Psychological Analysis
Psychological Analysis
Five Ideas From Chapter 7 of Psychological Analysis by Adam Sarhan
This was an ugly one, right? I was fortunate that I had no stock positions to worry about all week, but I did get smacked for being too cute and trying to make money on some non-equity ETF trades that also took a hit.
One positive thing about taking that hit is that it was a friendly wake-up call that I don’t need to waste my time messing around with wild ETFs when growth stocks aren’t cooperating. I actually don’t have to do anything at all.
When the market wasn’t cooperating with him, Livermore went fishing in Florida. When it doesn’t work for me, I enjoy reading and writing. And thanks to my day job and real estate investments, I don’t need the market to be ripping higher every month to make ends meet.
So with that in mind, I’m going to let my ill-advised ETF positions work themselves out and get back to focusing on keeping my trading process as simple as humanely possible.
I’m also going to dig in on the reading and writing, so let’s dive into what we learned from Chapter 7 of Psychological Analysis by Adam Sarhan.
Have an Attitude of Gratitude
It is much easier to win from a position of strength, not weakness. Since you control your beliefs, you, and you alone, control your mindset. Remember, we can’t control what happens to us in life (or in the market) but we can always control how we react to it.(92)
In Psychological Analysis, Adam Sarhan stresses that while you may not control what happens in the market, you have complete control over how you react to it. He emphasizes that the best way to implement this type of thinking is to remove all negativity and focus on gratitude, which feels right in line with how Ryan Holiday discusses the Stoics.
I read The Daily Stoic every morning and try my best to remove negativity and focus on the positive aspects of any situation. That’s always easier said than done, but it’s absolutely essential to survival in this stock market battle we’re fighting.
There’s No Easy Way Out (Yes, That’s a Rocky IV Reference)
It is important to note that human nature, unchecked, will almost always lead to financial failure, not success. The same is true for other areas of your life, not just your finances. Most people are programmed to take the easy route and not push themselves - mentally or physically. In reality, pushing yourself is exactly what is needed to get ahead and succeed in just about any endeavor. (95)
Sarhan points out bubble behavior in his section on human nature, but then he drills down to a discussion on how human nature programs us to take the easy path and avoid pushing ourselves, which inevitably leads to failure in any area of life.
In my trading, I tend to find that the easy way out often involves making my process more complicated than it has to be. Keeping things simple is hard for me, especially when things aren’t working quite as well as I might like. Fighting against that is turning out to be a full-time job.
Fear
Fear is such a powerful feeling that in today’s world, most people get so worked up being fearful that being in a fearful (or worrisome) state becomes a habit and a “comfort” zone, even when 9 out of 10 times the thing they are worrying about or scared about never happens.(97)
In his section on fear, Sarhan argues that most people spend a large portion of their lives fearing things that never happen. We learn to accommodate this fear and get used to the feeling, even if it never produces the outcomes we dread.
I don’t fear losing trades. I’m cool with that. The thing that I fear is never becoming a profitable trader after wasting years of my life trying. That’s downright frightening. It’s also exactly the kind of thing that could become a self-fulfilling prophesy if I let it.
Don’t Seek Validation
If you’re looking to the stock market to make you happy, stop right now, because the stock market does not care about you and in the end, it destroys traders who make emotional decisions. Your ego, sense of self-worth, and any other feeling should be derived from within, or other sources, but definitely not the stock market. (99)
The flip side of fear is happiness and joy, and Sarhan warns that the stock market will ultimately destroy anyone who looks to it for their happiness. He stresses that you must find other outlets for ego and self-worth so that you can detach your emotions from trading decisions.
I don’t have a problem here from a trading perspective, but I struggle with this in almost every other aspect of my life. I’m constantly looking to outside forces to validate my sense of self-worth, and that has never once been a productive way of thinking.
Making Changes
We have to start by wanting to change. Then we learn to resist our natural urge to pursue short-term pleasures and avoid immediate pain. Instead, we have to learn to recognize our emotions as we’re experiencing them, in some cases anticipate them, and we have to be intellectually honest about how our emotions impact our decisions.(102)
Sarhan closes his chapter introducing the concept of psychological analysis by explaining that we won’t be able to change the markets or human nature, so we will have to change ourselves. And if we honestly want to change ourselves, that process starts with recognizing our emotions and removing them from our trading.
The first 3 to 4 times that I read through this, I didn’t think he was talking about me. But as I finish up writing this email, it’s starting to feel like Adam has once again hit on exactly what I needed to hear. I need to be more honest with myself about how much emotion I have invested in becoming a better trader.
With that in mind, it’s time for me to get into some charts to see what is holding up best in this mess of a market.
Have a fantastic and profitable week!