How to Develop a "Trading Brain"

"The greatest enemy of the trader is fear. He who is afraid loses."
—Norman Welz

That's the underlying thesis of "Tradingpsychologie," a 2012 German book on trading psychology. Many readers and reviewers commented that it was the best book on the subject that they had ever read or that it was the first that was of any real use.

The book's author, Norman Welz, is a psychologist and journalist who developed a keen interest in the stock market and the associated psychology. His specialty is trading psychology, a subject in which he has not only extensive experience but also some unique insights. Among other things, he trains traders to develop their brains in the right direction.

Welz stresses that what differentiates both his work and his book from the vast literature in the field is the emphasis on applied trading psychology. It is common knowledge that traders need discipline, but accepting this idea is simply not enough to enable investors to operate in an appropriate manner.

Key Takeaways

  • To be a successful trader the right mindset is essential, says Norman Welz, author of the 2012 German book on trading psychology, "Tradingpsychologie."
  • To tackle trading psychology Welz works on the brains of traders through the subconscious and hypnosis.
  • Effective trading involves personality modification, says Welz, where those that concentrate only on charts and trends will ultimately flounder on the myriad emotions that come into play.

How to Develop a Trading Brain

It Is Truly All in the Mind

The essence of the problem is that most people like and need security in all its forms, but "trading is the most insecure business you can be in," says Welz. He argues that no other profession creates so many and such intense emotions and reflects so much of our personalities. Welz goes as far as to state that stock market activities personify money: "We don't just trade assets and money, we become the money."

To trade effectively, the right mindset is essential. Yet nothing is harder than divorcing ourselves from the various factors that have created our mindsets in the first place and that dictate how our brains function. We are influenced by parents, family, friends, the environment, society, the media, books, and more. By the time we start trading, all of these influences tend to fix trading patterns that are often dysfunctional or suboptimal. Trying to change these patterns is somewhere between difficult and frightening.

Why Do Traders Neglect the Power of Psychology?

In order to understand Welz's approach, it is necessary to understand the pervasive role of psychology and the brain. While the notion that psychology is vital to the stock market is nothing new, Welz believes that trading is literally 100% psychology. Without a psyche, we could never evaluate financial risk or recognize trends. "No brain, no stock market trading," says Welz.

Mental strength is thus absolutely fundamental to trading success. Furthermore, about 95% of our actions are subconscious, and we tend to replicate our behaviors over and over again. All too often, this replication means repeating the wrong or even disastrous courses of action.

To support this contention, Welz refers to a study in which 120 traders were given a system that had proved its intrinsic value statistically in 19 of the previous 20 years. After a test year, it was evident that 119 of these traders failed with the system because their mental tendencies led them astray. All but one trader had the wrong mental processes.

"Success comes from the head," says Welz. The system was good, but the attitudes and psychology with which the traders applied that system were not.

Most traders are men, who tend to think that psychology is not what really matters. They think that what matters, rather, are simplistic notions of being coldly rational, well-informed, and experienced. According to Welz, however, rationality, information, and experience don't help if the brain is not appropriately programmed and tuned. So what can we do to get our minds and subconscious to act appropriately?

Welz's Approach

Welz works on the brains of traders through the subconscious and hypnosis. Trainees are put into a trusting mood and the necessary competencies are anchored in subconscious regions of the brain. If this process sounds a bit weird, consider this: For many years, Welz has helped people overcome their fears and blockages, enabling them to win sporting championships and even to secure an Olympic victory. Furthermore, he has helped traders to earn money by activating the right mental energy, motivation, and, thus, behavior. He stresses that each person has unique mental bridges and barriers that need to be crossed or overcome in order to ensure success.

"Trading discipline" comes from modifying one's behavior in the desired direction and overcoming the mental resistance and fear that generally get in the way. Particularly in the context of trading, Welz believes that "there are armies of resistance." The trading brain in fact entails the integration of the right investment and market knowledge with the right mental capabilities. It is not that the usual skills are unimportant, it is just that they usually get overridden by the wrong mental and behavioral patterns.

Effective trading thus involves personality modification. According to Welz, "people who are not willing to attempt this should not even bother with trading." Those who concentrate only on the so-called logical aspects of charts and trends, including all those patterns like "flags, triangles, and channels or stops and trading ranges," will ultimately flounder on the myriad emotions that inevitably come into play and even dominate the markets.

The above, explains Welz, is "the ultra-short version" of his theory, but indeed the essence of the matter. Furthermore, he believes that anyone can become a trader and overcome his or her fears. Provided that people are not clinically ill, they can resolve those fundamental anxieties if they are truly willing to work on themselves. In addition, they need a good sense of and grip on reality if success is to result. Of course, financial knowledge and skills, information, and research all still play key roles.

However, it is hard work getting there. Welz believes that people shouldn't think they can "start with a mini-account and live from their earnings as a professional trader within six months." It takes time and dedication. Welz believes that if this weren't the case, the roads would be full of Ferraris and Porsches.

Frequently Asked Questions

How do you develop a trading brain?

To get in the right mindset to be a great trader, you need to recognize the role of emotion and psychology and actively take steps to mitigate those effects. Have a disciplined routine and objective trading strategy. Document your trades and how they pan out, with pre-determined entry and exit points that can be revised using sound criteria.

Who is Norman Welz?

Norman Welz is the author of the German book on market psychology, Tradingpsychologie: So denken und handeln die Profis ("Trading Psychology: This is how professionals think and act").

What does market psychology teach us?

Because market actors are human beings, markets as an aggregate of human choice can display herding behavior and other irrational tendencies such as panic selling and irrational exuberance that leads to asset price bubbles. By acknowledging the existence of market psychology, we can understand that markets are not always efficient or rational.

How can one use market psychology to their advantage?

By doing one's own research, people can identify when market psychology like fear or greed results in oversold or overbought conditions, respectively, and make contrarian trades—buying when others are overselling and selling when others are overbuying. It can also help jump on trends early but not chase trends after they've already gone past their fundamentals.

The Bottom Line

The fundamental role of trader psychology tends to be underestimated and too much emphasis is placed on the technical side. While both are essential, it is arguably the right mindset that differentiates successful from unsuccessful traders.

However, learning the technical aspects of trading is more straightforward than acquiring a top-notch trading brain. The latter generally entails working intensely on one's own personality traits and eradicating entrenched behavioral patterns. This process is not easy and requires dedication, time, and, often, the aid of a skilled coach. Nevertheless, the results are very likely to reap dividends.

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