Sound Trading Is Training In Trading Psychology

Written by: Brett Steenbarger | Trading coach, psychologist, Ph.D.

A sound trading process is akin to a gym where we exercise the functions that contribute to a successful trading psychology. As the following post illustrates, what we call a “trading process” is actually a number of interwoven processes that push us to exercise our abilities.

Idea Generation

Idea generation alone may have us:

• Analyzing historical information
• Synthesizing information across markets
• Consulting market research and valued market participants
• Making sense of shorter and longer-term patterns of price, volume, volatility, and more

Trade Definition and Structuring

Once we’ve generated the idea, there is the work of:

• Defining and structuring the trade to achieve the best risk/reward
• Establishing position sizing to best meet risk management goals
• Assessing moment-to-moment action to identify sound entry and exit points
• Identifying points for adding to positions or taking pieces of our trades off

Key Requirements for Effective Processes

Notice that all of these processes require:

• Sustained focus and concentration
• Deep, broad, creative thinking to assemble information into ideas
• Fast, flexible thinking to execute sound trades
• Personality strengths of conscientiousness and emotional balance

Building Inner Strength and Confidence

When we treat our trading process as a gym with many workout stations, we build a sense of inner strength, growth, mastery, and confidence. A poorly defined, simplistic trading process reinforces laziness and fails to build us cognitively or emotionally.

The Importance of Well-Defined Processes

We internalize what we do. What we do day after day in our trading preparation exercises the strengths that contribute to a strong trading psychology. When our processes are grounded in our strengths, the efforts of workouts are fulfilling, not taxing. There is no challenge as important to developing traders as that of defining processes grounded in our particular competencies and strengths.

Written by: Brett Steenbarger