Investing Psychology Secrets: Sure-Fire, Data-Driven Strategies to Supercharge Your Trading Results E-Book
Louise Bedford
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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Master your mindset and boost your investing success
Investing Psychology Secrets is your golden key to developing an unshakable mental toughness when it comes to investing in and trading shares. If you want to truly excel as an investor, you need to develop your psychological fitness first — so you can confidently handle whatever the sharemarket might throw at you. Investing Psychology Secrets reveals practical, evidence-backed methods to build your money mindset and improve your psychological strengths as an investor.
To grow your wealth consistently, you need to be able to triumph throughout the struggles and stress, the wins and breakthroughs, in ever-challenging financial markets. In this book, Louise Bedford, a leading expert in behavioural finance and the bestselling author of Trading Secrets and Charting Secrets, unveils her strategies for confident investing. She shows you how to build your resilience, maintain focus, and thrive in the face of market shake-ups.
With Investing Psychology Secrets, you’ll discover:
- How to create habits for success, with winning routines that lead to exceptional investing and trading
- Why positive thinking can shoot you in the foot and sheer willpower isn’t enough
- How to master your emotions and rewrite the money scripts that can boost your profits
- The paradigm-shattering truth about how meditation and mindfulness can reshape your results (it’s not what you think!)
- The unexpected connection between tarantulas, self-worth, and investing success — and what the neighbourhood cat can teach you about effective trading
Get ready to take control of your trading destiny, with the help of one of Australia's best-selling personal finance authors. With Louise Bedford’s Investing Psychology Secrets, you’ll build real, tangible investing skills — and unlock the secrets for lasting financial success.
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Seitenzahl: 325
Veröffentlichungsjahr: 2024
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Prologue
: Let's kick off
The keys to success
Trading vs investing
Are you a survivor?
KEY 1: Success habits: Build winning routines for exceptional investing and trading
CHAPTER 1: Why is psychological fitness essential?
Psychological fitness
Five reasons to improve your psychological fitness
Common biases
Metacognition
Fixed vs growth mindset
CHAPTER 2: Start, damn it … start
Which habits?
Let's get going
Science‐backed techniques for habit formation
Creating a new habit
CHAPTER 3: Autopilot investing
Neuroplasticity
What habits should you develop?
CHAPTER 4: Three rookie habits hurting your results
Habit 1: You are cruel to yourself
Habit 2: You make things too complex
Habit 3: You think you can go it alone
KEY 2: Emotional mastery: Keep your cool and flourish
CHAPTER 5: The hidden forces behind self‐sabotage
S.A.D. behaviours
The Kafka effect
Fear can drive you
When does money switch from being a positive to a negative force in our lives?
CHAPTER 6: Regaining focus in a distracted world
A little story
Distraction sickness
Why's it important?
How to stop being a victim of distraction overload
Mass insanity
CHAPTER 7: Purpose trumps passion
The bliss zone
The role of hope
So how can you develop your purpose?
CHAPTER 8: Isn't it all just luck?
1. Be aware of the concept of target lock
2. Be fully present
3. Create opportunities
CHAPTER 9: How to develop objectivity
Mood tunnels
What's the solution?
KEY 3: Money mindset: Know yourself to boost your profits
CHAPTER 10: Your money scripts could devastate you
Conversations to have with your spouse
A word of advice on new relationships and friendships
Your money scripts
Why it's important
Stop shooting yourself in the foot
Neck deep in debt
CHAPTER 11: The investment gender gap — fact or fiction?
Testosterone and other hormones
Confidence in decisions
Portfolio turnover
Activity isn't the same as profitability
Female‐managed funds outperform
Embrace your potential
CHAPTER 12: Raising money‐wise kids to shape the financial confidence of the next generation
But what can we do?
A warning
CHAPTER 13: How to stop money ripping apart friendships
1. Look, listen and learn
2. Make expectations explicit
3. Make it less taboo
Judgement from others
Some comebacks
KEY 4: Recharge and renew: Stay energised for optimal performance
CHAPTER 14: Avoid trader burnout
Four stages of burnout
Stress
Perception
Pressure
The STUFF framework
CHAPTER 15: Recover from the market knocks — fast!
Are you an owl or a lark?
The sleep struggle
Prevention
Shift your perception
Use your senses
Did you have an ‘ACE childhood'?
Write it down
Other methods
CHAPTER 16: How to handle a big loss
Reason 1: Revenge trading
Reason 2: Investing for the thrill
Reason 3: Fear
What can you do?
CHAPTER 17: As close as you'll get to a quick fix
What are you saying to yourself?
CHAPTER 18: Debunking the myth of willpower
The good news
Leverage this research to enhance your skills
KEY 5: Motivation: Use inspiration to drive your results forward
CHAPTER 19: Game on —exploring the winning mindsets of athletes and investors
The Movie
Positive thinking can foul you up
Feel it
CHAPTER 20: Feel the pain and do it anyway
The slap test
Paper trading
CHAPTER 21: Approach your goal setting the right way
Approach goals vs avoidance goals
Effective visualisations
Mastery goals
What sort of goals should you set?
Motivation waning?
What happened to Allyson Felix?
KEY 6: Prime your mind for success: Stories and exercises to reprogram your subconscious
CHAPTER 22: Don't delay
CHAPTER 23: Should you compare yourself to others?
CHAPTER 24: Silver boxes
CHAPTER 25: Your number one enemy
CHAPTER 26: Stumbling blocks
CHAPTER 27: What's your currency?
CHAPTER 28: Can money buy you happiness?
CHAPTER 29: Is this all there is?
CHAPTER 30: The self‐startler
CHAPTER 31: Your investing identity
CHAPTER 32: Eight things I wish people had told me about being a trader
CHAPTER 33: The forgotten struggle
CHAPTER 34: The brutal reality of investing: why honesty is the key
CHAPTER 35: No mud, no lotus
CHAPTER 36: Cane toad narcotics
CHAPTER 37: Investing lessons from Cleo the cat
CHAPTER 38: Love affair with money
CHAPTER 39: How an exotic dancer changed the way I viewed investing forever
CHAPTER 40: Are you a dandelion or an orchid trader?
CHAPTER 41: Permission to be rich
CHAPTER 42: Yes, they saw my undies
CHAPTER 43: Are you ready to become a full‐time trader?
EPILOGUE
: It's just the beginning
Sources
Key 1 intro
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Key 5 intro
Chapter 21
Further reading
Introductory
Intermediate-advanced
Acknowledgements
Also by Louise Bedford
Charting Secrets, Revised Edition
Trading Secrets, 3rd Edition
The Secret of Candlestick Charting
The Secret of Writing Options
“Somewhere inside you there is a brilliant trader wanting to come out.”
End User License Agreement
Guide
Cover
Table of Contents
Title Page
Copyright
Prologue: Let's kick off
Begin Reading
Epilogue: It's just the beginning
Sources
Further reading
Acknowledgements
Also by Louise Bedford
“Somewhere inside you there is a brilliant trader wanting to come out.”
End User License Agreement
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First published in 2024 by John Wiley & Sons Australia, Ltd
Level 4, 600 Bourke St, Melbourne, Victoria 3000, Australia
© Trading Secrets Pty Ltd 2024
The moral rights of the author have been asserted
ISBN: 978‐1‐394‐26400‐1
All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.
Cover design by Wiley
Cover image: © Mariia/Adobe Stock
Internal key icon: © Tartila/Adobe Stock
Disclaimer
The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.
PROLOGUELet's kick off
I opened my mouth to answer my daughter's question … and no sound came out.
Nothing at all … not even a squeak.
I'd had trouble with my voice for the past decade, but never to this extent. Something had shifted, deep inside my throat. A strange openness. An inability to connect. I could barely even swallow.
It was December 15th, 2019. I was on a holiday with my youngest child, Ash. She was 12.
Little did I imagine this would be my new reality.
I'd caught a virus that triggered a cascade of pain, and an inability to make any noise whatsoever for nine months. Related to a problem I'd had in my twenties (when I lost the ability to move my arms for around three years), it felt strangely familiar … and terrifying.
I was alone in my silent world while the pandemic surged, unable to talk with my family or friends, or even do a Zoom call. I'd never felt so isolated. Inwardly I was screaming from the injustice of it. Raging silently, and wondering whether this would be my reality forever.
Despite intensive speech therapy and a vast array of painful exercises designed to get sound flowing again, it would be two years before I could speak my first hoarse and scratchy sentence.
It's a strange thing to have your body turn against you and not to know whether you'll be able to return to full strength. It's demoralising and humiliating. Waves of grief overwhelmed me. The horror of my situation felt suffocating. Unable to chat with friends, or even talk over the dinner table with my children and husband, I withdrew.
It was subtle at first. But soon I found myself shunning everyone because I felt so damned vulnerable. I became the object of other people's jokes as so‐called friends said, ‘I'll bet your husband is loving this!’ I was appalled by the tactlessness. Their words cut into my already fragile heart.
Then it dawned on me. This was a mind game. It was a psychological challenge designed to test whether I was resilient enough to make it through.
Because, by heck, the universe will screw with you. It will treat your plans like a game of Jenga. But how you respond … what you do with your hurts, your discomforts and your disappointments … this is what's really important.
I turned to the lessons the markets had provided me. I sensed that within them were the seeds of my recovery.
Thank goodness I had investing as a back‐up plan. Having traded for over 30 years, I had an edge in the markets, which meant I didn't lose my job because I was already a full‐time investor. I really don't know what would have become of me if I had been pursuing a regular career when I lost my voice, because 99 per cent of jobs expect you to be able to talk.
I hung onto the words of the Roman poet Ovid: ‘Someday this pain will be useful to you.’ They were my life raft. I repeated them in my mind like a mantra.
I threw myself into research. What mind hacks could I find to improve my situation? What could help me — both to advance my recovery and to give my investing a boost?
Investing Psychology Secrets is the culmination of that research. In this book I combine my personal experiences as an investor and trader for more than 30 years with data‐driven, science‐backed, high‐performance methods to propel your results to the next level.
Over the past four years I've regained my ability to speak more or less reliably. I still experience setbacks, but I have been able to move through them. And even though I still need regular speech therapy to maintain my voice, I'm much better than I was in those initial months when I was terrified I might never speak again.
Sure, life may let you down. You might experience illness, retrenchment or disappointment.
Today you may suffer fools, face hostility or have to deal with people who despise everything you value in life. Maybe you aren't cared for in a way that makes your soul sing. It may seem like the markets are out to get you and you'll never be the consistent performer you want to be.
The question is, what are you going to do about it?
Listen to that voice. The one telling you that you deserve more.
Let no one keep you from improving your financial future:
Not the mother who wants you to fulfil her ambitions vicariously.
Not the father who expects you to follow the old rules for building wealth.
Not the domineering teacher who can't see you're about to spread your wings.
Not the employer who frustrates you with their unreasonable demands.
Not the voice that whispers in your ear at 3 am, ‘You're not good enough.’
Let nothing dissuade you.
Your investor's life awaits. You're about to unlock the mindset secrets you'll need to excel in the markets. And I'll be with you every step of the way, drawing on high‐performance research to soothe your frazzled mind. The lessons I'll share with you are relevant no matter what time frame you trade in, what pocket of the financial markets you focus on. You'll benefit whether you consider yourself a trader or an investor.
What I'm about to share with you is nothing short of revolutionary. It is your key to developing mental toughness so you can trade consistently in the markets and overcome that nagging self‐doubt.
The keys to success
In this book I'll build on many of the ideas I explore on my Talking Trading podcast (www.talkingtrading.com.au). I'll show you specific techniques you can use to change the way you look at the markets and yourself. The way to excel in the markets is to detach yourself from your results, and the way to do this is to develop your psychological fitness.
Investing Psychology Secrets is a bench press for your mind. Put in a little consistent effort now, and you'll stretch, develop and grow. You're about to learn why some investors beat the markets … and why most don't.
There are the six golden keys to psychological fitness, and we'll work through each of them together:
Key 1
: Success habits.
Build winning routines for exceptional investing and trading.
Key 2
: Emotional mastery.
Keep your cool and flourish.
Key 3
: Money mindset.
Know yourself to boost your profits.
Key 4
: Recharge and renew.
Stay energised for optimal performance.
Key 5
: Motivation.
Use inspiration to drive your results forward.
Key 6
: Prime your mind for success.
Stories and exercises to reprogram your subconscious.
Read this book starting from the beginning if you'd like. If you're after a quick two‐minute boost, though, I suggest you choose one of the stories and exercises from Key 6 to give you the lift you need. Many investors choose to dip into that key for a bedtime story, so their minds are primed for the next day's market action.
At the end of each chapter, I list the key concepts for you as a way of reinforcing the core lessons. When you want a quick refresher, you can turn to those sections for a reminder of the main skills to focus on.
Yes, you may feel a bit vulnerable while reading this book. It may even make you feel a bit queasy when you realise how much money you've left on the table because of your own limitations. But now is the time you put your foot down and get out of your own freaking way to scoop up the rewards the financial markets have to offer.
Trading vs investing
Everything I'm about to relay applies whether you identify as a trader or an investor.
In Australia and some other regions, investors generally have different tax advantages compared to traders. Investors also may choose longer term instruments such as ETFs (exchange traded funds), shares and managed funds, whereas traders may be more attracted to using CFDs (contracts for difference) and derivatives, profiting from sideways movement and downtrends, rather than just uptrends. Many investors adopt a ‘buy and hold’ strategy.
Some may not even use a trading plan. (Yikes! Perish the thought!) A trading plan is needed by all traders and investors to guide how they interact with the market. It helps you decide how to get into positions, how to get out and how much money to put into each position.
To improve your performance, document your trading plan and include all possible scenarios. A written plan reduces the burden on your working memory (your brain's short‐term information storage), especially in high‐pressure situations. If you'd like my free trading plan template, go to www.tradinggame.com.auand register your details, and I'll email it to you straight away. Following a predetermined plan reduces stress and increases the likelihood of consistent decision making, which will help you achieve success.
Even if you think of yourself as an investor, I urge you to consider carefully and document your entry, exit and position sizing. It's one of the keys to success. Although I'll be focusing on investing in the financial markets, even if you're investing in another asset class, such as property, collectables or a business, these mindset tricks are equally relevant.
Show a bit of mental flexibility here. You might think of yourself as a trader rather than an investor — or vice versa. But I use these terms interchangeably throughout the book. The lessons I convey can be applied regardless of your time horizon or how you define your financial activities.
Are you a survivor?
Ever watched the TV show Survivor? The goal is to outwit, outlast and outplay your opponents (while being starved, sunburned and semi‐tortured in the cause of ‘entertainment'). Investing is a bit like that, except the person you're competing against is yourself. You have to outwit, outlast and outplay yourself, performing at the top of your game. That's where the prize lies.
Being a great investor is a gradual, incremental by‐product of this activity, not an outcome. It is the fruit of the seed you diligently and lovingly planted. People who do well in the markets exhibit a unique combination of strength, endurance and resilience. These qualities don't come naturally to most of us, but they are exactly what you'll gain by reading this book.
Do you want to discover what it means to be a psychologically fit market dynamo? Join me on this journey and you'll develop your psychological flexibility so you're equipped to handle everything the markets throw at you. There'll be triumphs, struggles, vexation and breakthroughs. You'll learn how to keep your money firmly in your account, how to grow it consistently, and how to stop giving away your hard‐earned gains due to rookie mistakes.
I'll give you the tools you need to become a truly consistent performer. Let's start by looking at the success habits required for you to build exceptional investing and trading skills …
KEY 1Success habits
Build winning routines for exceptional investing and trading
Imagine putting your investing on autopilot. You don't have to think deeply about every decision. You can really concentrate on the aspects of your life that are more personally meaningful. You'll achieve exceptional results without any extra effort. And if you can work out a way to prevent bad habits from taking hold, it will free up your life, right?
It's essential to develop habits that permit you to devote less conscious time to the repetitive aspects of your life. Habits let you free up your working memory, allowing you to think more deeply about things that really matter. Because if every minor decision has to be painstakingly thought through, you'll soon drain your battery, and be more likely to make mistakes.
Behavioural finance expert Brett Steenbarger is spot on when he says, ‘The right trading behaviours start as rules and evolve into habits.'
We are the sum of the habits we create. Around half of our everyday behaviours are performed automatically, with little forethought. However, you need to develop conscious awareness of these behaviours. Any habits formed should feed into the goal of developing exceptional trading skills, and not be the equivalent of acting mindlessly.
Key reasons to develop good habits
There are three reasons why you should make the effort to develop good habits:
1. Good habits minimise decision fatigue
If you don't develop effective trading habits, decision fatigue can set in. Past a certain threshold, each extra decision you make taxes your working memory, and your ability to make additional decisions is reduced.
Sure, the first few decisions you make when you're feeling fresh might be carefully considered, but as the day continues, each new decision will wear down your working memory, and your ability to make additional decisions will suffer.
Think of it like a game of chess. You start with a lot of pieces and a lot of moves to make. But as the game progresses, you lose some pieces and your options become more limited. So it's important to practise your early moves in order for them to become habitual. That way you can save your energy for more important decisions later on.
2. Good habits help ensure you always keep learning
Freeing up your working memory allows more room for deep thought. Effective trading requires a combination of following good routines and course corrections when you've made sub‐optimal decisions. If you're always fighting mini‐fires, you just won't have time to think deeply about your next strategic move.
3. Good habits give you a confidence boost
When you're disciplined and doing what it takes, you feel like a financial market superstar. Your confidence grows when you stick to your routines and make well‐informed decisions.
Success hinges on more than just routine actions. It demands conscious engagement, deliberate choices and a deep understanding of your own behaviour. Every habit you form should be intricately woven into the fabric of your trading goals, fuelling your journey towards mastery.
That's where we're starting our journey towards developing psychological fitness. You'll learn how to develop habits with ease, to drop habits that aren't contributing to your goals, and to avoid habits that could deplete your bank account.
It's time to get rolling …
CHAPTER 1Why is psychological fitness essential?
Why is developing your mindset so important? Surely it's the ‘system’ you use that determines your success? Well, think again. This is exactly why you should work as hard on your mindset as you do on your trading plan.
I'm about to propose something controversial here: All success starts in the mind. Bank accounts are built one step behind the level of your mindset. The sooner you can accept this, the better. When you first dive into trading, you might think success depends solely on the system you use. But let me tell you, it's only after you've faced a few setbacks that you realise the real game‐changer is your mindset. You've got to be prepared to dive deep into your tub of emotional goo to come out the other side as an exceptional trader.
Investors start their journey fuelled by excitement about the boundless potential of the markets. The initial enthusiasm sweeping over you can lead to optimism bias, which causes you to overestimate your likelihood of success. It becomes all too easy to overlook or downplay any potential negative consequences.
Most people think the future will be easier, brighter, better. They feel they'll have more time, resources, abilities. Sadly, though, things don't usually turn out as well as we anticipate.
Researcher Sharot found, ‘When it comes to predicting what will happen to us tomorrow, next week, or fifty years from now, we overestimate the likelihood of positive events, and underestimate the likelihood of negative events.’ For example, we underrate our chances of divorce, being in an accident or suffering from a serious illness, while also expecting to live longer than expected, overestimating job success or believing our children will be prodigies. This tendency translates directly into the financial markets, especially when we're starting out.
Traders swing between extremes. If they're not overly optimistic, they are in despair about the markets and their own abilities. Consumed by thoughts of destitution, homelessness and uncertainty, they envision a bleak future. I like to think of this as awfulising. Psychologists use the term catastrophising. Either way, you surround everyday events in your life with drama to feel the adrenaline surge through your body. Researchers Sullivan et al. define catastrophising as ‘an exaggerated negative “mental set” brought to bear during painful experiences’. More simply, it's the tendency to imagine the worst.
As a trader, however, you can't afford to awfulise. There are consequences. Why? Because you may just awfulise a totally ‘normal’ situation and freak yourself out. If you constantly surround your trading with drama, you might also put some of the people who care about you offside. They'll seek to protect you, instead of being your cheerleader.
Drop awfulising now!
The price of awfulising is just too high. To avoid it, ask yourself three questions about the ‘calamity’ you're facing:
‘Is it true?’
‘What evidence is there for this?’
‘Is it useful?’
If the way you're thinking is not true, or if the evidence for it is scanty and it's not a useful way of thinking, you need to drop that line of thought.
From time to time the market can seem like it's attacking us personally. If you've ever popped money into a position and immediately the damned thing goes against your wishes, I can tell you, it's hard not to take it personally. But it's not just when you're making a loss that you have to think about your own psychology. It's also when things go well.
Top‐notch investing is not just about mastering technical skills. You also need to train your mind to handle the ups and downs of the trading world. This means developing coping strategies, managing your emotions and staying in control. It's essential to work on building your self‐esteem and staying optimistic, while still being realistic about your abilities. Don't worry if this doesn't come naturally to you — most traders need to work on these areas to develop psychological fitness.
Psychological fitness
Psychological fitness means having the ability to grow and bounce back from significant challenges. And, just like physical fitness, it's something you can actively work on and control through training.
When you accept that anything can happen in the markets but it's your mission to assess probabilities, you're on the right track. Only take trades when the evidence indicates that the trend you're backing will continue. If you truly believe this, then you won't block, deny or attack anything the market is offering. You'll respond with clinical detachment, basing your decisions on the weight of evidence.
To achieve this goal, you must train your mindset in various ways. You need to develop coping strategies, manage your emotions and maintain self‐control. For most traders, this level of self‐awareness isn't automatic.
Five reasons to improve your psychological fitness
Here are five reasons you should prioritise improving your psychological fitness. It will help you:
develop detachment.
To make objective decisions and avoid investing emotionally, you need to develop detachment towards your results. You've made a ‘good trade’ if you've followed your trading plan to the letter (regardless of the profit or loss you make). When you are at peace with any outcome of your trading, you'll be free to trade with precision.
open up to new possibilities.
Improving your psychological fitness sparks your curiosity and eagerness to explore new areas. You become more adventurous and develop a genuine thirst for knowledge.
embrace resilience.
Psychological fitness strengthens your resilience, making you less likely to give up and more inclined to persevere. You become better equipped to face challenges head‐on, bounce back from setbacks, invest more effort and find inspiration in the achievements of others.
stay grounded.
Working on your psychological fitness keeps you humble, preventing both overconfidence and self‐doubt from clouding your judgement. Interestingly, studies have shown that overly confident traders tend to earn lower profits in their trades.
learn from your mistakes.
By improving your psychological fitness, you develop the ability to learn from past mistakes. This ensures that you'll stay in the markets long enough to make necessary course corrections.
Emotional discipline may be even more important than having a good system. Writing in his very popular book The New Market Wizards, Jack Schwager puts it this way:
If there is a single theme that keeps recurring in this volume, as it did in Market Wizards, it is that psychology is critical to success at trading. In order to achieve success in life, you must have the right mental attitude.
If trading (or any other endeavour) is a source of anxiety, fear, frustration, depression, or anger, something is wrong — even if you are successful in the conventional sense, and especially if you're not.
You have to enjoy trading, because if trading is a source of negative emotions, you have probably already lost the game, even if you make money.
Sadly, sometimes you can be your own worst enemy. Especially when the market seems to turn against you, it can be hard to decide to pick up the pieces and give trading another shot.
The late psychologist and author, Dr Harry Stanton, was my friend and co‐author of our book Let the Trade Wins Flow. Let me tell you how I got to know him … and eventually had the honour of writing a book with him on trading psychology.
Harry is the sole reason I decided to study psychology at university. Frankly, he turned my life around when, as a 15‐year‐old, I was heading towards a very bad place. My darling sister, Valerie, gave me his book, The Plus Factor. I still have the original copy, printed in 1979, on my bookshelf. This book touched my heart. More importantly, it made me realise that my future was in my hands.
His words comforted me and made me feel less alone. They spoke to me. After the first three pages, I knew I had found my calling. I was determined to study psychology at university so I could gain insights into how people's minds worked … and how my mind worked. Years later Harry and I became friends. He shared with me his views about the markets and candle charts, and our friendship deepened.
Harry summed up beautifully my tendency to become ecstatic one minute and to plunge into the depths of despair the next. As a trader, especially when you're starting out, you'll swing from excessive optimism to abject despair like a little pendulum wrecking ball. The key to high performance, Harry told me, was to be less emotionally volatile, develop objectivity and always take a pause before making big decisions.
It's so easy to climb on board a joy/despair roller‐coaster, but in reality you'll make your best decisions when you adopt a more level‐headed approach. When you feel like your belly is doingflip‐flops because of this joy/despair cycle, personal mantras can help.
As a beginner, I cried about every loss I made. Not just one of those pretty soap opera weeps with tears rolling delicately down my face. I'm talking about a howling, red‐faced blotchy mess. Yet every profit had me dancing around the house, singing ‘I wanna be a billionaire’ at the top of my lungs.
It took me a very long time to calm the heck down.
Common biases
We're subject to a bunch of biases that can foul up our thinking and impact our investing results. Here are some of the biases that can affect you:
Confirmation bias:
We all hear what we want to hear, and investors tend to listen only to the news that tells them they're right.
Overconfidence bias:
If you think you're the guru of the financial markets, you might take risks you shouldn't.
Loss aversion:
No one likes losing money. But many people hate it so much they hold onto losing investments forever, hoping they'll magically turn into winners.
Herding behaviour:
Investors can blindly follow the crowd, even when it's not the smartest move.
Anchoring bias:
Imagine you bought a stock at $50. Now it's at $30, but you're convinced it'll go back to $50. Anchoring bias makes you hang on, even if your hunch is unlikely.
Recency bias:
Recent events have a big impact on our decisions. If the market's been great lately, we may imagine it'll stay that way forever.
Availability bias:
We're often influenced by what's in front of us. If the news is screaming about a particular company, we might jump in without thinking.
Hindsight bias:
Ever said, ‘I knew that would happen!’ after the event? That's hindsight bias making us feel smarter than we really are.
Endowment effect:
We tend to think our stuff is more valuable just because it's ours. Same goes for stocks we own — we may hang on when we should let go.
Disposition effect:
Selling winners too early and holding on to losers — that's the disposition effect in action.
Unless we are aware of these effects and work out ways around them in advance, we can struggle in the markets. After I learned about these biases, I began to recognise many of them in my own behaviour. They were part of the puzzle, but not the complete answer.
Metacognition
Only humans have the special ability to think about their own thinking. It's called ‘metacognition'. You can totally use this ability to level up your life, boost your performance and bounce back from tough life events.
The more you fine‐tune your skills by examining your own behaviour and motivations, the less your unconscious mind can wreak havoc on your trading outcomes. It's quite possible two people can use the same trading system but end up with different results. It all boils down to how they think about money, the markets and themselves.
Developing the right mindset is an absolute game‐changer, especially when it comes to gaining an edge in the markets. By making consistent and calculated decisions, rather than being buffeted by their emotions, these traders achieve more regular positive results.
However, all of this can take some time and effort.
The research strongly suggests that if you can stay in the arena for longer, you're more likely to be successful. Developing your psychological fitness can help you become resilient, so you're more likely to give yourself time to develop and grow as a trader.
Fixed vs growth mindset
In Mindset: The New Psychology of Success, Carol Dweck unveils a fascinating divergence in how people approach the world. People have either a fixed mindset or a growth mindset.
I caught up with a trader the other day and he said, ‘Well, if I haven't made it by now as a trader, I'll never make it.’ This is a sign of a fixed mindset. Traders with a fixed mindset tend to think they have reached their upper limit of endeavour and can never grow further.
Study after study has shown that those with a fixed mindset are more likely to give up, or even cheat on tests. Why do they cheat? Well, they feel that if the questions are difficult, a bad test result will threaten their self‐identity as being ‘clever’, and they'll fight to maintain this image of themselves. They'll quit for the same reason. It's easier to quit than to persevere in a field that's challenging.
A fixed mindset person:
tends to shy away from challenges in just about every area of their lives
is quick to quit when obstacles pop up
thinks putting effort into tasks is pointless so looks for short cuts
would rather ignore helpful criticism than use it to make positive changes
is intimidated or threatened by the success of others.
