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The predominant thinking with trading psychology is this: get rid of emotions and you’ll succeed.

But, this is a primitive approach to a rather complex subject.

The idea you can just lose your emotions and fears through suppression is like trying not to think about sex when an attractive opposite walks past.

Unless you have yogic-like superpowers it’s just not happening.

Elite traders know all this of course, which is why they’re embracing Trading Psychology 2.0 type techniques.

The thought leader in Trading Psychology 2.0, and the guy who literally wrote the book on it is Brett Steenbarger.

I’ve discussed him before.

If you haven’t yet read his blog, Traderfeed, then do yourself a massive favour already.

That is, if you consider yourself a serious student.


Process orientated self-coaching

Trading’s a lonely business. Many of us need another person to bounce ideas off, seek advice from, or be the recipient of moral support from.

If this is the sort of person you are, it’s possible you’ll struggle with trading.

And it’s understandable on the trading forums, there’s a near-constant barrage of questions on mentoring.

The fact is though, chances of finding a suitable mentor – without paying an arm and a leg – are slim.

As a one-man trading business you need to wear many hats.

From analyst to computer technician, accountant, to performance coach.

All Brett Steenbarger’s books will help you in achieving that end.

Brett likes to say:

Success requires a process for improving your process

And that is what his book, Trading Psychology 2.0 is all about.

Classics like Trading in the Zone and The Disciplined Trader are a good starting point for trading psychology.

But Brett’s approaches are different.

Less emphasis on cognitive psychology.

More emphasis on performance psychology – the study of your own trading performance.

Few if any books out there are as detailed in how to be a process-orientated trader.

I’ll warn you though.

This book can overwhelm. It’s for the dedicated beginner only. There are no quick-fix solutions here.

But, if you want to go full nerd on developing your inner trading performance coach, this book is the one.


The flow state

If you’ve already read some of Brett’s books you know he can sometimes go off on a mad tangent.

Like talking about his cats.

Or how an ex-girlfriend wasn’t really interested in him at the local dance, and in fact, he was really just dancing alone.

Somehow his life anecdotes always hit the mark though.

It’s not always easy discussing trading related topics to those who haven’t a large database of trading experiences yet.

Trading Psychology 2.0 talks a lot about flow.

And flow is one thing we’ve all experienced from time to time, but maybe weren’t aware of.

Mark Douglas calls it being in the zone. Whether it’s called flow or zone – the two are the same.

Optimal trading performance is in good part, about managing that flow state.


Examples of flow

One definition of flow is: where challenge meets skill.

Most of us can relate to driving a car on a wide-open road.

Much of that time we’re on autopilot.

And yet somehow fully attentive at the same time.

You’re probably listening to your favourite tunes, and are having a ball of a time on your own.

You’re not worried. Not concerned about anything at all. You’re just in the moment.

For myself; I spent many years as a kid, training Muay Thai.

I entered flow when sparring or in the ring.

Endless practice for hours, days, weeks, and eventually years meant I’d developed a mastery of that craft.

My skill at fighting was put to the test with the challenge of fighting an opponent.

Music is the easiest gateway into the flow state.

Whenever I heard that Rocky theme tune blast out, or better yet, Eye of the Tiger (cringeable I know), when Thai boxing, I was charged.

A footballer (soccer) player is in flow when he dribbles the opposition, and shoots for goal – knowing it’s an all or nothing moment.

There’s no greater example of flow than when Sergio Aguero scores the winning goal for Man City, in the last game of the 2012 Premier League season.

Premier League followers will know just how important that goal was.

For many, myself included it was beyond life or death.

The promise of one whole season came down to almost the last kick of the ball in the very last game of the season.

I wasn’t the only Man City supporter to cry on that day.

But do you think Sergio Aguero chocked at all that intensity? Nope.

He wasn’t even thinking about all the madness going on.

Or how emotions of thousands of people up and down the country were being pushed to breaking point.

He was – to put it quite simply, deep in the flow state. Talk about being a pro.


What does it feel like to be in flow?

What is the flow state like in trading?

That depends on the timeframe you trade.

It’s different for scalpers having a flow experience than long-term investors.

But I’ll tell you something it’s not.

It’s not worrying about your positions. Or whether the market is going to hit your stop.

It’s not thinking, ‘oh my last trade was a loser, I hope this one will win back all my previous losses’.

It’s not second-guessing or having sleepless nights over position sizing.

Flow in end-of-day trading is harder to define than say scalping or playing sports, because it’s not nearly so intense.

How do I know when I’m in flow?

For me it’s easy.

I’m just not caring too much about trading.

I’m not looking at charts.

I get on with other aspects of life.

Concentrated, but relaxed are two characteristics of the flow state.

Enhanced intuition is another.  You’re dancing with the market.

When you’re in flow, you’ve access to the higher brain faculties – and this is why flow is so important for traders.


Trading best practices

But Trading Psychology 2.0 isn’t just about accessing other states of consciousness.

Quite the opposite – it’s very much rooted in the real world.

It’s about building solid habits.

A trader who enjoys the thrills of victory and challenges of losses while markets are open, but who is not engaged in research, idea generation, risk management, and performance review, is similarly likely to fall behind the trader who embraces all of those processes.

Japanese manufacturers after the second world war developed total quality control.

US car manufacturers had become fat and bloated.

The likes of Toyota through attention to detail came to dominate the industry, by a process of limiting variability in output and quality.

Now, if there is one thing all market wizards agree upon, it’s that trading needs consistency.

And you do that by limiting the variability of your trading processes.

Constant improvement or Kaizen as the Japanese say, is the way to do this.

Trading journals are the most common way.

Brett Steenbarger suggests going one step further than the trading journal.

Each facet of trading needs its very own journal.

You have a journal for trade ideas, one for mistakes, one for market observations, and one for pure trading metrics.

You can really geek out on this stuff – and the book provides no shortage of ways to do so.

You’re studying your own trading behaviour equally as much studying markets. And, over time you’ll spot inefficiencies.

One of my biggest weaknesses was shorting.

I’ve taken many shorts over my career.

But for whatever reason, the rate of losers to winners has always been skewed.

At times I’d clear up financially on my shorts, and it was these times that stuck in my mind. Not the losses.

So I’d continue shorting, utterly failing to notice just how bad I was at it.

Then, after a string of short losses I’d double up on any longs – often making things worse.

It was like two steps forward one step back – only in reverse.

If I’d been more clinical in studying my trading patterns I’d not have wasted so long.

Steenbarger points out, much of successful trading comes outside market hours.

For a long time, I wasn’t prepared to do the necessary work.

I’d view the weekend as a pain in the butt, because I had no opportunity to make money – not that I was making it anyway!

What I should have been doing on weekends was some of the deep-like thinking Trading Psychology 2.0 suggests.

An elite performer spends far more time working on his or her performance than in actually performing.


Trading Psychology 2.0 is about elite performance

Jack Schwagger says that you have to get everything right in trading to be successful at it.

Brett Steenbarger says it a different way – you can’t be an average trader you can only be an elite trader.

All of his books, draw on stories from the navy seals, the professional sports world, and his own experiences coaching institutional traders.

If you’re in the navy seals they drill you so you don’t choke in the heat of battle.

The majority of us will never come face to face with a battle situation, thankfully.

But if you choke in trading, even for a minute, it can also be dangerous – financially.

It’s amazing how one small event; one-off day, one day spent hungover, whilst making a trading decision, can snowball into a losing month, or year.

Traders are elite performers too.

Maybe not to the calibre of navy seals, or professional footballers, but don’t underestimate what it takes to get ahead in this business!


Building on core strengths

Building on strengths is a major component of this book.

When we’re working to our strengths we are enjoying the process. When we’re enjoying the process, we’re learning better. Results come swifter.

We have the grit to move forward when we experience trading slumps.

The whole argument for finding a trading style fitting your personality is based on this thesis.

But how many can actually find their true strengths before blowing up, or giving up?

Here are some of my strengths.

I have a deep interest in the macro picture. I find it fascinating.

What this means is, I’ve got an idea where the next big moves might come from.

I don’t have issues risking more on strong convictions; and as a result often hit home runs.

I can spot bullshit a mile off, particularly from the talking heads and so-called experts in the industry.

I have developed solid approaches for swing trading my macro themes.

But there are many things I’m not good at.

I dawdle around in the morning, drinking coffee, watching the news and the latest Netflix series. I’m certainly in no rush to switch on my trading screen.

Therefore I’m not cut out for day trading or scalping – the times I have done it, I did it for the money, not for the pleasure.

As a result, the results sucked. I just don’t like making decisions quickly.

My style of trading is not everyone’s cup of tea.

Often I take one trading action a day – if that.

This would drive some traders nuts.

On the other hand, for long-term investors, my approach is too short-term and considered to be high risk.

It’s important to know where exactly you fit in on the timeframe scale.

If you don’t yet know, here’s some food for thought.

Do you like fast shoot em computer games?

If you do like fast shoot em ups, then maybe end of day trading isn’t for you?

Or if you hate fast shoot em ups, maybe scalping isn’t for you?

I personally prefer football management games, slowly building up a team over a season or more, buying and selling players, and occasionally playing matches.

Do you really think I’m cut out as a scalper?

When we move too far from our strengths, we can compromise our motivation and that compromises our performance.


Creativity in trading


Creativity in trading

According to Steenbarger, the old trading psychology is about having a trading plan and following it to the letter.

Trading Psychology 2.0, on the other hand, is about adapting to changing markets.

For newer traders, there’s often so much to grapple with, it’s difficult enough following one plan, let alone having to become a chameleon to changing markets.

And yet, this is what the best traders, fund managers, and investors do.

Trading Psychology 2.0 introduces the interesting concept of traders as entrepreneurs vs traders as clerks.

The trader in a static world need be little more than a clerk, executing the same actions in the same way each day. It is the changing nature of the world—and the resulting changes in markets—that ensure that clerk-like trading has a limited shelf-life in the world of finance

How many of us say to ourselves, if only we can find one good strategy or market we’ll be set for life?

I’ve been guilty of this too.

For a number of years, I traded silver exclusively.

Sometimes I did well, but if you know the metals, you know they can go to sleep for long periods too.

While I was using the same clerk-like approaches for few rewards, trader entrepreneurs, or trader visionaries had already moved on to the next thing.

Likely tech stocks or shorting oil, or whatever was trending cyclically at the time.

This was a hard lesson for me, for many years I was married to the idea of being a silver trader and couldn’t shake that self-identity.

Beginners tend to identify with one type of trading.

They label themselves as index traders, forex traders, or commodity traders.

Others take pride in their 5-minute bar charts, supply-demand techniques, or 4-hour chart swing patterns.

It’s great to a niche.

But it’s also important to adapt.

In the natural world, we call this evolution, or survival of the fittest.

But, it’s equally applicable to financial markets.

If all you do is stare at 5-min candles on major fx pairs, and then volatility dries up for months on end, the missed opportunity cost can be massive.

Trading Psychology 2.0 is all about finding creativity in your trading.

Even for newbies that need not be hard.

Monitoring position extremes in the  COT is a very useful skill to have. It can tip you off months in advance to where the next hot market is likely to be.

Or you could perform a simple daily scan for 50/200 SMA crossovers across a range of markets, and trade only those showing trending tendencies.

Even as scalpers and short-term traders we can still make the most out of these trends.

And this is where the real money is made in trading.

Unfortunately, it’s not something widely practised with newer traders.


How to use Trading Psychology 2.0

Brett’s approach to psychology in trading is refreshing.

It’s much more than the suppress your emotions and maintain discipline school of thought.

Everybody knows that suppressing anything doesn’t work.

We all know people who repress feelings, and the results are disastrous.

Do you think in trading it’s any different?

If you keep repeating, ‘I must be disciplined, I must be disciplined’, this very act will stress you out so much you lose your discipline.

Steenbarger goes to task on the mentors and gurus who say if you aren’t making money, it’s always a discipline issue. It rarely is.

Trading is a mental game in precisely the same way as chess or surgery. Once one has acquired a solid base of knowledge and skills, mindset is important in delivering consistent, high performance. Teaching a mental game to a beginning chess or medical student and pretending it will lead to world-class professional practice would be rightly viewed as folly.

Like I said previously, there’s much to take in with all Brett Steenbarger books.

Much more than can be accomplished in one reading.

I’m often lazy to do all the exercises he suggests.

Sometimes I read for enjoyment, sometimes when in a trading slump, at other times when I want to kick start my day.

Other times, when I am actually trading really well.

His writings (for me at least) help in all those situations. They put your head in the right space.

But don’t sherk on the exercises either.

For beginners, some of them will be enlightening.

If you feel daunted at the sheer amount of information in this book, take what you need for now and come back later.

It’s a well-established fact, it takes up to ten reads before a book finally sinks in.

Take a piecemeal approach if need be.

But tie up your reading with the Traderfeed blog too.

In a business with few mentors or coaches, Trading Psychology 2.0 can really make a difference in improving your trading process.

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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
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G Ryan
G Ryan
1 year ago

As always this helps a lot psychologically. Thanks! I kept checking for part 2 of bitcoin though. Would you tell how you read COT? In your macro view, has it peaked too fast?

G Ryan
G Ryan
1 year ago
Reply to  John Scott

Thanks a lot for Hedgopia. It makes a lot more sense combined with inflow/outflow. Speaking of holy grail, what do you think of this reverse scale strategy? https://invest-faq.com/five-minute-investing/

G Ryan
G Ryan
1 year ago
Reply to  John Scott

Thank you so much for your time and opinion! I do incorporate your harami and exit strategy into option trading. Just have to set aside 1/3 for taxes 🙂 With leverage, 3% lot and stop loss, it seems that a lot of liquidity is idle.

G Ryan
G Ryan
1 year ago
Reply to  G Ryan

Really enjoyed reading Darvas! Tune out the gurus and pay attention to volume. Tsla doesn’t seem too odd as long as human emotion remains the same. Thanks!

G Ryan
G Ryan
1 year ago
Reply to  John Scott

Darvas led me to G. M Loeb’s “Fighting for investment survival”, which Darvas himself liked. Loeb argues against diversification. Option has allowed me to salvage mistakes by taking advantage of time decay and the fact that one can predict the near future better than when the next option expires. I use stock charts but a lot of them don’t offer liquid options. Poor leverage choices we have in the US.