Dear Shrink Rap,

In one of your columns earlier this year , you talked about the importance of healthy ego strength for traders. You made an interesting distinction between healthy ego and what you called "false pride."

I've been trying to work with this distinction for months now, but it gets confusing. What I've been wondering is, how can I tell when I'm coming from healthy ego assertion vs. falling back on false pride? Thanks.

-- JNW

Shrink Rap: Yes, this is sometimes a tough one on which to be clear. It's easy to deceive ourselves that we are reacting from a strong ego when actually we're responding from false pride.

I think of "real" pride as the reasonable or justified sense of our own worth based on the attainment of our values. Most of the time, we "beam with pride" when we measure up to a task that requires some sustained effort and that has meaning for us. We accomplish something and bathe in that good feeling of successful completion. We also feel pride when complimented or recognized by others for a job well done or a particular personal characteristic that we are exhibiting.

Applied to trading, simple examples where we might feel pride would include a series of good trades, good judgment in refraining from making a trade or good discipline in closing out positions at designated limits.

Think of false pride as what we feel when we struggle to uphold a false image of ourselves, a grandiose image that we try to live up to. It is the image we might have of how we ideally wish others would see us, but that we know isn't really who we are. False pride is what we feel when we try to live up to this false image.

One way to know the difference between false pride and legitimate ego strength is by noticing the degree of defensiveness involved in our reaction to something or somebody. Usually, the more defensively we react, the more likely it is that we are responding from false pride. If we react quickly, intensely and without the ability to let in the feedback of the other, it's often from false pride. For example, rage attacks, impulsively striking back with cruel words to hurt the other and stomping away from someone offering a critique are all forms of reacting from false pride.

Let's look at false pride in the form of rigidity during trading. For example, the inability to quickly admit that you are wrong and exit a trade is one of the more damaging of its faces. Thinking that the market must conform to your technical or fundamental model rather than respecting the data in front of you is another form. Even believing that the market must do what history shows it has done in previous similar times is a form of rigidity.

This is clear when we look at how many traders were wrong in their judgments this year about the effect of lower interest rates on the market as well as the belief that we would never see three down years in a row. False pride always has trouble admitting it's wrong.

A strong ego is able to hear criticism without the immediate need to defend against the least perceived slight. It allows traders to learn from mistakes, not to become attached to rigid thinking and not to get too complacent in believing that their tools or methods are infallible. In other words, a strong ego allows for flexibility. And it allows for quick changes in direction of trades without bemoaning the fact that the market isn't moving as we think it "should."

The healthy ego is able to give others their due. It doesn't need to always strive to be No. 1 or stand out from the crowd. It enjoys attention, but does not need to actively seek it. It is not hungry for feeding by way of approval from others.

It knows how to argue a position and be firm, but it doesn't have to squelch or convince the other that he is wrong. It is assured of itself. It makes room for all the egos of others and realizes that everyone is the center, the sun, of his or her own individual universe. And it is confident enough to not mind being a satellite in the others' universes. Finally, it knows how to keep itself from getting sucked into the black holes of perpetual negativity and hopelessness. It can take a lickin' and come back tickin'.
Steven J. Hendlin, Ph.D. is a clinical psychologist in Irvine, Calif. He has been in private practice for the last 26 years, investing for the last 20 years, and actively trading online as a position trader and long-term investor since 1996. He is the author of The Disciplined Online Investor and maintains a site at www.hendlin.net. He is pleased to receive your comments and questions for publication in his public forum columns at steven.hendlin@thestreet.com, but please remember that he is unable to provide personal counseling or psychotherapy through the mail.

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