Setting rules, goals and expectations is a very important step in life, and especially so in becoming a successful trader. Without a framework, it is impossible to truly evaluate your performance for the sake of continually moving forward. Many people recognize the need for goal setting and planning; it is a popular topic in trading psychology. However, what many fail to recognize is that a plan, by itself, is useless. The hard part, and what separates successful people (in trading and other walks of life) from mediocre people, is the ability to stick to that plan. Following a plan is difficult, but so is everything meaningful in life.
In this country, it is a popular ritual to make New Year’s resolutions, because during the course of a year people gradually begin to stray away from their core values. I do not make New Year’s resolutions because I believe they are a sign of weakness, a reflection of the fact you did not have the mental fortitude to follow the ones you set only a year ago.
Warren Buffett is credited with a great quote that I feel has many viable applications, including trading: “It takes 20 years to build a reputation and five minutes to lose it.” You can build a trading plan and follow it for a month, a year, 10 years, but if you deviate from that plan for even one trade or one day, it can derail your trading career. You must always be mindful of your identity and rules as a trader, or you risk completely losing your way. The problem lies not necessarily in losing a significant amount of money or digging yourself a monetary hole; the danger is losing the psychological edge that is impenetrable mental toughness. Let me explain further, using a metaphor that is personally applicable.
When training for a triathlon or a marathon, it is extremely important to develop a workout regime to ensure you are ready for race day. There are several factors to consider including, but not limited to: how good of shape am I in right now, how long do I have until race day, and what can I reasonably expect from myself on a daily basis. If you have never done a race before, it is imperative that you consult a professional who can help you set your training plan. Train with other more experienced racers, and also perhaps find someone near your level that you can share ideas and tips with along the journey.
Once that plan has been created, considering what is realistic, you must in your mind commit completely to following it. If for one moment your commitment to that training plan wavers, you should not enter the race. The primary benefit of following your plan every day is that you will build endurance, hone technique and establish the right pace for you. The implicit, and perhaps more important, benefit of following your plan is that you will build the mental toughness necessary to finish the race on race day. If for one day you are lazy and decide to skip your workout, then your sense of mental toughness is compromised. Most people begin to rationalize taking shortcuts: I am tired today, it was a long week at work, my ankle kind-of hurts. Serious injury is one thing, but in your heart of hearts, you know the truth. If you cheat, you are only cheating yourself. Come race day, when you start to get a slight cramp or get tired, mentally you are finished. The best racers are not necessarily those who have the most physical gifts, but those who have the greatest degree of mental toughness. That applies to all sports and all walks of life. It’s not something you are necessarily born with, but building mental toughness is an arduous process.
In trading, these principles especially hold true. Perhaps that is why many athletes have success in trading; they have already built that sense of mental toughness. If one day you decide to abandon your personal limits or strategy, it is a slippery slope. If you leave that crack in the door, the flood gates will open and the next thing you know, you will find yourself in a monetary hole and an emotional rut. The second you begin to rationalize changing your approach—the market was volatile today, other people have been having big days why not me, I was already having a bad week who cares—is the first step towards crashing out of the business. Personally, if I reach my daily profit goal in the morning, I don’t care if Bin Laden gets captured in the afternoon, I am not making a trade.
Also, don’t be afraid to ask for help, like my junior high teacher always told me. “Michael, I know you don’t understand the problem, ask questions!” Use the traders around you to learn help you build a realistic trading plan complete with strategy, goals and expectations. Pick the brains of the most successful and experienced traders to see what aspects of their approach to the markets allow them to consistently make money. Find someone who has similar style and experience to you and bounce ideas of them. Learn from each others’ mistakes as well as your own. At the end of the day, though, take all of that knowledge you have gained, and build a trading plan that fits your personality, and commit whole-heartedly to following it. The same lessons will serve you well in life as well as in trading.
“Wherever you go, go with all your heart.” –Confucius
Next week I will get a little more technical as some of you have requested, explaining my favorite chart pattern, the psychology behind it and how I personally trade it to achieve consistent results. Have a good weekend, and start building that plan and renewing your commitment to following it for Q4.
