Trading Psyche – Introspection

According to Wikipedia:

"Introspection is the self-observation and reporting of conscious inner thoughts, desires and sensations. It is a conscious mental and usually purposive process relying on thinking, reasoning, and examining one's own thoughts, feelings, and, in more spiritual cases, one's soul. It can also be called contemplation of one's self, and is contrasted with extrospection, the observation of things external to one's self. Introspection may be used synonymously with self-reflection and used in a similar way."

In two words you might summarize the above paragraph as: know yourself. In the world of trading, introspection refers to knowing yourself well enough that your trading style, strategies, and practices are in alignment with your beliefs, limitations, and other constraints that might come as part of our emotional baggage.

Part of taking control of one's psychological edge in trading is to find this alignment. Without it you are working against your very nature. It's a bit hard to explain, but let me try with an example. I know myself well enough to know that I simply can't stomach large losses. Huge draw-downs can be taken in stride by some, but not me.

When I have experienced large losses I found that it was so discouraging that I wanted to give up. It caused me to throw away all of my trading guidelines and policies and things just went from bad to worse. This is when the negative characteristics of Fear come into play. Consequently, I try to develop systems that don't trade that way. I use conservative strategies that produce a good number of wins compared to losses, and losses, while never welcome, are kept at a tolerable level.

Here's another one... I also know that I can't tolerate lots of losses, even if they are small ones. It just doesn't fit my makeup. I'm an optimist and I like my optimism to be fed by lots of victories. I have developed several nice trading approaches that have about a 50/50 success rate, but they work because winners are much larger than losers. I don't like them. If I don't see 65-75% winners (or more) it's just not fun! So, I use approaches that have a high frequency of winners.

Hopefully those examples help with the ways you might know yourself; and here are a few other things to think about as you self-reflect:

• Know your trading style: This refers to the examples I gave above. What can you tolerate? What do you like to see? What causes your stomach to churn?
• Know your strengths and weaknesses: Some people are great technicians. Others aren't. Some are great money managers, or have great intuition.
• Know your physical limitations: I have mentioned many times (it’s the theme of this blog) that I work a full time job. I can't day trade. I need to be able to enter order after hours, and can't even do that too much. Swing trading and Theta positive trading fit my constraints nicely.

There are many other topics on which to self-reflect... these are just a few. The point is, everyone is different when it comes to their psychological makeup and how it's applied to trading. People bring different beliefs and experiences to the table. Knowing yours will help tremendously so that you trade in alignment with those beliefs and experiences, rather than against them.

Good Trading...