The Hindu Business Line : Therapy for traders

MARKETS have a mind, and you mind the markets. But do you mind your mind? Stock market traders make money, but they can make more money if only they don't stand in their own way. It is possible for traders to identify, interrupt, and change the problem patterns that interfere with successful trading, argues Dr Brett N. Steenbarger in The Psychology of Trading.

The book walks the readers through "the most common cognitive and emotional tendencies that distort efforts at identifying and trading market patterns". The blurb lists the main themes such as "trading from the couch" whereby you utilise emotions as valuable market data; methods for building focus and concentration for more automatic and trustworthy trading decisions; and creating shifts in states of consciousness to rapidly exit anxious, impulsive, depressed, and guilty frames of mind. There is more:

Many times, our responses to the uncertainty of outcomes interfere with the achievement of our goals. In careers, romantic relationships, and trading, we find ourselves enacting self-defeating patterns: cutting promising situations short and lingering in unprofitable ones. If our coping with risk distorts our efforts at pursuing values, we will fail to attain the stature that can be ours — as traders and as human beings.

To an outside observer, the investor who stops looking at quotes when the market moves against her and the student who discontinues his studies when he is failing are behaving in self-defeating and even masochistic ways. From an emotional vantage point, however, their inactivity makes perfect sense. They are protecting their psyches, not their portfolios or report cards. Like children who hope to escape the bogeyman by drawing the bedcovers over their heads, they hope to make unpleasant realities vanish by banishing them from consciousness.

Communication refers to what people say — their intended meanings. Metacommunication refers to the body language that accompanies communication — how people say something. Markets, like people, engage in communications and metacommunications. A market's communications are its movements over time: up 10 per cent in three weeks and so on. The market's metacommunications describe how it makes these movements: gradually or suddenly, on high or low volume and volatility, with a majority of stocks participating or not, and so on. Much of what we call technical analysis is an effort to read the metacomunications of the market.

Successful traders approach a new market position the way a rational person approaches a first date. They will wait for the market to prove itself before committing a large stake. By risking a limited amount of capital at the outset, they do not become emotionally entangled prematurely. If the anticipated move is for real, there will be plenty of time to get on board. If it is not for real, the losses will not be devastating. Plunging into a market, like becoming infatuated in a relationship, speaks more to the needs of actors than their objective circumstances.

Traders need the ability to form mental models of the market (left hemisphere) and to quickly revise these when anomalies occur (right hemisphere).

Even the most successful traders have a constructive side and a destructive side — a self that is capable of mastering the markets and a self that is capable of implosion.

Make a buy order — of the book, that is.

(Book courtesy: Wiley www.wiley.com)

BookValue@TheHindu.co.in

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