The Psychology of a Market Wizard: Ed Seykota on Emotional Discipline.

The Trader's Mind: The Final Frontier

Ed Seykota famously said, "Everybody gets what they want out of the market." This statement goes to the heart of his psychological approach to trading. He believed that the market is a mirror that reflects our own beliefs, desires, and fears. If a trader secretly desires excitement, they will find it in the form of volatile trades and wild swings in their account balance. If they desire to be right, they will hold onto losing trades, unable to admit they made a mistake. Seykota's genius was in recognizing that to succeed in the market, one must first understand oneself.

The Trading Tribe: A Forum for Self-Discovery

To address the psychological challenges of trading, Seykota created the "Trading Tribe." This was a group of traders who met regularly to discuss their trading and the emotions that came with it. The goal of the Trading Tribe was not to share trading tips but to help each other become more aware of their emotional patterns. By sharing their experiences in a supportive environment, traders could begin to see how their emotions were influencing their decisions. This process of self-discovery was, in Seykota's view, essential for achieving long-term success.

The Importance of Emotional Detachment

One of the key goals of the Trading Tribe was to help traders achieve a state of emotional detachment from their trades. This does not mean being a robot, but rather being able to observe one's emotions without being controlled by them. When a trader can view their trades with a sense of detachment, they are less likely to make impulsive decisions based on fear or greed. They can stick to their trading plan, even when it is difficult to do so. This is the essence of emotional discipline: the ability to act in your own best interest, regardless of how you feel in the moment.

A Practical Exercise: The "Feelization" Technique

Seykota developed a technique called "feelization" to help traders process their emotions. The idea is to fully experience an emotion, rather than trying to suppress it. For example, if a trader is feeling fearful after a series of losses, they would be encouraged to fully adopt that feeling. They might say to themselves, "I am feeling fear right now. I feel it in my stomach. My heart is racing." By fully experiencing the emotion, the trader can begin to understand its message. Perhaps the fear is a signal that they are trading too large, or that they are not following their system. By listening to the message of the emotion, the trader can take constructive action to address the underlying issue.