Imagine an ant moving diligently forward. It doesn’t stray to either side. It just keeps going straight ahead, never looking back to see how far it has come, working harder than anyone else to make progress. But in reality, the ant is walking in circles on the surface of a giant sphere.
From the ant’s perspective, it is extremely difficult to tell whether it is walking on a sphere or on flat ground. Its field of vision is simply too narrow. If only it could step back and observe itself from a distance. But that is impossible for an ant.
The surface the ant is on represents the system it currently operates within. When the system changes, from flat ground to a sphere, the ant may think it is doing exactly the same thing, but in reality, its behavior can lead to entirely different outcomes. The problem is that our cognitive limitations make it difficult to recognize the system we are operating in.
Have you ever recorded yourself when you were furious or extremely anxious, then watched the footage later when you were feeling completely calm? You might find your earlier self almost unrecognizable. It was clearly still you, yet something was fundamentally different: the system you were operating in had changed.
In fact, this is an even more serious problem than the ant walking on a sphere. Whether on a sphere or on flat ground, the ant can at least maintain the same basic perception that it is moving forward. But when your inner equilibrium is disrupted, the very way your brain processes information and makes judgments can change.
The ability to recognize these changes in your operating system, step back to assess your own cognitive state, and adjust your thinking and behavior accordingly is called metacognition. For an ant, metacognition would mean being able to observe itself from a distance. For humans, it means being able to take that step back and observe our own state without necessarily having to record ourselves on video.
And this is precisely where trading psychology, the mental discipline of trading, begins.
When your emotional state changes, the system you trade with changes. By now, you can probably see where this is going: it can destroy our trading model. Think that sounds unlikely?
I occasionally see posts like these in trading communities:
“I’m practicing with a small account and have been making XX% a month. Now I’m going to move to a bigger account and start printing money. Practicing with a small account has been great because there’s so little pressure. I’m improving so quickly!”
But will the same thing happen with a larger account?
It’s like an ant saying, “I can run ten meters easily on flat ground! Now I’m going to try running on a soccer ball!”
The most extreme version of this is paper trading. With paper trading, anyone who has a reasonable understanding of the market can often do quite well. But once real money is on the line, it becomes a completely different game.
Why do the results turn out so differently?
Because your mind, your entire system of thinking, changes.
And the biggest problem is that you often fail even to recognize that the system has changed. On top of that, we are remarkably reluctant to admit that our emotions have distorted our judgment. Consider a simple example:
“Hey! Do I look drunk to you? I’m telling you, I’m not drunk!”
We don’t just fail to recognize our state. Sometimes, acknowledging it feels like an affront to our pride. That tells you everything you need to know.
We work hard to adapt to changing markets and maintain consistency in our trading. Yet if an unrecognized variable emerges not from the market but from within ourselves, that should be the first thing we manage.
We cannot eliminate emotions. Emotions are largely automatic responses to stimuli, and not every emotion clouds our judgment. The problem arises when emotions change our decisions without our recognition.
Ultimately, what we need to eliminate is not emotion itself, but the influence of emotions on our trading when that influence goes unrecognized.
The first essential condition for doing this is, of course, recognition. And metacognition is what makes that recognition possible.
The problem is that metacognition is difficult to develop without deliberate effort. If you’re too busy trading to spend your time meditating on your own mind, you’ll need to find other ways to approach the problem.
Imagine our ant. It could never directly observe itself walking on a sphere from a distance, no matter how hard it tried. But suppose it diligently left pheromone trails along its path. After going around a few times, it might eventually notice, “Wait a minute. Haven’t I been here before?”
It would gain an indirect recognition of its situation.
What serves this purpose in trading?
A trading journal.
I’ll discuss trading journals many more times in the future, but today I want to focus on their role in mental discipline.
To traders who, like the diligent ant above, never keep a journal or review their own decisions and behavior, I can say this with confidence: you are diligently building a tower that is destined to collapse.
“But I’m making money just fine!”
Perhaps. But you may remember this post a few years from now.
Your journal must include honest notes about your emotional state and the circumstances surrounding your trades. This is particularly essential if you trade several times a day. Repeated trading tends to pull you progressively further away from a state of equilibrium.
The method can be as simple as rating your emotional state on a scale of 1 to 10. A 1 might mean complete calm; a 10 might mean the state you’re in immediately after a fight with your spouse.
This simple number is more useful than you might think. It gives you a record of your state of mind, much like the pheromone trail left by our ant.
Furthermore, the act of recording your state can itself help develop metacognition. When you’re completely absorbed in an emotion, objectively describing and documenting that emotion is not something you’re naturally inclined to do. The very act of writing it down becomes an exercise in stepping back and observing yourself.
So, once you’ve learned to observe yourself objectively and recognize your state, what comes next?
First, you need a standard to work toward.
What kind of mental state is suitable for trading?
In fact, we already know the answer. Put simply, it is the state you are in during paper trading: you think probabilistically without allowing greed, excitement, or impatience to dictate your decisions.
That is the mental state we should strive for.
We must continually work toward it by whatever means necessary. But in actual trading, we are bound to get excited, whether we win or lose.
As discussed above, metacognition allows us to recognize this change as quickly as possible. The next step is to use metacognitive regulation to correct the resulting distortions in our thinking.
Does that mean suppressing our emotions?
If we could do that at will, it would be ideal. But we’re neither Jesus nor Buddha nor Confucius.
One practical approach is to step away from trading until our emotions settle and our judgment stabilizes.
The problem is that very few people actually succeed at this.
How many times have you told yourself, “I’m shutting down the charts for today,” only to sneak back and open them again? How many nights have you declared, “I’m done trading for the day,” only to jump back in, consumed by anger?
That’s why we’re not Jesus, Buddha, or Confucius.
Does that mean we should give up?
Not at all. It simply means that getting to this point takes time.
Traders who eventually become consistently profitable often spend years going through this process. Eventually, they start saying things like, “Trading is so tedious. It’s so boring.”
Even when they’re making money.
A second, more practical method of regulation is to control your behavior instead of trying to control your emotions.
In other words, follow your rules.
If you follow the trading method you developed while in a calm and rational state, you reduce the opportunities for emotional distortions to creep in.
The first step is learning to follow those rules consistently. Habit formation can help to some extent. If your mind won’t cooperate, train your body to follow the rules anyway.
But then an even more sophisticated form of distortion tends to creep in.
You begin to reinterpret the trading method itself through the lens of your emotions.
You start bending the rules to fit what you want to do, much like the protagonist in the movie Memento, who manipulates his own understanding of reality.
In my experience, this distortion is more insidious over the long run than the first kind. Why? Because you genuinely believe you’re following your rules.
To guard against this, you need to move up another level and look at yourself from an even higher viewpoint.
You need to recognize the emotional states in which you tend to twist your trading method to justify what you want to do.
This, too, is an expression of metacognition.
And once again, your journal becomes an essential tool.
Write in your journal, record your state of mind, and then review your trades and trading rules later, once you’ve regained your composure. You may be surprised by how absurdly you’ve bent the rules to justify your decisions.
This is why journaling must happen immediately before and after a trade.
Only evidence recorded while you are still inside that distorted mental state can be truly meaningful when you review it later.
To conclude, mental discipline in trading means using metacognition to recognize whether your emotional state, your current operating system, is suitable for trading, then adjusting your mindset and behavior accordingly to minimize the variables you introduce into your own trading.
Perfect mental discipline is impossible. But minimizing the impact of your emotions and systematically identifying when and how your own judgment is being compromised are essential.
And once again, journaling is indispensable to that process. Without it, you are just circling the sphere. No matter how big that sphere is.
When our mental discipline breaks down, we fall straight into the traps of impulsive, emotionally driven trading and FOMO-driven chasing.
I’ll discuss these two traps in the next post.
This article is educational content about trading and does not constitute investment advice or a recommendation to trade any specific instrument or strategy.