<\/p>\n
We\u2019ve all heard the sad excuses after a bad run. The lame rationalizations.<\/p>\n
\u201cI know it was through my stop, but I thought that it would come back\u201d.<\/p>\n
\u201cYes, I saw the signal, but I just didn\u2019t believe it\u201d<\/p>\n
\u201cI don\u2019t know, I just froze\u201d<\/p>\n
When someone is struggling, one way to lessen the pain is to rationalize it away. That\u2019s understandable. After all, no one wants to wallow in pain and suffering anymore than necessary.\u00a0 But these sure are annoying to listen to.<\/p>\n
If a friend or colleague is struggling and in a bad place, then the last thing anyone wants to hear from them is some BS. What\u2019s even worse is when we catch ourselves making these excuses. We all have our ups and downs but we still have to take full responsibility. So just man up, be mindful of what you\u2019re saying and you\u2019ll be fine, right? <\/strong><\/p>\n Unfortunately, it\u2019s a bit more complicated than that. If someone just blew up, then a large part of the reason probably *is* because he \u201cfroze\u201d and didn\u2019t stick to his plan. While one part of him \u201cknows\u201d what to do, he can\u2019t get on board fully with doing it. Theoretically, he has a plan\u2014but when push comes to shove, he doesn\u2019t follow it. There is a great example on the SMB site entitled \u201cTrading Is All Psychology\u201d.<\/a> <\/strong><\/p>\n What\u2019s the solution? It all comes back to my favorite question, \u201cHow?\u201d. This is both a technical question about your strategy and a psychological question about your mind. First, you need a trading system that works. Then, you need to believe in it to the point that you become one with it. <\/strong><\/p>\n Put another way, you have a strategy that you want to follow. You\u2019ve probably researched it and tested it and everything seemed fine. Deep down inside, though, you don\u2019t believe in it so you don\u2019t follow it all the time. Why don\u2019t you believe in it? What would it take to convince you on every level?<\/p>\n As Brett Steenbarger so eloquently describes in his book, Enhancing Trader Performance<\/a>, most trading problems that people ascribe to \u201cpoor psychology\u201d are *not* psychological problems<\/strong>. They are actually trading problems<\/strong>. For instance, imagine that you put on a position that\u2019s sized five times as big as it should be, then get freaked out and close it an inopportune time. Of course you got scared and panicked\u2014you were taking too much risk! Thus, the first step if you\u2019re running bad is to make sure that you have a strategy. \u00a0<\/strong><\/p>\n Next up, you want to make sure that you have thoroughly researched your strategy and tested it in the markets that you\u2019re trading.\u00a0 You should have an idea of how it will perform in all market conditions and environments. Go back as far as the data will permit and really dig through every single setup and trade that you would have put on. Is the strategy working in your target market? Does it adhere to all of the basics of good trading\u2014having a discernible process, cutting losses, letting winners ride? A good trading system has to be grounded in solid trading fundamentals and in the specifics of the market(s) you\u2019re working with.<\/strong><\/p>\n How much will you make in an average year? What\u2019s your maximum drawdown? Tinker with it until you are confident that it works all the time and that it suits your own personality. If you are an economist by trading and try to day-trade, the backtest may show phenomenal results\u2014but it\u2019s not suited to your personality so it will be difficult for you to stick to it. Ultimately, you need something that works and works for you. Otherwise, you won\u2019t believe in it.<\/strong><\/p>\n Furthermore, do these fit with your goals? For instance, if your goals are to generate wealth long-term by compounding at 10% per year with very small drawdowns, then a system that makes 12% per year but could have a 30% drawdown will not work for you. Ultimately, you won\u2019t trust it and you won\u2019t follow it. Your results will end up being all over the place. Get really clear about your goals and whether or not your strategy fits in with them. If your strategy doesn\u2019t fit with your goals, then change your strategy until it does.<\/strong><\/p>\n Next, you will want to document your system somehow. First off, you will want some kind of philosophical statement, like a set of rules that govern your actions. As an example, it could be your philosophy on markets or your P&L and risk\/return goals. A good example is Dennis Gartman\u2019s Rules of Trading<\/a>, which cogently present how he thinks about the world of markets and explains in broad brush strokes how he tries to do things. You will want some documentation of how you intend to put on and take off positions day-to-day. It should cover the basic steps of managing a book:<\/p>\n The purpose of this is two-fold. One is to have a crystal clear idea in your mind about what you\u2019re doing. After all, if you can\u2019t write it down, then you probably aren\u2019t clear! Second is to keep you honest with yourself. When you are putting on a trade, or when you are reviewing your recent performance, you want to make sure that your trade rationales actually followed your process. If it\u2019s what you say you do, and what you\u2019ve tested that works, then you should want to stick to it. The written trading plan functions as a sort of checklist\u2014if you\u2019ve tick the boxes on a certain trade then you\u2019re probably on the right track.<\/p>\n You may consider this approach a bit boring or clinical. You\u2019re probably right. Where is does help you is to detach from the emotions that can spring up in trading, which is a good thing. By focusing on sticking to the plan and executing your checklist, you are reframing the game. Now, instead of having to worry so much about your positions, your P&L and your emotional state without a clear idea of what to do in any given moment, now you have shifted your focus more to making better decisions\u2014the heart of good trading<\/a>. By being a bit more emotionally detached and trying to stick to your system, you are reinforcing the odds that you stick to it and you are subtly reaffirming trust in it\u2014which raises the odds that you will stick to it.<\/p>\n Having a plan, we have done a lot to convince ourselves of its validity and to reinforce its decision-making.\u00a0 We have addressed the trading considerations that come up. Now, we are going to tackle the psychological issues. <\/strong><\/p>\n Visualization Exercise<\/strong><\/span><\/p>\n When we have a system, our task becomes getting our psychological makeup to believe it fully. What we\u2019re going to do is to imagine the ideal trader, one who always has a plan and sticks to it; one who stays calm and resourceful, even when under pressure; one who is successful and happy about that success.<\/p>\n The first part of this is identifying exactly when we were in our most resourceful state ever when it comes to trading. The famous psychologist Mihaly Csikszentmihalyi called this \u201cflow\u201d<\/a>, when you are completely absorbed in an activity and distractions just seem to drop away. Athletes call it being \u201cin the zone\u201d. Recall a time when you were clear-headed, relaxed, completely absorbed and feeling totally ready for the markets.<\/p>\n Maybe you haven\u2019t experienced this kind of state in relation to your trading.\u00a0 Maybe you\u2019ve only encountered \u201cflow\u201d in the context of athletics, where you became totally absorbed in the activity. Nonetheless, this is a good analogue for what you want to achieve in trading: immersion, brisk decision-making, an absence of internal \u201cchatter\u201d interfering with your performance. It could even be from school, where you prepared well 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.<\/p>\n Next, you want to imagine an Ideal Trader version of yourself. This will be a combination of the calm, confident, \u201cin-the-zone\u201d you that we just recalled and also of an imagined you\u2014one who is and always has been completely process-driven, trusting his strategy and detaching from harmful emotions; one who always knows the right action to perform; one who methodically executes his strategy, in good times or bad; one who has the confidence that comes from decades of experience, success and huge profits.<\/p>\n Get in to this representation and really feel it. This Ideal Trader is who you would want to be if you had could design the perfect trader from scratch; it\u2019s exactly who you would want to be after 30 years of trading experience. Think about how you would look; how you would act; how you would feel. What you would do every day in the markets? What would success look like? Importantly, if there are any objections that you envision, just let them drift away slowly. Let them pass.<\/p>\n Now that you have identified your Ideal Trader self, then you want the necessary tools to draw on that state whenever you need it\u2014which would be pretty much any time you\u2019re trading! That way, you will have the tools to reverse any unresourceful emotional states and any doubts.\u00a0 That is exactly what we are going to practice now.<\/p>\n The series of steps:<\/p>\n 10. Repeat a few times\u2014you should be able to access the Ideal Trader You state whenever you desire.<\/p>\n <\/p>\n The idea is that if you do this frequently enough, then your brain will start to reinforce subconsciously all of the characteristics of the Ideal Trader\u2014the very things that you want to encourage. By merging your daily behavior with that of the Ideal Trader, your brain is getting signals to take on those desired characteristics and traits and to overcome any objections that you might have had. This is the way to get your mind fully on board and to become one with your trading system.<\/p>\n By Bruce Bower | E-mail: Bruce [at] howoftrading.com<\/p>\n\n
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