“unlimited possibilities coupled with the unlimited freedom to take advantage of those possibilities present the individual with unique and specialized psychological challenges, challenges that very few people are properly equipped to deal with, or have any awareness of for that matter, and people can’t exactly work on overcoming something if they don’t even know it’s a problem.” – Douglas
In the second chapter of Trading In The Zone, Douglas addresses the psychological reasons that we are attracted to trading and the pitfalls that they create for us. He explains that the stock market offers us unlimited freedom to express our creativity in any manner we choose. There are no rules or boundaries except those that we impose on ourselves. If you really think about it, there is an endless list of racing strategies and an infinite amount of ways that they can be applied.
Douglas stresses that many traders have a difficult time building structure into this wild west style environment. I can certainly see where he is coming from. I have been studying and trading markets for an entire decade and still find myself fumbling around trying to figure out what to do next. I still haven’t build the structure that I need to be successful.
Douglas then goes one to discuss how many of us are naturally drawn to certain things and how the social structure that we exist in might not be supportive to these desires. He uses the example of someone born into an athletic family who finds himself passionate about classical music. There is not likely to be much encouragement from the athletic parents and siblings.
“This lack of support is not simply an absence of encouragement. It can be as deep as the outright denial of some particular way in which we want to express ourselves.” – Douglas
I think that most people can relate to this. Almost everyone has a story about what their parents wanted them to be and how what they chose to do was far different. My mother wanted me to be an engineer who wore a suit to work everyday. I chose to be a restaurant manager who wears Jordan shorts to work every day. I also run into resistance from just about everyone when I tell them that I want to be a stock trader. People who don’t know a single thing about trading have no problem telling me how little I know. That rejection can be very depressing.
“What’s important for us to understand about these unreconciled, denied impulses (that exist in all of us) is how they affect our ability to stay focuses and take a disciplined, consistent approach to our trading.” – Douglas
This is where Douglas starts to explain how these internal issues can surface in our trading.
“To prevent the possibility of exposing ourselves to damage, we need to create an internal structure in the form of specialized mental discipline and a perspective that guides our behavior so that we always act in our own best interests.” – Douglas
Easier said than done! I thought I had established this specialized mental discipline years ago, but I still continue to find myself making trading decisions that go against my own best interests. I really had my eyes opened to this fact in the last chapter, and here we see it again. I had convinced myself that I already had the mental structure to trade, but that was actually me trying to avoid building that structure.
“The markets provide structure in the form of behavior patterns that indicate when an opportunity to buy or sell exists. But that’s where the structure ends – with a simple indication.” – Douglas
That’s where the structure ends for me as well. I am great at identifying potential winning growth stocks, but does not mean I am good at buyings, holding, or selling them. I can list hundreds of leadings stocks that I have identified over the years, but almost all of them eluded my trading account. Some of them I bought at the wrong time. Some of them I didn’t buy at all. Once we get past the identification of a stock’s potential, my skills seem to be pretty useless.
“The structure we need to guide our behavior has to originate in your mind, as a conscious act of free will. This is where the many problems begin.” – Douglas
What I find interesting is that I have been smart enough to begin the process of building this structure, but I seem to have stopped in the middle of that construction.
From this point, Douglas goes on to explain four problems that traders can encounter as a result of their lack of structure. I have dealt with each of them in some form.
“I am implying that you can’t take for granted how much effort and focus you may have to put into building the kind of mental structure that compensates for the negative effect denied impulses can have on your ability to establish the skills that will assure your success as a trader.” – Douglas
The first problem that Douglas illustrates is a lack of willingness to establish rules. He explains that the reason most of us are attracted to trading is that it offers creative freedom, which naturally makes us averse to creating the necessary rules and structure in our trading systems.
I had been studying in trading for years before it occurred to me that I needed an actual system with written rules. I used to pick stocks because I saw them on TV. That’s how far I have come in this respect. What I find interesting at this point in my career, is that despite recognizing that I needed some rules and structure, I underestimated the effort and focus that structure would require.
“The hard reality of trading is that, if you want to create consistency, you have to start from the premise that no matter what the outcome, you are completely responsible.” – Douglas
The second problem the Douglas talks about is the failure to take responsibility for your results. Once again, this is an issue that I thought I beat many years ago, however it crept up into my trading again this past summer. As I continued to lose one position after another, I found myself rationalizing that it was just a bad market and that the loses had nothing to do with me. I was trying to avoid acknowledging that there was anything wrong with what I was doing.
“If a reward is random, we never know for sure if and when we might receive it, so expending energy and resources in the hope of experiencing that wonderful feeling of surprise again isn’t difficult. In fact, for many people it can be very addicting.” – Douglas
The third problem that Douglas addresses is an addiction to random rewards, which is very comparable to a gambling addiction. He used the example of scientific studies done on monkeys that showed that random rewards were addictive while consistent rewards that suddenly stopped were not. I encountered the addictive side of this early in 2012 when I was both winning and losing. As I spent the rest of the year losing, I lost interest in the market and thought about giving up altogether.
I am concerned that this addictive nature of trading combined with my own tendency to get too excited about the good trades and too depressed about the bad ones will always make me a mental liability. This is one of the reasons that I have been considering switching to a purely mechanical system that I can keep my emotions out of.
“One of the principal reasons so many successful people have failed miserably at trading is that their success is partly attributable to their superior ability to manipulate and control the social environment, to respond to what they want.” – Douglas
I have always been pretty good controlling my environment, usually through a passive aggressive approach. I will openly admit that I have had countless frustrations with the market not doing what I believe it should be doing. I am used to being in control and the lack of control I have over my trades can be very frustrating.
“Instead of controlling our surroundings so they conform to our idea of the way things should be, we can learn to control ourselves. Then we can perceive information from the most objective perspective possible, and structure our mental environment so that we always behave in a manner that is in our own best interest.” – Douglas
Once again, Douglas ends the chapter in a promising tone. I expect that he is going to explain some sort of plan or strategy to deal with the mental defects he is opening my eyes to. At the very least, he has made me extremely self-conscious.