There are two kinds of traders

In a post to my TraderFeed blog recently, I suggested that
there were two kinds of traders. One tends to trade the market based on visual
patterns and often needs to rein in emotional disruptions to decision-making.
The other is more analytical and bases trading decisions on tested models and/or
historical/statistical patterns, but often needs to ramp up risk-taking in order
to fully take advantage of edges in the marketplace.

These two kinds of traders naturally lead to two core strategies for helping
traders. The first is to eliminate or reduce unwanted, negative patterns. The
second is to initiate or augment desired, positive patterns.

A major, major reason why change efforts fail is that people try to accomplish
the second (developing positive patterns) by tackling the first (trying to rid
themselves of negatives).

The achievement of positives can never be reduced to a reduction or elimination
of negatives. Yes, it’s a good thing to stop arguing with a spouse or eliminate
holding positions beyond stop-loss points. A reduction of arguments, however,
will not in itself create a loving, trusting marriage. Nor will a stopping out
of losses in itself create opportunities in the marketplace.

(My experience, FWIW, is that a shocking proportion of the people who hold
themselves out as coaches and mentors of traders lack training and experience in
differentiating when presenting concerns require problem-reduction methods,
solution-enhancement strategies, or both. Nor do they have experience
coordinating the two modalities when each is necessary to address a situation.
As a result, they tend to take a “one size fits all” approach to trading
problems, emphasizing well-worn self-help techniques that can be found on the
pop-psych shelves of any bookstore. Too often, what passes for normal practice
among “coaches” meets the formal definition of malpractice among psychologists).

The psychologist, as I mentioned in my book, typically fills two roles:
comforting the afflicted and afflicting the comfortable. The first role is
relevant when people are swamped by their negative patterns of thought, feeling,
or behavior. Helping people reduce those destructive patterns can indeed bring
relief. For instance, a psychologist might help a stressed trader challenge and
reduce overly ambitious expectations that contribute to the performance

Other times, traders are too comfortable with the status quo and need to have
their comfort afflicted. Such is often the case with those analytical traders
who have found an edge and are now comfortable trading it without putting too
much capital at risk. No market edge lasts forever, and changing market cycles
ensure that what was once a profitable niche will eventually fade away. The
failure to exploit an edge when it is present leads to lost income no less than
the attempt to exploit patterns without an edge. Because these losses do not
show up as debits on the P/L sheet, however, they are less likely to disrupt a
trader’s comfort.

Psychologists try to afflict a person’s comfort because they know that most
people will pursue the time and effort of change only when it’s necessary. We’re
much more likely to address a trading problem when it’s put us in the red than
when we’ve left money on the table.

That, however, almost ensures that we will only make changes after those
changing markets have left us behind.

So there you have one of the best applications of trading psychology: Making
changes by building positives and staying ahead of ever-changing markets. “What
am I doing wrong?” is not necessarily the most important question to ask the
psychologist. Rather, you might also ask, “What am I doing right, and how can I
do it more often and make the most of it?”

Average traders change when they need to. Great traders, like great companies,
seek improvement before things have gone wrong. That is the meaning and
significance of Nietzsche’s observation: “Under peaceful conditions, the warlike
man turns upon himself”.

Brett N. Steenbarger, Ph.D. is Clinical Associate Professor of
Psychiatry and Behavioral Sciences at SUNY Upstate Medical University and the
author of over 50 peer-reviewed books, book chapters, and journal articles
regarding short-term approaches to psychological change. An active trader of the
electronic equity index markets, Dr. Steenbarger publishes an archive of
articles at
and a research blog at
. He is also author of The Psychology of Trading
(Wiley, 2003) and the forthcoming Enhancing Trader Development (Wiley, in