I had an interesting conversation with Pepperstone’s Head of Trading Martin Doepke (LinkedIn Profile: https://www.linkedin.com/in/MartinDoepke). As it turns out Martin is not only a great trader, he also holds a Masters Degree in Psychology.
We discussed the role self-image and self-esteem could play in achieving trading success and I thank Martin for introducing me to the theory of ‘Self-Concept’. In the following article I have adapted this theory into the context of trading and also added some of my own experience in coaching traders to explain how self-image adds to the emotional rollercoaster experience of so many traders and more importantly what to do about it.
You see, if you feel confident or not and if you believe that you have the ability to become a successful trader or not, has often nothing to do with reality but all to do with your self-image.
The theory behind this is that your self-image as a trader contributes to how you feel about yourself and therefore determines your trading behaviour.
Believe it or not, this is very exciting news in my opinion, because it means that simply by improving your trader self-image you can change your trading results. Self-defeating behaviour can be eliminated and replaced with profit producing behaviour in an instance.
In order to understand how your self-image affects your trading decisions and hence your results, we have to explore the realms of self-concept. Every trader has what psychologists call a self-concept. A self-concept are certain standards or self-guides a trader unconsciously compares themselves to. They act as a regulatory system for a trader’s behaviour.
Self Concept: Self-Image, Ideal Self, and Self-Esteem
Self-concept is a term that explains how you as a trader think about or perceive yourself. There are 4 parts to it:
· The view you have of yourself as a trader (Actual Trader Self-Image)
· The kind of trader you wish you were (Perfect Trader Self)
· The traits that you wish you didn’t have and fear will sabotage the achievement of your hopes and dreams (Feared Trader Self)
· How you feel about yourself as a trader (Trader Self-Esteem)
Your Trader Self-Image or also called ‘Actual Trader Self’ is how you believe you are as a trader, the attributes and traits that you believe you actually possess or lack as a trader.
The trader self-image is shaped not only by your trading experiences so far, but also by your life experiences, messages you received from other people about how they see you, your believes and values etc.
Perfect Trader Self
Perfect Trader Self is the traits that you believe you have to possess in order to ‘make it as a trader’, such being consistently profitable, never making mistakes, able to take losses swiftly, a trader who trades without emotions, who recovers from a loss quickly and moves on to make more profits and who is able to make a great living with amazing lifestyle choices such a travelling the world, buying a house for their moms etc. Many traders are so determined to achieve this perfect trader self-image because they are under the illusion that once they have achieved this kind of perfection, they will be 'loss proof', be mega successful and with that have secured the love and admiration of their peers.
The illusion of the "perfect trader self" is what usually motivates you to work on your personality development, to take up meditation / mindfulness practice learning to understand yourself better and to change, and improve your actual trader self in the quest to achieve your goals.
However, the perfect trader self is in my opinion often a fantasy construct and has nothing to do with reality. It is shaped by what traders read and hear on the internet, mostly by business people who put up an unachievably high standard that keeps traders feel inadequate and motivates them to spend money on services that promise to help them achieve the unachievable. So, for example, the fantasy of the consistently profitable trader is just that, a fantasy. Every trader goes through ups and downs in their career and the trick is to have more ups than downs and make significantly more profits in the up times than they might stand to lose in the down times.
Feared Trader Self
Then there is the part of you that you fear. The traits that you blame sabotage your successes by feeling unable to exit losing trades, missing out on the profitable trade, revenge trading etc..
The feared trader self is the part of your personality that you are afraid lacks or possesses traits that could have a negative impact on your chances to achieve your goals and dreams of being a successful trader. It is the part of yourself that you fear you are not in control of such as impulsively jumping into a fast moving market (feeling unable to stop yourself because the urge of the fear of missing out is so great), making a string of profitable perfectly executed trades followed by one trade that wipes out all the profits and more (feeling helpless and unable to press that mouse button to exit a losing trade at the predefined point),
It is really important to be aware of which traits you fear in yourself as it is human nature to avoid negative experiences. The irony is that by trying to avoid negative experiences traders actually create the exact outcome they are trying to avoid. Avoidance behaviour is usually at the cause of taking profits too early and not cutting losses immediately.
Expected Self - "Who he thinks you want him to be that he thinks he cannot become.."
I added the part of the expected self just for completion, however will not include it in the discussion.
The expected self is the traits that you believe others expect you should possess. It is your sense of your duty and responsibilities. This is often associated to your childhood when you experienced negative outcomes (criticism, withdrawal of love and affection and other ways of reprimanding). The expected self is also involved in your quest of trying to avoid negative outcomes.
So, if your parents want for you to be in a stable employment or make a career as a doctor, then you might subconsciously feel inner conflict with achieving your own goals of being a full time professional trader. Then parts of you do whatever they can to achieve their goals whilst the other part might sabotage those efforts to be loyal and obedient to your family as in this case being a successful trader is perceived by you as a negative outcome in the eyes of your family.
And if your family puts their hopes on you becoming a successful trader and you with every losng trade you believe that you have failed to live up to their hopes or wishes you are likely to believe that you have disappointed them. You could then be vulnerable to feeling shame, unworthiness embarrassment, or feeling downcast, because these emotions are associated with traders believing that they have lost esteem in the eyes of others and therefore don’t deserve their affection.
Self-esteem refers to the extent to which you like, accept, or approve of yourself; and how much you value yourself. Unlike guilt and shame, self-esteem is not a feeling it is a cognitive evaluation; it is how you think about yourself.
The quality of the trader’s self-esteem is influenced by the size of the gap between the actual self-image and the perfect ideal self.
Imagine a scale from 0 to 10 with 0 being the worst trader ever with all the self-defeating traits you can imagine and 10 being the perfect trader whose trading behaviour is flawless and consistent.
0 1 2 3 4 5 6 7 8 9 10
Feared Self <- Actual Self -> Perfect Self
If the trader believes that the gap between his actual trader self and the perfect trader self is small he displays high self-esteem. A trader with a high self-esteem feels 'good' about themselves and confident in their abilities even after a string of losses or making a mistake and never feel defensive should somone question or critise trading because they have a strong sense of self.
The danger here is that there is a fine line between healthy self-confidence and overestimating your skill as a result of having had a string of profitable trades.
Traders suffer from low self-esteem and feel 'bad' about themselves, if they feel that their actual self is closer to their feared trader self than their perfect trader self. It affects their self-confidence and they doubt their abilities which once again contributes to self-defeating trading behaviour like a self-fulfilling prophecy.
They are vulnerable to emotional and psychological turmoil such as guilt, shame and self-criticism and contempt (the famous rollercoaster) because traders with low trading self-esteem often attribute a trading loss to a lack of sufficient effort on their part. They are self-loathing and criticial, feeling annoyed with themselves for making a mistake accompanied by despondent and dejected related emotions such as disappointment in unfulfilled desires and dissatisfaction because they feel so far away from achivieng their hopes and dreams.
This is a vicious circle: Those emotions are highly uncomfortable. Emotions are energy in motion and the trader is then motivated to relieve the inner turmoil and release the energy by ‘jumping’ straight back into a trade. This urge to escape uncomfortable feelings usually results in more self-defeating trading behaviour as the trader then trades their emotions rather than their strategy.
The actual self is surrounded by the inner critic. The inner critic constantly compares the actual self with the perfect self.
You have a positive view of yourself because you believe that your actual trader self is closer to the perfect trader self. This tends to lead to
· Confidence in your trading abilities (taking losses swiftly, knowing that the next trading opportunity is already setting up somewhere else, that you can make up for losses quickly and easily, having the mental strength to let profits run until the technical exit has been triggered)
· Self-acceptance (= not being judgemental of yourself and beating yourself up and therefore taking losses without any judgment and self-loathing but easily and effortlessly)
- Acceptance of circumstances - you simply take whatever happens in your trading day as valueable feedback on how to improve your trading performance for your next trading session. For example, you would evaluate that you were unusually tired which caused you to be irritable, rightous and taking too high a risk by putting on too many positions in the attempt to make up for the loss. As a consquence you simply decide to take a trading day off to relax, recharge and get back into emotional balance, a place were you know you can make valid rational choices.
· Not worrying excessively about what others think (Just taking losses without any special thoughts because that is just what you do as a trader. Not thinking: I can’t take that loss now, what will my trading manager, wife, mentor think of me?)
· Optimism (never mind, there are lots of opportunities, I make it all back)
You have a negative view of yourself as a trader meaning that you believe your actual trader self is closer to the feared trader self. This tends to lead to
· Lack of confidence (Oh man, I really need to get out of this losing trade, but what if it turns around and goes back into my direction? Oh look a reversal pattern on the 5 min chart, maybe it will turn around now? Damned, stupid thing, failed the reversal pattern. Oh man, I already lost half of my account, will I ever make it? I know that I know how to trade, but I just can’t stop letting my losses run until the account is almost gone, I really should get out of this losing trade. If it gets to this price here, then I will definitely get out and take my loss – of course that is not happening)
· Wanting to be like your role model who has 20 years more experience than you (Putting on big positions like your trading mentor and then making sabotaging trading decisions out of fear. But they are like a Formula 1 race car driver, they are so skilful that high risk is not dangerous to their account)
· Always worrying what others might think (What am I going to tell my wife why I again didn’t manage to make a profit this month? What if my friends ask about how my trading is going and when I am going to buy my Maserati that I was boasting about?)
· Pessimism and hopelessness (I will never make it, I just can’t pull that trigger, feeling of helplessness (I am just such a loser, I am hopeless). If I take a loss now half of my account is gone, I don’t want to take a loss.)
A trader with low self-esteem usually lacks a sense of self and are like a ball in a ping pong machine highly affected by external influences. They organise their thinking and behaviour around how they feel or rather don’t want to feel instead of following their trading strategy. They commonly experience high degrees of shame and guilt, display self- loathing and judgemental tendencies and experience emotions such as annoyance, anger, frustration, depression and hopelessness when they didn’t perform in accordance with their perfect trader self but played out behaviours and traits of the feared trader self.
They get stuck into thinking thoughts such as I will never make it, I am such a loser, I shouldn’t even feel this way, I shouldn’t be upset about losing money, I should be more disciplined, I should be unemotional often experiencing a lot of fear and anxiety which emanates from shame and worry about what other people think, get defensive if anyone questions their trading endeavour and they feel guilty for even thinking and feeling like this.
The 10 Step Plan To Improve Your Trader Self-Esteem
The way to improve your self-esteem is to reduce the gap between your actual trader self and the perfect trader self in a slow progressive manner.
1. Explore which traits you believe you have that fall into the category of ‘feared trader self’. So, do you display inconsistent behaviours such as being impatient, impulsive, ill disciplined?
2. Then in a second step, define exactly how you display this behaviour. For example, impulsive = seeing runaway market, feeling fear of missing out, jumping into trade without proper analysis nor applying my trading strategy.
3. Now define which traits you believe you have to adopt in order to be the trader you want to be and once again define exactly how those traits would play out in your trading behaviour.
4. Reality Check! Is your definition of ‘perfect’ realistic? The problem I see is that there is a lot of incorrect information in the trading world that is designed to keep traders in the belief that they are not good enough. For example, the notion of being consistently profitable is utterly useless and unrealistic. Most traders confuse being consistently profitable with having no losses. I know traders who only have a profit ratio of 55% and yet they make more profits than anyone else. However, their behaviour is rather consistent, which doesn’t mean that they never make mistakes. They just address and correct their mistakes much quicker than everyone else.
5. Think about, what would be the most useful definition and most realistic traits of a perfect trader according to your circumstances? An example for a more useful definition of perfect trader self is to understand that it is perfectly normal to feel discomfort when having a loss, or missing out on profits. A perfect trader recognises that and doesn’t give into the urge of relieving those feelings by giving into the urge of wanting to make up for a loss straight away, that there are 220 trading days in the year and there is plenty of time and opportunity to create amazing profits.
6. Create an improvement plan. Be honest about where you are at right now in terms of your trader self-image and then make a plan of how to improve in small increments. Knowing that you are in the process of becoming a successful professional trader by improving every day a little, makes this whole trading experience manageable, and believable to your little subconscious. It avoids the feelings of overwhelm and gives you confidence that you actually can eventually achieve your goals.
7. Define what kind of traits you want to display at what stage of the above mentioned 0 to 10 scale. So, if you are a trader who currently has a 80/20 profit loss ratio and destroys his profits with 10 blowout trades per month, then you will progress to the next stage of the perfect trader by reducing the % loss and also the number of blowout trades. If you finish the month with only 8 blowout trades and reduce your loss % from let’s say 50% to 45% of your trading account then you have progressed and should be proud of yourself even though the end result is still far from your end goal of being a fulltime professional trader.
8. Reduce one mistake at the time and you are well on your way to success.
9. There are times when you continue to believe things about yourself even when there is evidence that you actually have improved. This is known as the perseverance effect. That means if you believe negative things about yourself, you are likely to maintain those beliefs regardless of what the statistics would actually tell you if you were to keep a performance log.
10. Connect your account with a free analytical software tool such as Myfxbook which shows you an amazing array of your trading statistics. Those statistics show you exactly how you perform and which areas of your trading need improvement.
I hope this article is useful for you and will help you to progress further on your trading journey.
If you are looking for help with your trading psychology and how to improve your trading performance please feel free to contact me to discuss how coaching could help you to achieve your trading goals faster.
With a toast to your trading profits