There Are Two Kinds of (Financial Market) Traders

I believe that there are 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 pressure.

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 Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.