Each of our individual personalities lead to various ways of viewing the world, so it should come as no surprise that different personalities will accompany different viewpoints of the market.
How do you view the market? Esteemed trading psychologist Brett Steenbarger theorized that there were six common ways in which stockmarket enthusiasts view the market, as a form of “cognitive lense”.
Steenbarger’s six market views are listed below. Ask yourself whether you identify with any of them – and whether you are familiar with the positive and negative aspects of each view, as well as the likely outcomes of each approach.
1. A trader views the market as an enemy to be conquered
This viewpoint seems to depict the market player as a conquering hero that feels that they have the power to overcome the market, if they so choose.
On the other hand, it can be interpreted as the type of trader or investor who feels that the market, as an enemy, is a threat – a threat that is too powerful to be conquered.
Though it is good to be confident, the former school of thought could lead a trader to overconfidence; the latter to underconfidence.
And while it is important to recognise at times that the market is something of a creature that is out of our control, it is also important to recognise that the market is never your enemy.
Those who blame the market for mistakes are likely to succumb to negative emotions, and overlook the fact that their own mistakes are driving a bad trade.
You cannot “conquer” the entire market, but you can conquer your own trading fears and set up efficient and successful trades through discipline, training, and using you desire to trade in a positive manner.
2. A trader approaches the market as a puzzle to be solved
We all feel at times that the market is a puzzle to be solved. This occurs when the market moves in ways we don’t expect it to move.
The recent bear market is a good example of this. Despite warning signs, no one really saw the global economic downturn coming – and it his us hard.
Though it is smart to acknowledge that the market in general can be puzzling at times, this “bigger picture” shouldn’t distract you from each of your smaller pictures – your individual trades.
Spending too much time analysing why the market is moving the way it is can lead to a kind of analysis paralysis – you fail to closely follow your trades whilst you puzzle over the overall picture.
On the other hand, it is a strength to engage in curiosity over the market, as this can lead to greater learning about the market. Just don’t run away with the idea.
3. A trader sees the market as a paradise of potential riches
What a starry-eyed viewpoint this one is! However, it would hard to find a trader who hasn’t felt this to some extent.
This sentiment is especially common amongst traders who are beginners. The lure of money, after all, is a big part of the reason why you get into the stock market to begin with.
Desire for money alone however does not a good trader make. Despite what many stock market films will tell you, greed isn’t good – greed can blind you, and ramp up your overconfidence.
It is important to view the market with a positive mind-set, but your focus should be on the strategy used to make money, not the ideal of money.
4. A trader regards the market as a mistress to be wooed
This view involves the mind-set where a market player may think, “Persistence alone will pay off in the end.”
In romantic comedies, our wannabe-Romeos will go to creative and outlandish ends to win their women. In real life, this sort of behaviour lands you in jail, or at least with a restraining order.
Okay, the market is a different field altogether – but restraint IS important. Constant persistence is not only draining, but it can give you tunnel-vision. Wooing is a costly action because it is time-consuming.
Because the concept of wooing is also interwoven with the idea that good luck will settle your end game, this can also be a dangerous mind-set to take on. The stock market is not the same as gambling, and you’re not relying solely on luck. You need to employ thinking and be prepared to learn a great deal if you want your trades to succeed.
5. A trader views the market as a dangerous minefield
This is smart thinking in a lot of ways, because this mind-set acknowledges that there will be mines ready to explode in the stockmarket. Trades don’t always fall our way, the market doesn’t always react as we expect, and there will be disappointments.
However, it doesn’t pay to be a pessimist, in the long-run. Fear of a trade exploding in your hands can lead to fear of executing trades.
Our trading psychology lessons have covered a lot of information already on fear, and how it can cripple your trading life.
While it is important to take a disciplined approach to the market, it’s also important to acknowledge that there will be positive trades that bring positive returns. After all, isn’t that why you’re in the market in the first place?
6. A trader looks at the market as a video game
This is a very interesting and current way of viewing the market. After all, fifty years ago there were no video games on which traders could base this mind-set. (Looking at the market as a New York Times crossword puzzle, anyone?).
Video games nowadays are extremely popular, and are increasingly becoming a large part of people’s pastimes. However, video games are pastimes in that they don’t have to be taken seriously.
The stock market engages your money, so it must be taken seriously. And while it’s fine to enjoy the process of trading (as we enjoy the process of playing video games), you have to remember that in real-life there are real results when it comes to the market. You can’t simply press the escape key and restart the trading game.
Of course, we’re not suggesting that the stock market become your sole life focus, but it is important to take it seriously.
Conclusion
Take a look at the above metaphors, and analyse whether you identify with any of them.
If you do, is this mind-set affecting your trading? Are you engaging any emotional responses to trading that trigger these mind-sets?
If you identify very closely with any of the above mind-sets, it could be time to change how you trade – and think.
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