Welcome to Part 1 of our two part series on Methodology vs Psychology.
I love this quote from Mark Douglas:
"We don’t see the markets as they are, but rather our interpretation of them."
It’s a scary thought.
If we are all basing our interpretation of the markets on a subjective viewpoint, then every trader is coming up with variations in analysis. It's a free for all!
Everyone has a different view on what is more important when it comes to trading.
What we think about ourselves is also going to affect how we view the markets.
Methodology or psychology?
Methodology is important.
Yet if you are unable to have the right mindset when trading, then all your rules, risk management and systems are going to fall flat.
If I could offer my younger self some advice, It would be about the psychological factors that can make or break you. Then I'd outline how to deal with these factors when they arise.
Trading is as complex as it is simple. It’s a paradox.
A simple methodology is as good as any.
Know whether the market is going up, down or sideways, then act accordingly.
Throw in some disciplined risk management and position sizing.
The psychological side is not so simple.
How are you going to deal with losses?
How are you going to deal with having to give back open profits?
What about open gaps higher when you are short, or open gaps lower when you are long?
What about those trades you didn’t take that immediately head strongly north?
Or those trades you did take that immediately head south?
What about when your stop takes you out right on the tick, only to see the stock reverse and continue to trend higher without you.
Pretty soon you start to think that it’s you against the markets.
So you go back to your methodology to try and beat the markets.
To find the Holy Grail.
To add another dozen oscillators to your chart to make up for previous losses.
Your behaviours start to mirror ‘revenge’ trading.
Simply put you have lost it psychologically. The markets appear to have scrambled your brain.
Yet in reality the market has done nothing. It's you!
Markets are made up of a mass of emotional beings making emotionally charged decisions.
You are one of them.
So in many ways you’re not only dealing with your own psychological frailties, you are dealing with everyone else’s as well.
The key to having a solid mindset is all about acceptance.
Not resistance. Not anger.
Acceptance is key.
And it doesn’t mean you have to agree with what is happening either. It just means you need to embrace it.
Then work with it and not against it.
More about acceptance in Part 2 of our series next week.