This is one blog post that I hope you never have to read.

Why? Because it’s all about failure.

The word “failure” has tons of connotations. Shame. Guilt. Disappointment.  Anger.

These are things that we try to avoid at all costs.

If the world were perfect, you would never run into failure in your trading career. I hope that you will never be in a hole that you have to struggle to climb out of. I sincerely wish you a phenomenally successful career where you have a continuously smooth, upward-sloping equity curve and you become superbly wealthy.

As for me, I know all about failure because I have failed—spectacularly, actually. When I started my career, it was in one of the most coveted spots globally—a proprietary trader at a big global bank. Pretty damn good for a 22 year old. Heck, very few 32 year olds could ever land a job like that. Indeed, as a trader, I thought that I was hot s*%t and on the quick and direct path to limitless riches. Instead, I dropped the ball. Spectacularly. When it comes to failure, I know it all too well.

Unfortunately for most traders, including myself,  our career is not a straight-up path. In the pursuit of profits and excellence, we have experienced our fair share of setbacks and struggles. We have taken our lumps and wallowed in misery, wondering when we would ever get back on track. And we know that, while we will give it our best effort and always strive mightily to improve, we will probably meet with failure and setbacks at some time in the future.

In fact to trade well, we need to tolerate failure. We will have some trades that lose, even if we are running well. We will have some losing weeks or months, even if we have a good year. We will do some stupid things from time-to-time, even if we end up profitable in that timeframe.  In fact, given that we are taking calculated financial risks,  it is inevitable that we will experience losses and setbacks.  To paraphrase Van K Tharp,  taking risks without experiencing the occasional loss or setback is like breathing in without breathing out. This reinforces the need to prepare for losses and failure  in our trading.

Obviously, this humbling conclusion begs certain questions:

-When faced with failure, how do we bounce back?

-How do we come back from failure and learn from it, in order to be better than ever before?

-What lessons can we draw from the past?

Because I have failed badly as a trader and come back, I hope that have something to share with the rest of you. If you can draw some lesson that helps you avoid failure, or to come back faster and more powerfully, then this post will have fulfilled its mission.

Defining Failure

Obviously, before we can go any further, we need to define failure. In a markets context, the first answer would be that failure is “losses”. Yes, P&L is a critical barometer of success. I’m just saying that there is a lot more nuance to this answer than “Were you profitable or not?”.

Imagine that you were up 20% per year on average for five years and then you are up 1% in the most recent year. Profitable, yes, but you would be content with those results? Probably not. Perhaps you had a good year in terms of profits but should have made two or three times as much because the market conditions were perfect for your trading style. Lastly, you could be down 2% in a year, but if market conditions were terrible for your style and your last drawdown in similar conditions was 10%, then you could even consider yourself to have succeeded, despite having lost money.

We need a definition of failure that accounts not just for profits but for how you are making decisions overall, relative to your expectations. As I love to bang on about, trading is all about making good decisions. Profits don’t magically appear out of thin air—rather, they flow naturally as a result of making sound risk/reward and process-driven decisions.

What we are really talking about is your performance relative to your expectations, in all aspects. The most obvious level is profits. One excellent trader can expect to make $10 million in a year and berate himself for failure if he makes only $6 million; another could be hoping to make $200,000 and feel that he succeeded if he made a $210,000 profit. We can also benchmark our performance according to other metrics, like win/loss ratio; average winner vs. average loser; etc. By way of example, one trader could strive for a 60% win rate and fail by only getting to 58%; another would be a success shooting for 40% and getting to a 43% win rate.

Similarly, you need to have a broad conception of how your trading style should perform under various market conditions—and use that knowledge to determine position sizing and other risk parameters so that you never threaten your account size in adverse market conditions. Thus, failure comes when our results are out of whack with realistic expectations for our trading style in market conditions.

If you are a long-biased equity investor and don’t make tons of money in an up 50% bull market, then even if you are up 15%, you have failed. If you are a day trader and want to go from making an average $1000/week to $2000 /week over the course of the year, and you don’t, then you have failed. If you were expecting to make a few research-driven trades per month and ended up with 100 poorly researched short-term trades per month, then you have failed—regardless of your profitability.

How To Come Back From Failure

Working with this definition of failure, we already have some idea for how to come back. There are a few basic steps, which I will outline below. But the precursor is to have an honest appraisal of how you are doing at that exact moment—and to resolve to do better. If you are unhappy with your trading results, fine, you are unhappy—but you can start right then and there to get better. Wallowing in your unhappiness will do nothing to correct your mistakes, and is likely to worsen your sense of distress. There is absolutely no reason to beat yourself up!

Step #1: Figure Out Your Trading Style

Like I wrote earlier, the key is to have your own style for making decisions. The most important step is here to make sure that you have a defined trading style. This is your way of doing things—how you get in and out of positions, how much risk you take, etc.  Ideally, it’s written down with a set of rules or guidelines that you try to follow.  Without an understanding of your style, you run the risk of flailing around in the markets with no clear plan, donating money to the market. As the saying goes, “Failing to plan is planning to fail”.

If you don’t have a plan or if it’s not well-formed, then remember this: if trading profitability is a business, then this is your business plan. You need a plan for how you intend to take money out of the market.  So, take the time to get it all written down and really define what you are doing. If you are just starting out and don’t have extensive experience with trading, then it’s okay to borrow a trading plan from someone else who’s successful. It can be a book, a course, whatever- just make sure that it works.

While failure can result from not having a plan, it can also stem from not having a plan that’s suited to your personality. If you are a research economist by training, then you should stop trying to be a day trader. If you are star athlete who excels at making in-the-moment decisions, then long-term trend following is not for you. If you are an experienced execution trader for a bank and start trading your personal account by swing trading in highly liquid stocks, then that almost certainly does suit your personality. Thus, a key ingredient to success is that have a trading plan which fits your personality.

As Steve and Mike like to point out, someone who doesn’t cut it as a day trader may have a fabulous career ahead of them—it just will be doing a different style of trading that’s more suited to their personality.

Step #2: Set Realistic Expectations

Once you have defined a plan, then you need to set expectations around it. The most important of these are the profitability and the drawdowns that you envision. You should know if your plan will be “slow and steady” or a rollercoaster ride. That way, you can benchmark your future profitability against some kind of measuring stick. If you are trying to make 20% a year plus, then you should know that in advance of looking at your P&L statistics.  You should also judge it against the risk being taken- defined as the potential drawdowns. If you expect only 6% maximum drawdowns, you should also have some idea of that in advance—and be happy with 4% drawdowns and extremely unhappy with 10% losses!

If you are coming back from a perceived failure, you need to have an idea of how you think you *should* be doing, and then evaluate in comparison to that—and ignore other comparisons. For instance, if your neighbor is up 40% one year while you are up “only” 20%, then it’s natural to be a bit envious—but if your style is lower volatility and you know that a 20% return is at the top end of what your trading style can produce, then you can rest easy and ignore the comparison. Focus on your results and how you are doing things, not on something that you can’t control.

Most people fail because they haven’t calibrated their expectations for different market conditions. After all, markets can change and you need to prepare for it in advance. You also need to understand how your trading style will perform in different markets. Obviously each trading style has market types that are more or less favorable—and you need to have a good idea of what P&L and drawdowns to expect in those different market types. As an example, if you are using William J O’Neill’s CANSLIM system, then you would expect a small- to medium-sized drawdown during bear markets for stocks and up to 100% annual returns in big bull markets. Market type doesn’t always mean bull versus bear. If you are trading forex, then think about how you would do in choppy and rangebound markets versus trending markets.

Failure usually derives from not paying attention to how you were making decisions. Thus, the next set of expectations should relate to how you go about making decisions. You want to make sure that you are checking each trade against your trading plan, so that you are following your rules. When you enter a trade into your record-keeping system, there should be a rationale that explains why you put it on—and how it’s consistent with your overall trading approach. That way, if you are long-term trend follower but put on a trade that was a just a short-term punt, then you need to realize that you slipped up in how you make decisions. In this department, set your expectations high – make  a commitment to have each trade in line with your system’s approach, consistent with your trading rules and well-documented.

Once you have explicitly and clearly defined your expectations, then you are more empowered to bounce back in your trading.

-First of all, you should have realistic expectations, so you are not going to beat yourself up for results that fall short of some lofty, blue skies expectations. Expecting to get every trade right or to make 100% per year is ridiculous.

-Secondly, you are much better prepared emotionally to handle drawdowns, because you can realistically forecast how much you will lose in bad market conditions—and try to outperform *that* goal, rather than futilely trying to make money when the odds are stacked against you and your system. You know how to persevere.

-Thirdly, by setting high expectations for how you make each trading decision, you are going to fine-tune your decision-making process, giving yourself a better long-term foundation for success. It will also divert your attention from just your P&L, putting even less psychological stress on you.

Step #3: Take One Step To Do Things Better. Then Repeat.

Now that you have a plan and realistic expectations attached to it, the route back from failure is simple. As we have discussed, you need to stay focused on process-driven goals, rather than just P&L ones. The best way to address this is to pick just one small element of your trading and to vow to do it better. Revise your expectations higher and work on it until it’s to a level you’re happy with. Then repeat.

As an example, imagine that you are a swing trader. Your rules suggest selling a stock when it’s up 20% and moving on to the next position.  While doing your research, you notice that some stocks continue to perform after they’ve gone up 20% because they have extra institutional buying support that the other winners don’t have. You use this information in the most straightforward way—you revise your trading plan. You vow to devote extra focus to this one aspect—making sure to identify the potential big winners that have strong buying support and hold onto them longer, to capture bigger profits.

Now, while going about your normal trading plan, you are going to put more emphasis on this one particular point. You will still focus on executing One Good Trade at a time—not trying to shoot the lights out all at once, but rather making sure that each trade is individually sound. Now, you will pick entries and exits the same way but go that extra mile to look for extra buying support. It becomes easier to close positions that don’t have that support and also to hold onto the big winners. Thus, by tightening up just one aspect of your approach, you can measure directly how that translates into your overall results.

Moreover, that one aspect of your trading is not in isolation—it has a knock-on effect on all facets of your trading. Continuing this example, in learning to look for institutional buying support, you have become a better tape reader. This in turn enables you to pick better entry points or to start timing better your exits. Another example—you focus on cutting your losers faster. By examining more closely your losers, you notice certain ongoing patterns in those quick losers—and stop entering positions that demonstrate those patterns. Your results improve on the back of this.

Thus, the road back from failure is not a road—it is a series of the most deliberate steps possible, one after the other. By drilling down to one very specific aspect of your trading, you start fixing a small problem  or upgrading a minor part of your trading. This ripples out into other aspects and helps you to identify the next step and the next solution.

Once you have done the prerequisite work, the road back from failure is straightforward. Instead of beating yourself, remember—“There is no failure, only feedback”. It actually helps us to know where to change—so we can focus on the process of trading at the smallest, most controllable level.

Put it under a microscope and figure out what you need to do improve it. And then do it, measuring yourself against the benchmarks you set. Once you are happy, repeat.

Other Tools

You can augment this process with other tools. I have discussed elsewhere trading and visualization (Check out Part 1, Part 2, and Part 3). In this case, you should enlist visualization exercises and see yourself executing your trading plan successfully. You should imagine feeling good about sticking to your discipline, about doing the things that you are trying to improve in your trading. This is the basic blueprint for successful visualization in trading.

Furthermore, you should visualize having accomplished certain process-related goals at a point in the future, using the goal-setting techniques found specifically in Part 3. For instance, you can imagine yourself having achieved certain metrics, e.g. a win rate above a certain percentage, or a certain maximum drawdown that you are comfortable with. Associate these metrics with the very same feelings of satisfaction and triumph that you would a certain P&L goal. Imagine the changes that you would have made along the way, both in yourself and in your trading, in order to better accomplish this goal. Rejoice in your coming back from failure, in your overall improvement and the massive changes that have resulted in your profitability.

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading

Over the past 10 days, there have been two occasions where I hit my daily loss limit. Sounds like a tough stretch, but on a net basis it’s actually been positive thanks to some other good days.

Mind you, I’m generally a disciplined trader, and in a dozen years of full-time trading I have broken my discipline countless times but have never truly gone on tilt where it’s account life or death.

That said, I do not have a broker-set cutoff. That’s where you specify a dollar amount, which when hit will lock you out of making more trades. It’s still your account and you could call in and override that I suppose, but it’s at the very least a break in the action for you, and a very good thing for some people – namely, developing traders.

Back to my point and the title of this post, what happens when you hit your daily loss limit?

For me, it’s a general dollar amount where I start to understand that barring some really great trades, and with the amount of risk I am willing to take, I’m unlikely to recover. It’s a matter of recognizing that I’m likely to do more harm than good – either to my account or my confidence.

At times, I’ll hit that level and I just need to admit defeat, shut it down, and come back another day. I might leave my platform open and monitor the market or open positions, but I know I don’t need to press any more buttons. Adhering to that has on many occasions prevented deeper wounds to my account.

Knowing when to walk is found in two things: one internal, one external. Internally, you must understand yourself and your tendencies. Externally, you must be able to recognize current conditions and determine if there’s good reason to continue or not.

Over the past week, however, I had two different outcomes when I chose to trade beyond that mental cutoff.

Exhibit ‘A’

The first was a day where my limit had been reached, but I allowed my emotions to interfere. This was the internal element, and I was in no shape to continue. (That, by the way, also prompted this week’s video.)

I didn’t go on tilt, but I lowered my standards in what was ultimately a mild version of revenge trading. That never pays off, and in this case it cost me a little more. As it should have. I hit my loss limit plus another 1/4, which isn’t a ton but it is too much.

The mistake was that I continued to trade because of my P&L. Catch that? Because of it, not in spite of it.

Exhibit ‘B’

The second occasion was similar in that I reached my mental cutoff, but it was different because it was a day where my emotions were settled.

I continued to trade not out of anger or frustration or ego to prove I was right, but because there were multiple stocks in play which warranted my participation. Conditions were very favorable for making good trades, so I continued.

I was accepting risk beyond a normal cutoff amount, but it was with a level head and with some real potential to turn the day around. And I did. It was rewarding, not in the sense of “I told you so” but simply because I kept taking good trades when they surfaced, added it up in the end, and came out slightly ahead.

It’s nice to dig out a bad day, even if it means you barely do better than break even.

On some days, those are wins.

Jeff White

Everything You Wanted to Know About Visualization And Trading, Part 3

See Part 1

See Part 2

In the first two parts of this series, we used a variety of visualization techniques to simulate good trading. In this third and final part, we are going to use the same advanced visualization techniques, but in different ways that can also serve to help our trading. Rather than simulating good trading, we are going to use visualization tools for new purposes: to undo bad trading results; to manage emotional states; to set goals for the future.

Visualization Basics

We know that visualization works because your brain equates images with the real thing. Thus, mental practice reinforces real, physical practice, improving the decision-making circuitry involved. In this part, we are going to expand this—because your brain has trouble telling the difference between imagined and real images, we are going to invent certain experiences in order to persuade our brain to bring about what we want to happen or to change what happened in the past. Instead of reinforcing our decision-making circuitry for something we are doing, we are overwriting stuff that we don’t want to happen or creating entirely experiences that we do want to happen.

“How” this works is quite interesting. To put it bluntly, your brain is a learning machine—it is always soaking up information, drawing conclusions or generalizations and taking action. Most of these happen without your conscious awareness. Oftentimes, these generalizations do not serve you or your trading.

For instance, imagine that you have a position on that’s losing money and you begin to experience the usual symptoms of stress – sweating, tunnel vision, heart pounding, etc. You are like a deer in headlights. Obviously, you didn’t make up your mind in advance to become stressed and to watch your decision-making powers wilt away. Instead, your brain just did it automatically. The generalized fear you have of losing money is acting up, without your control and it’s hurting your trading.

This is where advanced visualization techniques come in. With the right tools, you can easily deprogram yourself from these automatic reactions—negating the unconscious generalization that hurts your trading results. Ultimately, the goal is to reprogram oneself so that, in the future, your brain will make the right unconscious decisions and work towards your goals.

It’s one thing to talk generally about visualization techniques. Now, we are going to plunge into different settings. What each has in common is that we are using the same tools of visualization, but in slightly unconventional ways that are specific to the setting. Before, we had used visualization as a very blunt instrument—as a generalized tool for practicing trading excellence. Now, we are going to use it with surgical precision. The idea here is that by understanding how our brain works, we can use visualization in a very specific way to induce a very specific result—but ultimately, one that is more powerful.

Three Case Studies

Case Study #1: Undoing the emotional impact of bad trading and its results

A common experience for traders is that after a run of bad trading decisions, or a string of poor results, we begin to lose our confidence and encounter negative and inhibiting self-talk. Perhaps all traders go through periods of disappointing results or making mistakes. Sometimes, we just sail through it naturally without any ill effects. The problem arises when our brain makes unhelpful generalizations that lead to self-criticism and a lack of confidence. As any trader will attest, this can seriously undermine one’s game and make it difficult to get back in the groove.

If you have had a really bad run and are feeling depressed, then you can confirm: it’s one of the most disempowering feelings in the world. It’s like getting the stuffing kicked out of you in a fight or being fired unexpectedly from a job. It’s downright unpleasant. But once we have gone through the initial emotions, the next step is to pick ourselves up again and get on the right track, to making good decisions and being profitable.

The best first response is to stop trading immediately and to review the trading before and during your bad run. You may have been deviating too far from your trading style or risk management practices. Before getting started trading again, make sure to have those methodological questions squared away. Then, start trading only with substantially reduced size, so that the P&L swings will carry less emotional impact. As always, good trading fundamentals dominate.

But sometimes good fundamental trading skills are not enough to recover from a bad run. Once you are back to trading, you may be afraid to take risk, or you may be stuck in a self-critical rut. Whatever it is, you want to get back in the game and to have all of the psychological resources that you need to succeed.

We will do a visualization exercise that takes away the emotional sting of bad trading results and thereby helps you to get back in the game. As we covered in Part 2, changing the way that an experience is represented can alter the emotional impact. What we want to do is to change our memory, so that it takes away the emotional pain associated with bad trading. We follow this set of instructions:

1. Get nice and relaxed, preferably in a sofa or a good chair. Do not do this in bed—you don’t want to fall asleep!
2. Breathe in and out deeply and get into a slow, deep, comfortable rhythm
3. Access the memory of your bad trading result, after you started to have those unresourceful feelings. Get specific about the exact moment that triggered those feelings. Was it when you hit a certain dollar figure drawdown? Was is when you had a certain % drawdown in your equity? Or was it when you had your 19th trade in a row that lost money? Whatever it was, make sure you are specific and clear about it.
4. Have in your mind a representation of that feeling bad state. Get an idea of how you look when you are in that state—how you are depressed, or angry, or whatever. For instance, do you slump your shoulders a certain way? Is It obvious on your face that you are depressed? Get a firm idea of that picture in your head and all of the sounds and feelings that come with it. Call this Bad Picture.
5. Now, imagine how you would like to be. Most importantly, you would like to be feeling balanced and empowered—able to continue trading. You would like to be in an ideal state for trading, poised, confident, etc. You feel motivated. You are “over” your losses and ready to devote your focus to trading well and not necessarily to making money. Make this image really compelling by making it bright and close-up; change everything else around to turn up the emotional impact. Call this Good Picture.
6. Now, go back to the trigger point for when your bad feelings begin. Start with Bad Picture. Put a bright dot in the middle. Let that bright dot expand, quickly, replacing Bad Picture with Good Picture as it expands outward. Good Picture  will completely cover up the old one. You are overwriting the triggered response to your losses by substituting good feelings in the place of bad feelings.
7. Repeat this process ten times, making sure that the Good Picture remains as compelling as ever.
8. Test. Go back to the trigger memory in your mind. If you still get bad feelings when you think about your bad trading run, then repeat this process a few more times until it works.

This process is adapted from the book “NLP: The Technology of Achievement”, which details the processes used in sports and in therapy to improve performance and clear out unresourceful psychological feelings.

Case Study #2: Reversing unresourceful emotional states

The previous case study is one example where we need techniques to manage our emotional state, in order to stay empowered and resourceful after a bad run of trading results. However, it is by no means the only situation where we would need to do manage our results.

There are numerous possible stresses to our trading: We could be getting over-exuberant; we could have life events like the birth of a child, death in the family or divorce that are  impacting our emotional state and thus our trading; we could be distracted by something unrelated to our trading at work.

While there are innumerable possible distractions, the solution is always the same—we want to return to the most powerful, useful emotional state for trading in order to make the best decisions possible. Thus, we need a universal exercise that shows us how to get in the right state.

The first part of this is identifying exactly when we were in our most resourceful state ever. Maybe you had experienced it one day, coming back from a really restful vacation, where you felt completely focused, switched-on and in-the-zone. Perhaps it was after a yoga or meditation session, where you felt a certain kind of clarity that you hadn’t before. The famous psychologist Mihaly Csikszentmihalyi called this “flow”, when you are completely absorbed in an activity and distractions just seem to drop away. Athletes call it being “in the zone”.

It is possible that you haven’t experienced this kind of state in relation to your trading, either because you’re just starting out or because you haven’t build the kind of confidence and self-assurance that comes with success. Thus, you’ve only encountered “flow” in the context of athletics, where you became totally absorbed in the activity. Nonetheless, this is a good analogue for what you to achieve in trading: immersion, brisk decision-making, an absence of internal “chatter” interfering with your performance. It could even be from school, where you very well-prepared for an exam and you just sailed through it effortlessly. The key is to find a period of peak performance and effortless, spot-on decision-making that you would want to replicate at any given time.

Once you have  identified your idealized peak performance state, then you want the necessary tools to get into that state whenever you need it. That way, you will have the tools to reverse any unresourceful emotional states. That is exactly what we are going to practice.

The series of steps:

1. Get nice and relaxed, preferably in a sofa or a good chair. Do not do this in bed—you don’t want to fall asleep!
2. Breathe in and out deeply and get into a slow, deep, comfortable rhythm
3. Reconnect with your experience of peak performance. Go back and remember what you felt like, what you seeing and hearing. It could be that you were hearing nothing – that’s ok as well. Get to know in detail all of the various feelings of that experience. If you think that something could still be better, then tweak that experience by varying the representation of some parts of the representation to alter their emotional impact
4. While experiencing that peak performance state—we will call it “peak performance you”—imagine yourself but with a big circle underneath. See yourself standing above that circle, experiencing the feelings and experience of peak performance. Make that circle big, brightly-colored, pulsing with some kind of light—just so that it’s well-marked and stands out in your mind.
5. Now see your body stepping out of that circle, but leave all of the feelings and experiences within the circle.  That way, the feelings and experience have become separate from “peak performance you”. Now, this whole peak performance state can be accessed just by stepping into the circle.
6. Imagine yourself in a trading situation where you want to get into the peak performance state—for instance, starting your day out the right way or trying to keep your cool after a couple losing trades. Imagine you, with all of your trading knowledge, desire to succeed and experience. We will call this “Trading You”.
7. Imagine “Trading You” stepping into the Peak Performance circle. Connect with those feelings and experiences of peak performance, and how they would boost your trading. Imagine “Trading You” as a peak performer, absorbed in the flow of trading.
8. The next step is to set this up for use any time that you want. Step out of the Peak Performance Circle, and return to being just “Trading You”. Choose a trigger for the experience of Peak Performance—it could be a phrase that you say to yourself, like “Get in the zone”, or a simple gesture, like tapping yourself on the back of the hand twice.  Use your trigger and step into the Peak Performance Circle. Now step out, returning to Trading You, and fire the trigger and step into the Peak Performance Circle.
9. Repeat a few times—you should be able to access the Peak Performance state whenever you desire.

Case Study #3: Setting Goals

One of the most widely known uses for visualization is to simulate experiences that we would like to achieve- not just playing well at a sports competition, but also receiving a gold medal at the Olympics or kicking the game-winning goal. We know how visualization works as mental practice–  we are firing the same neural pathways as the actual physical experience. By doing a mental run-through of how we would like to do it, we are reinforcing this in real life.

For goal states that we would like to achieve, the mental process works a bit differently.  If we are just imagining ourselves receiving a gold medal at the Olympics, then aren’t we just practicing bowing our heads so that they put the medal on correctly?  Is that what we want? Of course not.

What we do want is for the goal experience to draw us powerfully, to encourage us to undertake the actions necessary to achieve it. That requires a different, specialized visualization exercise.

While a visualization exercise can have some pull on us towards a goal’s achievement, the key is to  explicitly link the goal’s achievement in the future with the actions necessary to reach the goal, starting from today. In effect, we are pre-programming our brain with a course of action that can be followed, all the way up to the goal. That way, the steps to take at any point are simple, and we have imagined walking through them all successfully, all the way up to our goal.

The key to this process is understanding how your brain represents time—its past, present and future. Once we understand that, we can manipulate that to induce our desired outcomes—for instance, a goal that we have achieved at a certain time in the future.

The first step is to understand that your brain stores its past and its future in a certain relationship to the future—and we are going to work with that relationship. Otherwise, how would you be able to distinguish between events that happened in your childhood and your to-do list for tomorrow? Once we get how our brain stores events or items that are in the future, then we can use that knowledge to implant certain goals in our future, as if their success were already pre-ordained. Better yet, we can fill in the area between now and the goal with all of the things that we did to accomplish our goal.

Before we start the exercise, we need to discuss how to set goals. Well-formed goals need several criteria in order to be accepted by your brain and spur action

1. A precisely described target that you have achieved. Saying you want “to be rich” is very vague. Instead, name a certain monetary sum that you would associate with being rich. Or you can state a performance goal but be a bit less specific about how you got there. 25% per year for four years would mean a cumulative gain of 144%– set that as your goal, because 25% per year, *every year*, would be harder to hit.
2. Defined date. Saying you want to make $10 million is nice, but you don’t want to do it 40 years from now. Rather, say “I want to make $10 million by Dec 31 2014”. That helps your brain get specific about it. Note: it has to be somewhat realistic. Trying to make $1 billion by tomorrow is not going to be perceived as realistic by your brain and will be rejected!
3. Proof. How exactly will you know that you have accomplished it? It could be a brokerage statement with that exact monetary figure.  It could be you moving into a new house that cost roughly that sum of money. Or it could be you receiving a statement from your administrator demonstrating the performance figure.
4. A representation. Roll all of these into one image/representation. For instance, if you had set your goal as achieving a $10 million brokerage account by Dec 31 2013, then you could imagine yourself at home, on the computer, printing out the statement that shows your account value with the date printed on there. Then make sure to get into the feelings that would accompany it—satisfaction, contentment, confidence, triumph, etc. Really work all of the accompanying feelings into that representation. In his wonderful book “The Science of Getting Rich”, Wallace Wattles calls it your clear “compelling mental image”—compelling because you want to be IN it.

Now we are going to practice working our well-formed, richly described goals into our future.

1. Get nice and relaxed, preferably in a sofa or a good chair. Do not do this in bed—you don’t want to fall asleep!
2. Breathe in and out deeply and get into a slow, deep, comfortable rhythm
3. As you become more relaxed, take a moment to reflect on some memories from the past. It’s helpful if they have concrete dates—for instance, the first birthday that you can remember or  The key question here is- where are they physically located in relation to you? Are they to your left? Behind? Become familiar with where past events are located and what the continuum looks like—is it a straight line, a curvy line, etc? We call this our “timeline”.
4. Now become familiar with where your experience of the present is in relationship to the past. Is the present right in front of you? How much space does it occupy on your timeline?
5. Do the same for your  future—figure out where the future is in relationship to the present? Is it in front? To the right? And figure out how far it stretches—can you only conceive of events a few days ahead, or are you one of those people who has everything already planned out for years to come?
6. Become aware of how your brain stores representations of events in the future. What does a goal look like? Maybe you have some goals already that are compelling—being  a spouse, being a parent, retiring? If those goals are compelling to you, then you will want your trading goal to be represented the same way.
7. Now that you have mapped your timeline, you are going to embark on a little journey. Imagine your timeline and that your body floats up,  above your timeline. Now float through your future to the exact date when you want to have achieved that goal.
8. Float down into the time and imagine yourself experiencing the goal state- i.e. experiencing the wealth, abundance, comfort and happiness of the goal state. Make the representation compelling!! Make the pictures big and bright; the sounds, enticing; the feelings, irresistible.
9. Now, look back from that future moment, to all of the actions that you took to reach that state. Imagine some of the various milestones along the way. If you had imagined reaching a certain net worth, then imagine being ¼ of the way there, ½, etc.  For this part of the exercise, it is important to watch yourself doing it, rather than being in the pictures.

10. Watch yourself performing the various actions, like the work that you did every day, the preparation, the psychological work, etc. and see yourself doing it at various points along the way. The reason for this is to reinforce the idea of what you were doing every day, or at regular intervals.

11.  Also, imagine yourself having made any changes that were necessary to accomplish your goal. While in the goal state in the future, you could imagine yourself as being a better version of you, through having improved in certain ways or having overcome personality flaws. While you may not be able to identify when exactly those happened, by the time of your goal, those changes will have occurred.

12. Now float back to your present. Contemplate the future and your future goal should pull yourself more powerfully.

This is a visualization exercise that you can do many times and have it get better every single time. Each time you can update the goal image and make it more and more compelling. With every run-through, you can fill in more and more details for how you got there.

These techniques are widely used in the therapy context. Two authoritative guides to the topic are “Timelines and The Basis of Personality” and “Adventures with Timelines”.

Conclusion

This marks the end of the three-part series on visualization. Hopefully, this has given you, the reader, a comprehensive overview of visualization and its relationship to trading. We covered a lot of ground, all the way from what visualization is to sophisticated techniques for its utilization. Above all, remember to practice the techniques as outlined in this piece—otherwise, you will be missing the main benefit.

For those who do practice the techniques, I would love to get feedback. What were your experiences? Did you feel good or comfortable doing the techniques? Were they useful? Have you tried any experiments that work better? Let me know! Email me at bruce [at] howoftrading.com

By Bruce Bower | www.howoftrading.com | Twitter: @HowOfTrading

Part 2 of 3

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Click here for Part 3

In the first part of this series, I walked through a simple visualization exercise designed to help your trading—especially, by emphasizing the fundamentals of good trading performance, such as having a plan; being able to execute it; staying calm and focused during the day; and being able to evaluate your results in those terms.

While that exercise is very useful, it is also very basic. This basic model, without any bells and whistles, certainly has its use. But what you really want to is to get the most out of it by having the fancy additional stuff. Now, we are going to learn how to take your visualizations to the next level, by borrowing in a bunch of tools used widely in other fields, like sports psychology and therapy, to improve it.

Taking What Works And Amplifying It

As we discussed last time, the reason that visualization works is because your brain activates the same neural pathways as when you actually perform an action. By doing a visualization, you are firing the same neural circuits and thus reinforcing the action in your mind. The representation of the event is what initiates the whole process.

There is one component of this that we didn’t touch on before, but which is key for improving the results of your visualization exercises: emotional impact. The way that you represent events in your head conveys varying levels of emotional intensity. Representations, and thus visualizations, that are coded to be more impactful will be more effective.

We already know this from normal life. Think about watching a movie on a 13” black-and-white screen with tinny sound. Now, watch the same movie on a huuuuuge IMAX screen with surround sound. The movie may be the same, but I can guarantee that the IMAX has exponentially more emotional impact. The difference is not the content—it’s how it was represented. Because the IMAX experience is bigger, louder, seems closer and more immersive, it ends up carrying that much more emotional impact. Thus, by changing properties of our visual representations like size, distance, brightness, etc., we can take the emotional impact and dial it up or down as we choose.

The other way to change the impact is through adding in different senses. While the exercise is called “visualization”, what we are actually doing is creating a total experience—and by adding in different senses and feelings, we get a much more realistic representation of the experience. By including sounds, feelings, even smells, we can enrich dramatically our representation of an experience.

Again, we know this from our everyday experience. Think of a vacation that you went on that you reallllly enjoyed. For instance, a trip to a nice, warm Caribbean island. Of course you can remember what the beach and the sea looked like.  That’s just the visual part of the experience. But you can also probably remember the feelings of the sun overhead; of the breeze coming off the sea; of the sand under your feet. You can recall the sound of waves lapping against the shore; the sounds made by wildlife; music playing around you. You could even recall the salty smell of the air; the refreshing scent of morning coffee,  etc.

The web of rich sensory information really brings this experience back to life. Imagine if you had  received a postcard, i.e. just a picture, from the people on the vacation- it wouldn’t have nearly the same impact as that whole experience. This reinforces the point that we can increase the emotional impact of an experience by engaging all of our senses, not just our visual faculties.

One thing to consider is that most people are much more comfortable in their non-visual senses. For instance, a really good athlete is probably much more comfortable using his physical sensations, like the feeling of sand under his toes, to make sense of events. In that case, it is important to work first from the sensory system that they are most comfortable with, and then use that to form pictures. Continuing with this example, the athlete could re-immerse himself in the beach experience with non-visual senses and then gradually start to let the pictures come back. This is called overlapping—you’re taking your best recall of the scene and then gradually working in the other senses. Keep this in mind if you have trouble making pictures—you don’t need to start with a pure “visualization”, but rather can start with your strong suit.

Moreover, just like with pictures, we can make changes in our representation of other senses to enhance their emotional impact. A concert with loud thumping loudspeakers has much more resonance with us than a little tinny radio in a far-off corner. With sounds, we can make them louder or dimmer; closer or further away; higher- or lower-pitched. We could use voices—in a trading exercise, you could imagine yourself saying supportive comments to yourself while trading. And you could change the voice itself to be whomever’s—to keep yourself relaxed while working, you might imagine a masseuse’s soothing voice instead of yours. Hard not to calm down, huh?

How to Incorporate This Into A Visualization

In Part 1, I discussed having a visualization of the whole trading session, segmenting by the various parts of the day. For each segment, we are going to take the same thing that we had imagined before and enrich it. While this is not an exhaustive list, it should catalyze some ideas of your own.

1. Preparation and market open

The most important is to feel relaxed, calm, confident and ready to take on the day. You want to be in the right state at the beginning and stay that way. In addition, you want to reinforce the very work that you are doing as being necessary and useful to successful trading.

Thus, add the following to your representation

• A clear, bright, up-close picture of yourself doing your market prep, like you’re watching yourself from only a little bit away
• The appropriate sounds, phrases and voices for you to be relaxed. One could be a soothing voice that says “You are relaxed and calm”, or your own voice saying “Take it easy”.  Find what works best for you.
• You can add a more professorial voice that reminds you “good preparation is absolutely necessary for trading success” or “Your preparatory routine is like stretching—you need it to be prepared for what comes next”
• A relaxed, calm, peaceful yet prepared feeling. Feel where that relaxation would be in your body. How relaxed would your muscles be? How would you carry yourself if you were really relaxed and prepared for the day?
• We often stare at the screen with a lot of tension in the area around our eyes, which strains the muscles and fatigues us unnecessarily. Instead, practice feeling relaxation around your eyes and on having a “softer” field of vision, where things seem “fuzzier” around the edges.

1. Walk through a sample position entry

Here, your goal is two-fold: to have a set of well-established criteria for getting into a trade and also making sure that a position actually conforms to those criteria. You will want to emphasize the confidence you have in your previous testing and homework for your entry criteria. You will also want to make sure that you use images, sounds and feelings that correspond to the discipline of actually going through the criteria. Make it like a similar experience involving a list—a shopping list at the store, a packing list before a trip, or just your usual morning routine.

1. • Visualize yourself brightly, up close and in vivid detail, reviewing over your entry criteria as you look through the markets. Visualize your “rules of trading” or “rules for entry”—even if they are not written down as such, imagine a sheet of paper with those words written at the top in big, bright, bold letters. This drives home to your brain that there are rules governing your trading and not just random punting.
   • Hear your own voice saying confidently and firmly some encouraging words like “Stick to your setups and stick to your rules”; “Trust your homework and testing”. You can also use a derivative of this like, “One step at a time” or the Russian saying, “Measure seven times, cut once”.
   • Use creative metaphors that provide a set of images, feelings, and sounds. You could envision yourself as a hunter on the plain, waiting for the perfect animal to slay. Thus, you would adopt the same feelings of slight anticipation and awareness; you would be on the lookout for potential opportunities all the time. Watch yourself prepping for the right kill. You only take the opportunities that you know are likely to work—just like a good trader.
   • For putting on a trade, visualize a checklist of your various entry criteria. See the various criteria and then putting a big, bright, red checkmark in a box next to each one. Once all of the criteria are met, then imagine another big box entitled “Put on The Trade”. Then see that box being ticked. You now have the signal to trade.
   • Use sounds to do the same thing. Imagine yourself asking a question in your own voice for item on your list—and then responding “Yes” as you go down the list. Or the voice asking the questions could sound like a mentor figure that you greatly admire and respect.

1. Putting on a trade

Once you have decided to put on a trade, the key is to approach it calmly, without panic. The worst thing that you can do is to force the execution too quickly or sloppily. As such, you need to feel relaxed. You need to imagine yourself picking your spot and patiently executing the trade.

• While imagining yourself trading, practice the feeling of relaxation. Feel the calm all over your body- you need to make sure that you are not panicking when you put on the trade.
• Watch yourself looking at the screen closely, picking the level or levels for trade entry. In your mind, you will want to take extra effort to make the picture bright, up close, and in superb detail—so that when the time comes, you can get that level exactly right.
• Hear the voice of a mentor saying something basic like “Patience…patience”. Or hear your voice saying “Remember, every penny counts—after all, it’s my money”. You will use this verbal reinforcement to stay mindful of the right entry strategy.
• Visualize your fill—the point at which your order is filled and a price and quantity come back to you. Use bright, vivid imagery of what a great fill would look like, up close to you to make it really compelling. Then add in other sense to reinforce it, like the voice of your colleague saying “Hey, that’s a great fill” or a little tingling of excitement in your stomach that denotes your being happy with the fill.

1. Taking off a winning position.

This is going to be very similar to the visualization for putting on a trade. Just like in that case, you are following a pre-determined set of criteria and then making the right decision. With closing a position, there are only a couple of things to add

• Definitely include in your visualization a sound that connotes making money. It could be the “ka-ching” sound of a cash register ringing, the clicking and clacking of poker chips, the sound of an ATM dispensing cash or whatever you associate with being paid money. The basic thing is to reinforce the  idea that closing winning trades means profits, and profits means cash in your pocket. We are not going to overdo this point (I will explain why later), but just give ourselves a subtle reminder.
• You will absolutely want to include a representation of yourself feeling good when closing out the trade. As you are sticking to your criteria on both entry and exit, I will assume that you are trading well, defined as sticking to your pre-defined rules. The idea is to feel good about having done everything right by having followed your rules from start to finish. That can be you congratulating yourself or you getting a kind of rush that you can get when you really did something well. As we have seen before, trading is about making the right decisions, and thus, you want to reinforce the fact that you traded well.

1. Taking off a losing position

There will not be much different here than from taking off a winning position. You will want to walk through the same checklist for taking off any trade, only this time it will be at a loss. This could be because it hit a pre-determined stop-loss, or because it’s been a loser for a time and you just decided to cut it. The point here, as with before is to reinforce the fact that you traded well, from start to finish

• Include yourself feeling good after closing the position. You want to feel good because you did well—you stuck to your rules when you put on the position and when you took it off. It happened to be a loser, but that doesn’t mean that your trading is losing. While this may seem counterintuitive, remember—you are in the game to keep making “One Good Trade”, not expecting to make money on every individual position. Being mopey and depressed doesn’t help anyone to keep their head in the game. Keep your head up, feel good about making the proper decisions, and move on to the next trade.

1. End of the day and wrapping up

Ideally, you will review the day and find that you traded well all throughout the day—researching potential trades well, putting them on and off. The end-of-day wrap up is the chance to evaluate that—to see if we were sticking to our rules in the heat of the moment, or were we straying into gambling? Did we miss some big moves or news items in the market that we should have caught?

• For the recap, you want to sharpen up your visualization of all the news, end-of-day prices, etc. Make them really bright, close, vivid. Imagine that something deserving of your attention will literally jump off the screen at you—even bigger and brighter than other things on the screen. Imagine that anything else in your own trade blotter, notes, etc will also jump out at you if it deserves attention. The important thing is make sure that you do not overlook anything important. Spend time on this aspect of the visualization
• Just like with putting on and taking off positions, imagine that you go through an end-of-day winddown checklist to close it out. See or hear yourself going through the checklist and mark off each individual item until finished.
• With trading, it is important to realize that coming to the office and being prepared and following the markets and trading well is a good day. This is the case even if we do not always put on trades or even if we lost money. Thus, make sure your to give yourself a bit of congratulatory words in a supportive, encouraging voice. Say something like “Good job today, you worked hard”. This voice either be yours, or that of a mentor-type figure; it should be close to you so as to increase the emotional impact.
• Imagine yourself leaving the office and feeling good. It is important to practice feeling good when we leave every day, no matter what, so that we de-sensitize ourselves to losing days and so that we do not become overly exuberant on big winning days. Also, we need to keep up the optimism and drive in order to keep coming to work and giving it 100%. Practice the feeling and state of being happy, content, satisfied, eager to face the next day.

Wrapping Up

As we have just been through, you can significantly enhance your visualizations of trading success two ways: changing the brightness, intensity and other aspects of the image itself; and adding in sounds, feelings, and other sensory information that enhances the overall experience. Through dedicated practice and a little imagination, you can take your visualizations of trading success to the next level, to the point where they are literally mental practice of how you would like an ideal trading day to proceed.

Why Am I Always Watching Myself But Not Participating?

If you noticed, I was always writing to “watch yourself” doing something. It seems a bit strange at first—why watch yourself when you can just imagine yourself being in the very midst of it? Well, there is a very good reason. We have two viewing positions for any visualization: associated (i.e. experiencing it as if from our own eyes) and dissociated (i.e. watching ourselves at a distance).

Dissociated images have less emotional impact than associated. Imagine your high school graduation—you can recall receiving your diploma and being supper happy about it, I’m sure? Now imagine if you were just a spectator—the feelings dissipate somewhat. That’s the case with visualization exercises as well. The reason we chose dissociated is two-fold—one, by watching yourself trade, you get a much better idea of everything you are doing when you’re trading, so it’s actually better for mental practice; two, trading is supposed to be dispassionate, and you are reinforcing that.

There is one reason of this visualization where you can use associated imagery, Ie experiencing it as if you were in your own body: at the very end of the day. Of all the things you would want to associate into and really feel more passionately about, it’s the good, enthusiastic feelings that come from having worked hard for a day.

It’s a good idea to watch yourself going through the trading day and then as you’re prepared to leave the office, step into the image and really feel all of the good feelings that you would want to feel: good, positive, happy, enthusiastic, a little self-congratulatory. Take a few moments to imagine how that would feel—a lightness in your head? Butterflies in your stomach? Maybe a smile ear-to-ear? Only you know what works for you.

In general, associated images are good for visualizing the state of having reached your goal and reveling in that. They are not good for visualizing the nitty-gritty “how” necessary for getting there. Thus, when you think about goal states—walking out after a successful trading day, reviewing a successful and profitable year of trading, receiving a gold medal in the Olympics—do it in the associated state.

In the next part we are going to take the visualization tools that we have established and use them in new creative ways to help your trading. This includes doing more with goal-setting; getting over bad trading decisions or a losing period; and overcoming some deeper-seated psychological blocks.

By Bruce Bower | www.howoftrading.com | Twitter: @HowOfTrading

Everything You Wanted To Know About Visualization, Part 1

Part 1 of 3

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When discussing elite performance, visualization is a key tool for boosting performance and increasing success. It’s widely utilized not just by traders but also by athletes and entertainers. Scientific studies have documented its usefulness in improving performance. We can all agree that it’s a fabulous tool and that it’s worth making use of.

What’s discussed less often is how visualization actually works in practice. When we are making our wonderful images of trading success, how should we do it? What works and what doesn’t with visualization—and why? And how can we improve on standard visualization techniques to take our trading to the very highest level?

In this series, I will do a deep dive on everything related to visualization and hopefully answer the questions above. First, I will cover the basics—what is  visualization and how people think it works, drawing on a host of sources.

Then we will cover how to improve on existing visualization, using tools and techniques that are widely used in other spheres, most notably therapy.

Lastly, we will address new and exciting ways to use visualization to change memories, as a goal-setting exercise or to change your personality wholesale.

What Is Visualization?

Quite simply, visualization is mental practice. It’s the process of imagining something that you want to happen—either a goal or a process. The typical visualization pattern comes from the sports world, where an athlete would imagine themselves winning a championship or standing on the podium receiving  a medal. In some martial arts, students are encouraged to practice moves by observing the teacher, then making a movie of the motion in their head and then stepping into that picture—before they ever make any physical exertion.

The idea behind visualization is that mental practice is just as good as real-life practice, giving you a chance either to rehearse for an event that hasn’t happened or to reinforce other practice that you have already put in. By practicing in your head, you have effectively increased your training time and intensity. For instance, one famous study of basketball players demonstrated that a mix of shooting baskets and visualizing shooting baskets was just as effective as regular old practice.

Essentially, the mental practice is working the same as real practice—and no matter what form, practice is practice. As we undertake a course of action, for instance making a smart trading decision, we form a neural pathway—that is, a connection of brain circuits necessary to accomplish the task. As we practice performing a certain action, we strengthen and reinforce that neural pathway. In his wonderful book The Talent Code, Daniel Coyle explains how the myelin around the neural pathway of elite performers actually becomes thicker, providing physical evidence of what we are talking about.

This conclusion: your brain interprets reality and imagined things very similarly. This squares with our everyday reality. Imagine if you have a phobia of snakes and someone shows you a vivid photograph of a snake—you’ll have a fearful reaction, even if it’s involuntary. Essentially, a phobia is a learned reaction to a certain stress—even if you didn’t choose that reaction consciously. For instance, some people have a paralyzing fear of water that prevents them from taking a shower. Nevertheless, that neural pathway is strong. With visualization, we are deliberately choosing the behavior we want and using mental practice to reinforce it.

What To Do

With respect to trading, a good visualization could be making a mental walkthrough of yourself making a good trade or staying calm and collected during stressful market conditions. It could be imaging yourself cashing a certain-sized check after a huge, breakout year for your trading. The key is that you make pictures in your head to simulate the actual event that you want to happen and that it is relevant to your trading results. While you could make an image of you lying on the beach in the Caribbean and enjoying an early retirement owing to your trading profits, that would probably only improve your cocktail-mixing abilities.

The most helpful course of action is to use visualization to reinforce other positive steps you are taking in your trading, like making process-driven decisions. Ideally, you are now trading at least a few well-defined setups for entries and have some good exit criteria in place.  You need to define your best setups in advance and be comfortable with how they work. You could define a setup by having a checklist of necessary points for it to qualify—for instance, if it meets five out of seven points then you put on the position. The key is to have a more or less objective way of defining what is a good trade in order to get in. The sound trading fundamentals need to be there first. Visualization is the ideal tool to reinforce good trading fundamentals—but it can’t replace them.

Let’s Get Started

Following the above example, let’s say you want to do a visualization exercise to improve decision-making, so that you are always making good trades, sticking to your system and staying disciplined. You decide to visualize this. How would it work?

There are a few key steps:

1. Get relaxed. You must block out distractions in order to visualize successfully
2. Begin your visualization from the appropriate starting point. In this case, you want to start off in a calm, focused resourceful state in a work setting—because you are going to stay there
3. Walk through slowly, deliberately and in vivid detail the activity that you want to practice. See yourself doing it.
4. Check that it all works and is realistic, otherwise your brain won’t buy it. As a counterexample, you could imagine leaping tall buildings in a single bound but your brain will never accept the suggestion.
5. Review what you’ve done.
6. Update or rerun as needed

1.Relaxation

Most traders are not very good at relaxing—stress and tension are our two most common sensations.  The key to relaxation is an awareness of our whole body and what it’s doing—our muscles, our breathings, our posture. After days sitting in front of the screen, we often don’t notice how tense we have gotten and our badly our posture has deteriorated. A quick walkthrough on how to relax

1. Find a comfortable place, like a well-supported office chair, a sofa, or a recliner. A bed is not the right place for this- you don’t want to fall asleep.
2. Become aware of your body. Do a quick scan of all of the various areas of your body, little by little—starting at your forehead, moving down through your face, your jaw, your neck, etc until you get to your toes. Where there seems to be tension, just make a mental note.  Notice your breathing—how you inhale, how you exhale, how often.
3. Interrupt your normal breathing pattern for a second. Hold your breath, then breathe out until you have nothing left. Then take a *big*, *deep* breath in—feel it all the way down to your diaphragm. Hold it for ten seconds and *slowly* exhale. Let the air just leak out, gradually. Each breathing cycle should take a long time, up to a minute. Repeat this process ten times, until you start to feel more saturated . You should feel your heart rate begin to slow down—if you want, check the pulse on one of your wrists.
4. While continuing this breathing pattern, begin to progressively relax your body. Start with your forehead, and flex the muscle (yes—there is a muscle there!), then let it go and leave it relaxed. Then move down your body again, doing the same with your face, your jaw, etc. Where you noted tension earlier, repeat this two or three times until you’re sure that you’ve worked the tension out.
5. If it helps, you can imagine someone progressively massaging you. Or you could imagine a balloon gradually losing air—hear the air hiss out of it, symbolizing the built-up tension that’s leaving you. Or you could picture yourself in a relaxed place, like a beach or a hammock in your backyard. The important thing is to find whatever extra image or experience that will help you to relax.

Ari Kiev’s book Hedge Fund Masters has a large section on visualization. While it doesn’t have very good instructions overall, their relaxation exercises are very good.

2.  Begin At the Right Point

You want to find the appropriate point to begin your experience. For most traders, that is when they arrive to the office or computer, or wherever else they are trading. You want to start off with a clean slate at the right beginning point, in order to practice doing things exactly right for the whole trading session.

1. Imagine a relaxed, cool, calm, focused version of you. Take a good look at this person—get to know how exactly your super-relaxed face looks, how you are breathing, how you are carrying yourself. Note how much you visibly enjoy trading and coming to the office.
2. Notice the details of the scene  What time is it? What does the office look like? Re-imagine the office with some details that make it more fun, more relaxing and more focusing, to further alleviate any pressure
3. See yourself walking into the office and taking your seat. See how confident you are of your gameplan and that success will be yours. Get started on your pre-game routine—watch yourself updating charts, checking overnight market activity and newsflow. See yourself checking your positions and formulating a gameplan for the day.

3. Imagine your disciplined, focused, trading day.

1. Now the market opens. See yourself following prices, your open positions, any potential setups you’ve identified and any open orders you have. Importantly, watch yourself being calm, collected and engaged throughout the whole process.
2. You are following a certain instrument and think it could be a potential position. Now, walk through a sample trade. Go through various characteristics of the instrument, check them against your various entry criteria, and check everything off against a checklist. See yourself with a filled-out piece of paper with all of the entry criteria or a detailed trade rationale.
3. The position is a go. Imagine yourself calmly putting on a position, being disciplined in terms of getting in.
4. Now imagine that you are monitoring your positions and one reaches your take-profit level or meets your take-profit criteria. Imagine acknowledging the level and calmly, smoothly, unexcitedly taking the position off. Or imagine yourself going through the same checklist exercise for taking the position off, ticking all of the boxes, and only then taking it off. See yourself congratulating yourself for making a disciplined trade.
5. Do the same exercise with a losing position. Imagine that you are following the market attentively, and that it reaches a level that you had previously set for taking it off (your stop loss point). Once the position reaches that level, calmly, unexcitedly, unemotionally close it. See yourself congratulating yourself for making a disciplined trade.
6. Imagine yourself at the end of the working day. See yourself reviewing your trade blotter and notes where you have all of the following:

• detailed trade rationales;
• disciplined position entries and exits (be they winners or losers);
• notes about potential positions;
• notes on the market—news, key levels, how it trade, fundamental views;
• comments on your emotional state—ideally, it is calm

7.Imagine yourself leaving the office, knowing that you gave it your all, were focused and disciplined. Imagine how you would look if you were sure you had done that, just for one day.

4. Make sure everything works and works for you

If you have something that’s not right with your visualization, your brain will be less likely to accept it. Make sure to run back through it, checking all of the details. Your mind will flag troublesome points for you. You need to solve them for the visualization to have maximum effect. It’s like in sports—the point of practice is to practice doing it right. There’s no point in practicing going up on the wrong foot for a layup!

For instance, if you imagine yourself getting to the office at 5AM and you are not a morning person, that will cause a problem. If you imagine yourself following exit criteria that you don’t really believe in or follow, your mind will be skeptical. In that case, review them again and either get comfortable or come up with new ones that you are comfortable with.

Assuming everything checks out, then  you can “wake up” now. You’ve finished—good job!

One other item: I didn’t mention money at any point. One reason is that what we using visualization to practice the core skills of trading, and that is what we are reinforcing. As trading is mostly about making good decisions, that is the logical place to focus our attention. The other reason is because money, and indeed all financial goals, fit into visualizations in a rather unusual way—we will cover that in a later piece.

5.Review what you’ve done

You’ve just installed in yourself and practiced a simplified version of good trading routine—being prepared, deeply involved in the market, making good disciplined trading decisions, putting on and taking off positions when you need to, and being satisfied with that. Pat yourself on the back for having walked through it.

After you’ve done this process the first time, remember that it’s like any kind of practice—the first time, it may be difficult but it gets much easier as you do it. You’ve essentially created the first trail in the forest, and from now, it will be much easier to follow it. Whenever you want to practice this part of your trading, especially without putting actual money at risk, you can walk through this visualization exercise.

6. Update or rerun as needed.

Now that the plan is there, feel free to rerun whenever you need. Ideally, you would do it outside of the trading day—before you go into the office or on the weekends, when you are not trading. That way, you don’t have to take time out of your day. During the day, it’s better to do relaxation-focused visualizations or other similar exercises, like yoga, meditation or prayer.

If you don’t find yourself being better prepared or focused during the trading day, then feel free to update. Some suggestions:

• You might want to add several stopping points during the day where you se yourself being focused, absorbed, and relaxed. For instance, every hour on the hour
• You can add yourself talking to your colleagues and accepting good ideas or feedback.
• You can imagine yourself blocking out distractions—imagine a little forcefield or bubble around you and all kinds of distractions just effortlessly bounce off of it. Or you can picture walls and a door around your trading station, where distractions have to knock and you decide whether or not to let them in.
• If you have trouble with trading too often, you can imagine yourself evaluating the market, concluding that there’s nothing to do, and subsequently doing nothing for the day. Then imagine patting yourself on the back.

Hopefully this explained how a basic visualization exercise works and how to use it to help your trading. While the explanation of how it works was brief, it should have been enough for the purposes of this exercise.

In the next piece, we are going to explore in more detail how visualizations work. Because visualization as a mental phenomenon is a little unusual, we will draw on some research about how your brain actually works in order to understand it better. Once we understand how visualization works and why, then we can start manipulating various parts of the visualization experience itself, in order to improve the results. Since visualization and its related tools are used actively in fields like sports psychology and therapy, we have lots of experience to draw on. All told, it will lead us in some new and exciting directions.

As always, feel free to follow me on twitter: @HowOfTrading or read my earlier articles on www.howoftrading.com

And a big thanks to the SMB team!

The following news was released after the market closed.

16:31:20 FDA Panel Votes 20-2 In Favor of Approval For Vivus’ QnexaVivus, Inc. (NASDAQ: VVUS) received excellent news on Wednesday as an FDA advisory panel has voted 20-2 in favor of approving the company’s weight-loss drug Qnexa. The panel’s decision is non-binding, but it is highly likely that the FDA will follow the panel’s positive recommendation.

link to this article

I just received the following text from one of the traders on our desk

“im such a ass tho..i saw VVUS holding 20 bid for size and i had 1000 lined up at 20.05″

The trader did not take the trade. He had identified an excellent risk/reward setup well within his risk parameters. He failed to pull the trigger because he had a tough regular trading session and although he had just made some money trading HPQ in the after hours it had been very stressful as his initial entry on a short was ill timed. He didn’t want to feel any more stress today.

Here is the after hours chart for VVUS. It traded up more than one point after he identified the long setup. Once you have trading skills, have a good understanding of price action and have developed a series of well defined trading plays what remains is execution. Execution ends up largely becoming a function of your energy, focus and emotions. Today our trader was focused but he was tired and he was feeling timid due to some recent trading stress. So he was unable to execute.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

No relevant positions

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

One of the ways I evaluate my trading is by checking to see if I got back in a stock after being stopped out. As a pro trader I think risk first and profit second. Many times I will be stopped out of a position that trades through my stop price only to see it later reach my ultimate profit target. Whether I am able to get back in for the move following the stop out says a lot to me about how well I am trading. If I fail to get back in then perhaps I am not focused enough or my confidence level is not where it should be.

Let’s take a look at the BIDU price action from today to see where one of our traders was stopped out, but ultimately was able to get back in for an up move that led to him having a profitable day. His managing of the position and being able to get back in gives me a strong indication that he is trading well right now.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

No relevant positions

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

I asked Dr. Andrew Menaker, trading psychologist, the following question:

You have a trader, a very good trader, who struggles to start December. He writes you an email saying this market is garbage and his taking an extended leave. What is your response to such a trader?

Dr. Menaker responded:

While it’s true that market conditions do change, it’s also true that our internal state changes, and that also has a big impact on our trading.  Regarding the decision to take a break, what’s important for this trader to consider is how much of their frustration is due purely to market conditions and how much is due to changes in their own psychology. Often, it’s a combination of both, but its helpful to know how much.

Sometimes, a personal reason can be enough of a justification for a break when there is an increase in personal life stressors outside of trading that compromise the traders ability to perform.

The decision to take a break can be well-founded, or it can be a form of denial or escape. The important thing is to understand the true underlying motivation is for the decision by parsing out what is really coming from the market versus what is coming from the trader.

We all lose here and there, it’s just part of trading. You can’t avoid it, but that isn’t the issue. Where many traders struggle is how to handle a loss gracefully.

Instead if equating a trading loss with personal failure, shift your mentality for what a loss means.

Does it mean you’re stupid? Not necessarily.
Does it mean you were wrong? Yes, in at least one way.
Does that mean you will never get it back? Absolutely not.

Losses are an event, yes, but they also subtract from your account. Consider them a cost of doing business as a trader. Brick-and-mortar stores have overhead, but as a trader, the biggest portion of your overhead is the losses you take.

When businesses cut costs, they’re reducing their overhead as much as possible to fatten their profit margins. Do the same with your trading. Reduce your ‘loss overhead’ by accepting a loss quickly and moving on to the next trade.

It’s much more fun to always be adding to your account rather than seeing funds flow out, but as soon as you start viewing trading losses as something impersonal, it’s going to change your perspective in a very helpful way. Rather than fret over them and allow losses to cloud your thinking or alter your mood, viewing them through the proper lens will help you more quickly get them back and then some.

Like it or not, trading is a business…how are you managing yours?

Jeff White
Producer of The Bandit Broadcast

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Traders are a skittish bunch. We can make the same trade 100 times, but the one time a left-field event occurs, it can spook us forever. (more…)