10 Ways to Deconsruct Your Trading And Build a Better Plan turned out to be one of the most poplular posts ever written here at Trading Advice, so here’s another 10.
This time with a specific focus on building a mental approach to trading that will always allow you to derive the most from your trading plan.
But first a little background… When I crashed and burned back in 2003 even after having so carefully tested my trading method, I was seriously done in. I’d poured every ounce of my spirit into becoming a successful trader and it was absolutely devastating to me that I could blow it so easily. It got to the point that I was so emotionally wound up, and filled with a sense of doom as a trader, that I knew I had some very serious work ahead of me to undo the mental and emotional damage I’d done to myself learning to trade.
So this advice is based on my own real journey of undoing the mental mess I’d made and getting a straight ‘trading head’ on my shoulders. I hope it can be useful to you.
1. Know Your Numbers
Okay, I know I said another 10, but this first one is always going to be first on every list – its the foundation and bedrock of every plan.
Know your trading method’s expectancy. In a sea of uncertainty, knowing your edge is the only thing you’ve really got to rely on. Its absolutely 1000% imperative that you know and can trust your method. Remember it doesn’t need to be perfect – its not like you have to have a method that’s right even most of the time. You just have to have a method that makes a profit on balance, that you can execute consistently.
2. Stay Calm Before During and After
Are you monitoring your emotions? Do you have an effective method for reducing the nervous excitement that comes with trading, and which often affect your perception and judgement?
When I’m trading, I’m constantly clearing my emotions – before the session begins, a few minutes before each trade, often during a trade and usually afterwards as well.
3. Accept The Risk
Is the money you risk on each trade real for you? Do you really accept the amount of money you are risking and are you willing to let it go?
I find it helps me to think of risk as the amount of money I’m willing to spend to find out whether my edge is going to work on this trade. Note that I say spend. I actually think of each trade as though I’ve purchased a lottery ticket. I think that the amount of my stop has already been paid to find out if the edge works, so that as the trade proceeds I’m not afraid to lose anything.
This is why the first point about knowing your expectancy is so important – if you trust your expectancy over a series of trades you don’t have to be afraid of the outcome of any single one.
4. Flip a Coin
Do you expect to be right when you call on a coin toss? No, right?
Do you remind yourself each trade you make, that anything can happen and probably will?
In any given trade, pretty much anything can happen, no matter how perfect the set up looks. I use the image of the coin toss as a way to remind myself not to expect to be right, instead to expect that anything can happen.
Having a way to remind yourself not to get attached to being right, will help you stay objective.
5. Don’t Delay the Pain (and earn extra credit!)
I realized that I liked putting things off, so for a few months I forced myself to do things that I didn’t like doing every time I saw they needed doing. Taking the early shift to walk the dog, raking leaves in the yard, washing up. I hated it at first but after a while I saw it get easier and easier – because I no longer had a barrier in my head. And believe me Mrs C was over the moon!
6. Think Like Las Vegas
Do you think of each trade as an island, as the great hope, or do you think in terms of probabilities over a series of trades?
Casinos make their money by keeping the odds in their favor over a large number of bets. And that’s how successful traders think too. They don’t get attached to the success or failure of any given trade. Their primary goal is to stay calm, relaxed and open to the market’s opportunities so that they can execute their edge precisely and keep the odds in their favor.
7. Let Yourself Be Wrong
Do you have a need to be right? Do you have perfectionist tendencies? If you suspect that you do – have it seen to!
Seriously, needing to be right can be debilitating to your trading success because it controls so many other trading behaviors. For example when you think you are right, your mind actually shuts out contrary (and potantially important) information. When you think you are right you don’t need to accept the risk of the trade, why would you, you’re going to win. When you think you are right you hold on too long, even when the signs that you should have gotten out were staring you in the face.
When I began trading I used to shout at the charts – “come on baby” – I used to sing “come on baby light my fire” when I wanted the market to go up and “go down” when I wanted it to dive. I was so desperate to be right that I couldn’t have seen any warning signs if a herd of elephants were running towards me.
8. No Hallucinations
This is the crux of why its so important to implement all these other strategies. When you are wound up, anxious, unwilling to accept that you are wrong, avoid and delay the pain of loss, you begin to hallucinate. The chemicals pumping around your body from the emotional tension are distorting your perception. You see signs that aren’t there, you miss the signs that are there. You start to overtrade. Your discipline slides. And soon you are lost. The best thing you can do is walk away – and get some help.
9. Let it Go
Can you let the trade go? Or do you hold on – either to your success or your failure. Both euphoria or the need to be right and win the money back can end up causing serious losses as your judgement is impaired.
In my opinion – spoken from experience – the best help we can get from a psychological standpoint as traders is learning how to let go the emotions which affect and distort our ability to be in the current moment – seeing objectively what the market is offering. The relief of release brings a whole new perspective.
When someone first suggested emotional clearing to me and I read the description of Core Transformation – achieving soulfulness, love and peace – I was reluctant. It was a bit too much peace and love for me and not enough practical solutions to trading problems. I couldn’t have been more wrong. The state of mind that results from emotional clearing is perfect for trading – calm, relaxed, open, detached, intuitive, positive.
10. Affirm Yourself
In both The Disciplined Trader and Trading in the Zone, Mark Douglas suggests using affirmations. Normally I’m not a big fan of affirmations – I don’t think they work very well. However there is one that I have found works. I repeat really slowly “I am a consistently profitable trader”. I savor each word and allow the import of its meaning to soak in. I’ve found that in conjection with these other 9 points it really helps solidify the meaning of being consistent, being profitable and being (and thinking like) a trader.
Here’s a bonus point – if you are married or in a serious realtionship, make sure that things are straight between you about your trading and the money you risk. The Wife/partner can become a silent emotional black hole of doom and non-support (in your mind), unless they are cool with it or you are cool with them not being cool.
Have a great weekend!
All the best