and mental strategies, so with that in mind, everything about trading is 100% psychological, including why and how you trade or which system you will follow or build.

Many traders have a hard time “believing” this and it is almost the antithesis of what people learn in academic finance. So only you can decide whether it is worth the time to learn more about yourself and the psychological aspects of trading.

If you would like to learn more (this is one of Dr Tharp’s specialties), then we can certainly guide you in the right direction. You just might be surprised at the results!

People get exactly what they want out of the markets. Most people are afraid of success or failure. As a result, they tend to resist change and continue to follow their natural biases and lose in the markets. When you get rid of the fear, you tend to get rid of the biases.—Van K. Tharp, Ph.D.

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