The other trading doctor ( 🙂 ), Brett Steenbarger, recently wrote a really interesting post on his blog. One of the things I’ve always liked about Brett’s writings on trader psychology, going right back to his first book The Psychology of Trading, is that he looks deeper at things than most have done. He doesn’t simply say “be disciplined” which is what so many who have written about trading psychology have done in the past. Brett actually gets into what helps contribute to breakdowns in discipline.
In this particular post, Brett looks at things from the perspective of market cycles – the way the markets act in structurally different ways across time. At times they trend. At times they range. Some times volatility is high. Some times volatility is low. Correlations are high during certain periods and non-existent in others.
Brett makes the case that as traders we have a strong tendency to identify ourselves in only one relatively narrowly defined fashion. That leads us to develop trading strategies which tend to only work well in certain types of markets. As a result, we inevitably struggle in other market phases. It doesn’t matter how strong we are mentally. If our trading system doesn’t fit the current market, it’s all for naught.
Of course, suffering a protracted period of poor performance has a way to create or highlight any flaws we might have in our mental makeup as traders.
The challenge Brett makes is that traders look to think about things more like asset managers. That means being able to profit from a multitude of market conditions, not just a singular one. It’s really food for thought. I definitely recommend give the post a read. If you are at all contemplative about your trading it will make you think. And that is always a good thing!