By M. William Scheier, a futures trader and analyst in the E-mini Index contracts*
Posted: May 23, 2008

No matter how clever your trade entries are, successful trading is mostly a mental game. The following treatise on trade psychology will appear hereafter in a series of installments and has been excerpted (and modified for use on this site) from chapters of the book Pivots, Patterns and Self Recognition. The excerpts appear here by permission of the publisher, valhallafutures.com.

Prologue
I searched myself. Heraclitus

The greatest inhibitors to success in trading are those found in our heads. These inhibitors are behavioral attributes and tendencies common to us all and arise for two reasons. One, because the workings of the markets are counter-intuitive; and, two, because the element of severe personal and financial risk stands between the object of our endeavor and the activity it takes to pursue it.1

If there were no risk involved at all, it would be hard enough just to master these counter-intuitive trading strategies, so difficult it is at times to unravel the market's meanings. But, because risk is an inherent aspect of speculation, the task of trading is more on the level of the most difficult achievements a person can accomplish in any arena of intellectual contest.

The mental behavior models associated with trading are well documented everywhere in the literature on the markets. The subject is most often referred to as market psychology. The habits, emotions and biases of this behavior have been enumerated, depicted, qualified, labeled, categorized and analyzed everywhere and by everyone who, in the course of trying to trade for him or herself, thought to regurgitate his or her observations back to us in print and lecture.

In fact, the discussions of these behavioral tendencies, the affects of fear and greed, for instance, are so common to those of us in pursuit of trading skills that their persistent examination may actually be serving to nullify our ability to do anything effective about them.

We read about errors traders make because of these things and, perhaps, even recognize how we did the same ourselves in past trades. But, none of that text seems to help us deal with the phenomenon any better when it is happening to us in real time.

When making critical trading decisions, we are usually not even aware of what category of behavior or other we are operating under until the error is firmly behind us. "I knew better than that," one might find oneself saying in retrospect, "but I just couldn't help myself."

Such a remark is tantamount to wondering if it is possible that someone had somehow taken over for our self and was apparently operating our trading activities on our behalf, unbeknownst to us at the time it occurred. How can this be? Is there someone else inside controlling each of us at times that we're otherwise unaware of?

On the surface, this seems an absurd proposition. And, worse, it suggests that perhaps we're really not completely responsible for -- nor in control of -- ourselves and our behavior at all.

Who among us has not had thoughts of being a better person, living at times a slightly different life, undoing the outcome of some earlier life-event once made a mess of, or even adjusting some aspect of ourselves we suffer from habitually. If we're really in such conscious control, why can't we just change ourselves? Why don't we just fix it all, exactly the way we want?

The thesis of the second part of this series, subtitled "Self Recognition", proposes that certain underlying motives surface during trading in disguise. That these motives are alternately so consuming and in conflict that only by the purposeful practice of building another character of consciousness altogether can we recognize and use these motives for what they are. And that, only by first identifying these motives' true natures -- and then accepting their presence as necessary and integral -- is there hope to harness their influence against an external conflict over which we truly have no control whatsoever, such as the market.

The journey of understanding trading psychology unfolds somewhat like a story. Like any story about the conflicts of a journey, our story of the psychology of trading has its characters. In it, there are three. These same three characters live inside the head of each of us. I trust you'll recognize them as their profiles unfold. They are the Trader, the Analyst and the Accountant.

We'll develop the description of these three characters in the subsequent installments of this series. In truth, they have little, if anything, to do with their namesake career categories as used in the everyday world. But, giving them familiar titles associates them roughly with the general categories of responsibility each performs in our respective psyches.

These installments on the subject of trade psychology are best introduced in small doses. Consuming the concepts slowly should allow the reader to begin seeing him or herself in these character descriptions all the more clearly and so fulfill the purpose of the book's section subtitle, "Self Recognition"...

*Reprinted (and modified) with permission from M. William Scheier and the publisher, valhallafutures.com