An optimal trading psychology is much more than the absence of conflicts.
Much of what is written about trading psychology reflects the psychology of amateur investors and traders. We hear about fear of missing out on opportunities, trading on tilt, overtrading, and so much more. To be sure, these can imperil success in financial markets, but they are not the day-to-day challenges I observe among professional traders and investors. Here are three distinguishing features of optimal trading psychology that stand out among those who have sustained success over time:
1) A mindset of excitement and enthusiasm – If there is nothing in markets that is piquing your curiosity and sense for opportunity, then you will not be in an optimal performance state. We cannot count on profits to sustain our motivation and drive. The investors and traders who stay energized are those that love to generate ideas and continually engage in creative conversations, research, and observation to look for what others are missing. I recently spoke with a trader who had lost a good amount of money on a market reversal. He spoke relatively little about the loss and instead focused on an unusual opportunity that he saw developing in Europe. He poured over data suggesting that economies within Europe were moving in different directions, setting up worthwhile relative trades. He was interested in learning from his recent loss, but even more interested in what was brewing in macro markets. His optimal trading psychology was one of excitement, enthusiasm, and the thrill of discovery. Yes, he loved profits, but only insofar as they validated his insights into the financial world.
2) A mindset of learning – On a typical day working at a hedge fund or other money management organization, I might speak with eight to ten professionals. On average, none speak with me about emotional disruptions in their trading, lack of discipline, or anything of the sort. That makes sense, because if those truly were problems, they never would have made it to the point where they were managing significant capital. What I do see is that the most successful portfolio managers and traders are actively learning from their peers, often through structured collaboration and teamwork. A dynamic I’ve observed on successful teams is that every team member brings something unique and distinctive to the group. This enables the team to see issues from multiple angles, and it sparks fruitful discussions and shared efforts. Similarly, the best traders and investors have selective networks of colleagues who they can rely upon to bounce ideas and challenge their thinking. An optimal trading psychology follows from the creation of an enriched personal and professional environment. Mike Bellafiore of SMB Capital recently sent an email to colleagues in which he observed that successful traders were expressing particular joy over the success of their junior teammates. Profitability, for them, was more than making money: it was a validation of an arrangement in which everyone makes everyone else better.
3) A mindset of mastery – I have long found that the mark of a successful portfolio manager or trader can be found in the productivity of the time they spend away from trading. Not all markets are created equal: sometimes the best trading is to protect capital and refrain from risk-taking. During such times, the most successful traders find other ways to be productive, other ways to be successful. They might mentor others; they might research new markets or strategies; they might review past trading and focus on areas where they can improve. One very successful money manager automated the signals that indicated opportunity, so that he could spend as much time as possible away from screens. This permitted him to work on personal projects while he waited for markets to set up, including innovative three-dimensional artwork that depicts data structures. The optimal trading psychology that he described was one in which success could be measured as a function of profitability relative to the amount of time actually spent trading. This transformed random, choppy market conditions from frustrations to opportunities to master fresh domains.
Enthusiasm, learning, mastery: these capture an optimal trading psychology that is energized and engaged. At a broad level, these are only possible when we love the process of doing as much as the outcome and when our work becomes a vehicle for our personal and professional development. Peak performance follows from peak mindset.
I am Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. I work as a performance coach for hedge fund