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Trading Psychology Techniques - 6: Building Self-Awareness

The majority of psychological problems in trading occur "in the heat of battle", when we become so caught up in market action and our concerns about P/L that we become reactive rather than proactive.  At those moments, we become immersed in our thoughts and feelings and lose the broader awareness of what is going on and what we are meant to do in such situations.  That is why we can look back on our actions at a later occasion and wonder how we could have been so foolish.  Once we enter that "fight or flight" mode of stress, we activate parts of the brain that are geared for action, not reflection.

Self-awareness is the capacity to think about our thinking and reflect on our actions before we react to situations.  The self-aware trader stands back from his or her reactions, notices his or her thoughts and feelings, observes the tendency to act upon these, and then steps back to decide the best course of action.

Notice that self-awareness does not mean being totally free of emotion and impulse.  Self-awareness means that we become observers to those so that they do not dominate and dictate our next actions.

For example, I can see the market drop on increased volume and notice that I'm frustrated that I'm not participating in the move.  I begin to think, "What if this is the start of a bear move?" and then I experience a fear of missing something even larger.  As the weakness continues, I quickly hit the bid and sell the lows, only to see the selling dry up, value buyers come in, shorts cover, and price zoom higher.

The self-aware trader learns to pull back from decision-making during times of "fight or flight".  Often that can mean a temporary pull back from the screens and a self-reminder that this is not a good time to act impulsively.  Here are some specific techniques I've found to be helpful in these situations:

*  Slowing Down - This is where meditation practice can be tremendously helpful.  By breathing slowly and deeply for a sustained period while keeping your focus on one thing, you can learn to quickly re-enter the zone.  It is difficult to be emotionally worked up when you're cognitively focused and physically relaxed.  The more you practice meditation and relaxation skills, the quicker you can access the calm, focused state during the heat of the moment.  Daily practice is essential for internalizing these skills.  The Headspace app is a popular tool for building meditation skill and self-awareness.

*  Coaching Self-Talk - Because I've worked with so many traders, it's easy for me to step back and ask myself what I would tell another trader in the same situation.  For example, I'll remind myself that there is a significant probability of a bounce following the market decline based upon my previous studies.  Instead of becoming fearful of missing further downside, I begin a slow, careful hunt for signs of bottoming and opportunity to benefit from trapped bears.  Combining the slowing down with coaching self-talk can be very helpful in avoiding problems but also using situations to find opportunities.  A good example of this is taking a loss in a good trade idea and using the information to find an opportunity in the opposite direction.

*  Journaling - Writing naturally slows us down.  When we write out what is happening in the situation (or talk it out in an audio journal), we become able to hear ourselves think and plan.  We also gain the ability to read what we've written or listen to what we've said.  This gives us a greater level of perspective by bringing a measure of objectivity to our processing.  Even a brief journaling can help us remember best practices in situations.  I find it helpful to remind myself that I'm in no mindset to trade and that the best thing I can do is use the occasion to refocus and find new opportunity.  That turns the journaling into a positive, putting us on the front foot.

*  Mental Rehearsal - It is helpful to have a basic self-awareness routine that you establish as a process.  You can then, as part of your preparation for the day, use imagery to conjure up situations in which you lose self-awareness and then visualize yourself going through your basic routine.  So, for example, you can visualize yourself becoming frustrated and then visualize yourself talking in a self-coaching way while pulling back and slowing your breathing.  The idea is to turn your self-awareness process into a habit pattern that eventually will kick in on its own.

There is no loss of discipline without a prior loss of self-awareness.  If you can sustain an awareness of what you're doing and why you're doing it, it becomes difficult to fall into reactive modes.  That is what helps us stay cool in the heat of battle, whether in athletics, military combat, or trading.

Further Reading:

The Power of Self-Awareness in Trading

Previous Posts in This Series:

Keeping a Trading Journal

Testing Your Trading Ideas

Managing Your Energy

Building a Morning Routine

Developing Relationships

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