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.
By Louise Bedford, behavioural finance expert and host of the Talking Trading podcast.
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.
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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.
Reducing volatility when trading
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 doing flip-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.
This is an edited extract from Investing Psychology Secrets: Sure-Fire, Data-Driven Strategies to Supercharge Your Trading Results by Louise Bedford (published by Wiley, June 2024)
LOUISE BEDFORD is a behavioural finance expert and bestselling author. She has over thirty years’ experience as a successful trader, hosts the Talking Trading podcast, and is one of Australia’s most compelling voices speaking on the financial markets today.
