It warrants comprehensive discussion but I would narrow it initially to stay focus on some key elements. The basic conversation is about market events or the trade environment, the information flow arising and its interaction with our trading mind and the consequent decision making arising from it. Self awareness is simply about the broad phases of awareness, acceptance, and actioning.
When we interact with the market, we are constantly consuming and digesting the information arising form key events. Market information by themselves are benign in nature. However a familiar theme we all understand is that the moment we have a position in the market, any information arising thereafter seems to take on a different meaning. It is important to understand why is there a sudden transformation in how information is perceived if we are to understand the nature of self awareness.
As I alluded in an earlier post we trade our beliefs of the market. Therefore how we perceive information is critical in influencing our behaviour. Let's illustrate with an example. Recently the Dow made some major moves including dropping 1000 points in one trading session. What was your reaction to such a market event? Say if you :
(i) Had been shorting the Dow for the past few weeks and finally closed your short and giving up just before the big move; or
(ii)Had been building up a series of long positions and was profitable but now is in a loss situation because you had only a mental stop; or
(iii)Are an observer waiting for an opportunity to go long; or
(iv)Are the public reading the headline news.
I would safely venture to say that the reactions would be different across the spectrum depending on individual circumstance. The process in developing self awareness is to conduct self examination and to understand our own reaction and understanding on how that reaction is driving the decision process. The idea is to build up a personal profile on how you personally react to different market events as you engage the market.
As the trading mind process market information, it induces certain thoughts and those thoughts influence our decision making. There is a common expession about "buying your thoughts". In essence you are prepared to go along because you are beholden by that thought. In cognitive terms, fusion is when the thoughts over a certain event are perceived in a certain manner and because there is buy-in it will influence how you react. Say if you are investor (ii) the drop of a 1000 points is a threat to your long positions. What happens if it continues to drop? Those are thoughts that will certainly arise. Such thoughts most likely will generate a certain amount of discomfort if not fear. They are emotions arising from a market event based on your perceived thought that maybe "I am going to have a loss". Are you going to close your long positions out of fear of a further drop? If you were investor (iii) would you be buying instead of selling? Self awareness is simply about understanding how we perceive information and how we are emotionally reacting to situations. Why is it a threat in (ii) and an opportunity in (iii)? As I mentioned before information itself is benign but how we perceive it is critical. it also means we can train to reframe information such as a threat can be an opportunity and hence we might end up with a different decision.
We know emotions influence how we behave but we can't trade without emotions. It is scientifically proven that we cannot even make basic decisions without emotions and so I would suggest to drop the notion that you can trade without emotions. Self awareness is about accepting that emotions play a role and more importantly be able to identify it when it arises and to work with our emotions rather than against it. A common approach is to use defusion techniques and will be the next item of conversation.
Now this is fascinating! So many traders think they have to eliminate emotions in order to trade well, so this is an interesting antidote to that.
Thanks for your great posts.
I wonder how much a trading strategy would be improved just by not trading when we recognise our emotions are out of kilter. That would be a great experiment. A simple extra line to a trading plan - if you feel grumpy, don't trade!