Most aspiring traders evaluate their performance according to their P&L. But if you define your job as a trader as simply bringing home a paycheck, you may be adding unnecessary “scoreboard pressure” to an already challenging task.
The trend-following Turtles typically had more losing months than winning months. If they allowed themselves to get bothered by the down times, they might have lost confidence in their method.
Instead, they were coached by Richard Dennis and William Eckhardt to disregard the losers and continue to follow the method. The reason is that according to the laws of probability, even with a winning system there is virtually no correlation between the result of our last trade and the result of the next one.
It’s a trap to focus on winning because we have no control over whether we win or lose on any particular trade. Each and every trade is truly a roll of the dice, although we hope we have loaded the dice in our favor and over the longer-term, our edge will generate profits.
If we shouldn’t focus on winning, what should we focus on?
I suggest: avoiding operator errors, or to put it in the positive: perfect execution. This shift in approach to trader self-talk is fundamental to sports psychology and active trading is much more like a sport than a business.
In my sport, tennis, we track two kinds of errors: forced and unforced. In evaluating player performance, coaches look at the ratio of winners to unforced errors. An example of an unforced error is hitting an easy rally ball into the net.
Unforced errors in tennis are like stupid mistakes in trading… we lose focus, or get lazy or impulsive or overly creative or angry or greedy or afraid, etc. In trading, losses happen on their own, so adding in gratuitous mistakes is costly. We want to make sure that when we lose it’s a good loss, not a stupid loss.
What is a good loss? It’s a loss taken in accord with our trading plan, after a proper entry.
The key point, which Mark Douglas emphasized over and over, is that we really don’t know what’s going to happen around the corner of time, so it behooves the responsible trader to mentally prepare for the loss before we put on a trade.
Running that loss scenario through one’s mind in advance will help prevent the destabilizing emotional rollercoaster that occurs if one simply trades one’s fluctuating P&L. The less emotion, the easier it is to remember our plan and execute it… perfectly.
www.daytradingpsychology.com (Peak performance coaching for private traders)
www.trader-analytics.com (Peak performance coaching for RIAs, banks and hedge funds.
