Process Vs. Outcomes, Part II

Andrew Menaker, PhD

This is an important follow-up to the blog, Process Vs. Outcomes posted on July 23, 2020.

One of the primary ideas in the first blog about Process vs. Outcomes is how difficult it is to focus more on process and let go of outcomes. In trading, we learn that focusing on our process or following a proven strategy is critical, but after some experience with trading, most people become more attached to the outcomes, much more than focusing on the process. This is very understandable for a number of reasons.

We want to make money, and a positive outcome (making money) suggests that we are on the right path. And although we know losses are unavoidable, nevertheless, we fixate on the outcomes, be it positive or negative.

As a reminder, just because a trade made money does not mean it was a ‘good trade’. When we make money but take too much risk, whether it’s an impulse trade, too much size, or something else, it’s human nature to still consider it a ‘good trade’, simply because we made money. Likewise, when we lose money, its easy to automatically think of it as a ‘bad trade, regardless of the quality of the process that led to that ‘negative’ outcome.

The ability to tolerate losing money in a well thought out trade, including proper risk management and sizing, is a key milestone in the development of a trader. It’s easier said than done. No one likes losing money. I can’t say it enough; it’s such a critical aspect of trader development. Paying more attention to outcome quality versus the process quality is how the boom and bust cycle begins that so many traders get locked into.

Making money feels good, and losing money feels bad. It’s human nature to want to avoid discomfort, and in trading we must learn to overcome some natural human tendencies, primarily the need to avoid a variety of different forms of discomfort – waiting, losing, missing out, leaving money on the table, etc.

In addition to these common human tendencies, there are also deeper – to varying degrees subconscious - needs such as the need to feel valued, to feel good enough, or the need to ward off feelings of not being good enough, and others. These thoughts and feelings often have a conscious aspect, but their underlying associated subconscious dynamics are the most difficult to overcome. These subconscious dynamics often stem from previous life experiences outside of trading.

Whether we realize it or not, we bring our entire self with us into trading. It’s easy to imagine that it’s possible to compartmentalize, but in reality, we are trading our own Inner Market, as much as the one we see on the screen. The proof? Why do traders have such strong reactions to losing trades when they knew before hand it’s a normal part of trading, including successful trading? We are trading our own Inner Market – how we feel about ourselves – as much as the one on the screen in front of us.

Equating outcome quality with our decision-making quality (the process) is a dangerous trap in trading. It sets the stage for the boom & bust cycle to begin and then perpetuate.

When we don’t learn to tolerate the natural discomfort that comes with being a trader, understand our own Inner Market, or become aware of the individual personal subconscious dynamics we bring along with us in each trade, we’ve increased the likelihood we’ll be a boom & bust trader.

When a trader is caught in a boom & bust cycle they often have a disproportionate concern and focus on outcomes; and this causes them to be ego-based traders, making it virtually impossible to ever ‘let go’ of outcomes and to begin to learn to tolerate the normal discomforts we all experience in trading. Avoiding discomfort in trading is also closely related to a strong need to be right.

Not only is being right what often drives boom & bust traders; they’re also driven by the fear of not being (good) enough. In some ways you can think of this as two sides of the same coin; the need to be right and fear of not being (good) enough.

Stay tuned; there will be much more to say about this important topic.

Andrew Menaker PhD is a trading psychologist; you can read more about him at  Twitter @Andrew_Menaker