The following is a guest article written by Andrew Menaker, Phd and Licensed Clynical Psychologist working with high-achievers and with traders. Andrew was a guest on our podcast episode: “How Neuroeconomics can Improve your Trading”. Listen to it here.

Most traders recognize that psychology is a big part of trading. A common experience for many traders is a P&L boom & bust cycle, make money, and then lose it. Rinse and repeat. A major factor behind this boom & bust cycle is how traders think about their trading. This blog post will give you some ideas and specific things to do that can help you end the boom & bust cycle.

Many traders believe it was ‘good trade’ if it made money and was a ‘bad trade’ if it lost money. But there is a problem lurking under the surface with this type of thinking. The problem is the conflation of process and outcome. We can never control the outcome of a trade, but we can control our process.

One of the most common problems I hear from struggling traders is the difficulty in consistently following their plan. Successful traders certainly have losing trades too, but they think about their trading very differently. They’re able to separate how they feel about their process versus the outcome of each trade, and that helps them to follow their plan.

Here’s a very practical first step you can take to improve your results. Sort and evaluate your trades into one of four types:

·  A Type 1 trade is where you follow your plan and you make money. Everyone likes these.

·  A Type 2 trade is where you follow your plan and get stopped out at your pre-defined risk level. Nobody likes these, but they are a part of successful trading.

·  A Type 3 trade is where you don’t follow your process and you lose money.

·  A Type 4 trade is where you don’t follow your plan and you make money. Impulse trades and revenge trades are two common examples.

Look for patterns in your trading.  One very common pattern is a Type 2 followed by a single or a sequence of Type 3 or 4 trades. Make it a goal to reduce Type 3 & 4 trades. Even though Type 4 trades make money, they are the most dangerous, feeding our ego and causing us to think we did the right thing.

Separating process from outcome is not easy in trading. It is human nature to think that any good outcome (making money), regardless of the quality of the decision that led to it, was a good trade. It helps us feel good. Avoiding discomfort is a primary objective of human nature. Most trading ‘mistakes’ can be seen as attempts to avoid discomfort.

In trading, it is very easy to let the need to avoid discomfort, in all its various forms, become the priority, keeping us stuck in the P&L boom & bust cycle. This desire to avoid discomfort in all its myriad forms (waiting, missing out, taking a loss, managing a winning trade, leaving money on the table, etc.) is a major developmental issue in trading.

It takes work to flip this around, to prioritize long-term goals over short-term needs for gratification and attempts to avoid discomfort, and the conscious and subconscious fear of not (being) good enough. One of the reasons it’s not easy to flip around is because many of the unmet needs and fears of not (being) good enough have very deep subconscious roots, often going back to childhood.

Most boom & bust traders are on a never-ending quest, or in a perpetual conflict, around this deep-seated fear of not (being) enough. Until both the conscious and subconscious aspects of this conflict are properly addressed, it continues to perpetuate itself. The boom & cycle continues.

In addition to sorting your trades and separating process and outcomes, it’s also helpful to know that emotion is information, a signal to pay attention to.  This is what very successful traders understand, they may not say it this way, but they understand they’re trading their own Inner Market (what they’re feeling and why they’re feeling that way) as much as the market they see on the screen. This is what I see in my work with some the world’s most successful traders.  Understanding your own Inner market will help you to follow your plan.

Feel free to contact me at my website www.andrewmenaker.com for more information.