#KNAWLEDGE: 3 Books On Trading Psychology

If you don’t know who is the title making fun of, for your own sake please don’t ask.

One point that you can see on crypto social networks sometimes but not very often is the background of the people who are invested in cryptocurrencies. The markets consist mainly of young people, as for the new 2017 crop they are mostly young professionals before the high point of their day job earnings which itself is a positive long-term information for the cryptocurrency markets.

There are also people who were really early to the party though, say, people who bought in before 2015. The situation of these folks is such that trading a small percentage of their stash with some lending or masternode management on top of that can set them up quite alright by now.

The problem with this segment of the markets is not necessarily the skills, there is a lot of good technical analysis analysis for crypto on Twitter and Reddit and once you are set up on an exchange, nothing stays in the way of your lunch money practice.

The problem for people who hopped on the train so early is that the direction and speed of the cryptocurrency space is way out of line from what they could expect from life. If you are one of them and you haven’t lost your mind by now, that’s already an achievement. There is a lot of psychological pressure and doubts followed by doubts about doubts can wreck your judgement if you let them, and make you more likely to make mistakes in critical moments.

There is a lot of drawdowns in the markets: two months of consolidation, a week-long chop that you don’t want to trade, sometimes the summer doldrums too. During those times when for whatever reason you know you won’t be trading for at least a few days, a lot of people waste their time staring at the charts anyway. While it is a great opportunity to

a. set up your LLCs and such before you book those profits

b. work on your psychology

Books that are not really about trading but kind of really about trading

Jared Tendler — The Mental Game of Poker

Jared’s book is probably the one you should read if you are feeling stuck with your trading but it will have tremendous value even if you are doing just fine. He is a poker player coach so the book includes a questionnaire he gives to his clients. It applies to traders very well too and filling it in forces you to look at what you are actually doing, how that differs from what you would like to be doing and what do you think is holding you back.

I’ve created a trading-focused version of the questionnaire here on Github as a markdown file, fork the repo if you care. The idea is to come back to the questions at times and note the changes and progress, Github or some other system with versioning is ideal for keeping track of that.

Probably the most valuable lesson of the book is about the learning process model and unconscious competence: You learn a skill but until it is settled in your mind so well that you aren’t even aware it is something you weren’t born with, you will not remember to use it in the critical moment when you are under pressure. And what’s even worse, if you have bad psychological habits that you’ve been living with for so long they feel like your personality, these bad habits will crop up when you’re under pressure instead of your newly learned skills because they are your unconscious competence. That means, in order to build a professional consistent ability that won’t crack under pressure you need to not only learn and practice new things but also forget deep settled bad habits.

BTW: If it weren’t good people wouldn’t be stealing it.

Daniel Kahneman — Thinking Fast and Slow

If you haven’t heard about this book then I don’t know what you were doing. Here is the summary:

System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. Kahneman exposes the extraordinary capabilities — and also the faults and biases — of fast thinking, and reveals the pervasive influence of intuitive impressions on our thoughts and behavior. The impact of loss aversion and overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the challenges of properly framing risks at work and at home, the profound effect of cognitive biases on everything from playing the stock market to planning the next vacation — each of these can be understood only by knowing how the two systems work together to shape our judgments and decisions.

You will learn an awful lot about cognitive biases, quick judgements and all kind of rubbish you would probably want to avoid knowing about, but understanding how these problems come about might help you get rid of the bad habits that affect your critical decisions.

Michael Mauboussin — More Than You Know

More Than You Know’s core premise is simple to explain but devilishly difficult to live: you will be better investor, executive, parent, friend — person — if you approach problems from a multidisciplinary perspectives.

In a way the author’s description of the book makes it clear why the top of this list has a book for professional poker players. ‘More Than You Know’ explains a lot of interesting ideas about what probably influences your trading and definitely influences the trading of a substantial portion of the crowd, which is what matters a great deal on the markets. At the same time the ideas are not pseudoscience or pop-psychology. There is a lot of actual research and Daniel Kahneman’s ideas are mentioned throughout.

Take for instance emotions: You will often hear the best thing is to disregard emotions completely when you trade, but there is a research that shows that it is impossible. Once you become aware of something your subconscious mind will process it and produce an emotional affect based on the (fast thinking) impression. It is valuable to know how certain things affect you but in trading it can be even more valuable to know how they will typically affect the crowd.

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