Shrink Rap: Investor, Know Thyself

Editor's note: With this column, we introduce Steven Hendlin, Ph.D., a clinical psychologist in Irvine, Calif. He has been in private practice for the last 25 years, investing for the last 20 years, and actively trading online as a swing trader and long-term investor since 1996. He is also the author of The Disciplined Online Investor (McGraw-Hill, 2000). Dr. Hendlin's column, titled "Shrink Rap," will answer readers' questions about the psychological issues surrounding trading, investing and money in a public forum format. "Shrink Rap" will appear every Wednesday. Be sure to send your queries to Dr. Hendlin, and, as always, let us know what you think.

While most players in the investing world pay generous lip service to the importance of what they call the "psychology" of trading, what they usually mean by this term is simply getting an edge by any means possible. What they usually mean is assessing the other guy's thinking, not their own. They want to "psych out" other traders, predict their actions and profit accordingly.

As a clinical psychologist with 25 years of experience, my perspective is that the real psychology of trading isn't primarily about trying to psych out the market as a whole, or the other guy. It centers instead on understanding how your personality, moment-to-moment thinking, mental images, perception of events and flow of emotions affect your trading decisions.

Most training programs and literature in the field emphasize market fundamentals, technicals, trading strategies, technology, using the news, economic theory, market patterns, etc., but vastly underrate the importance of the trader's mind itself. ...