WARNING: AN ULTRA-LONG POST…….. IF YOU ARE GOING TO READ THE WHOLE POST, YOU WILL NEED A STRONG FRESH CUP OF COFFEE… I DRANK THREE JUST TO BE ABLE TO WRITE IT….
The work in the area of trading psychology is huge for me. There is quite a stark difference between reading something, feeling inspired and getting excited about it, and then actually translating that inspiration into action, and not just one-off action, but new habits, new behavioral patterns that are applied consistently on a daily basis. So progress in the “Crash Course” is a lot slower than planned/anticipated – partly because I have allocated more time to trading strategy design, and partly because it takes a long time to digest and work through the psychological points.
But in essence, this single blog post summarizes most of the work/thoughts/ideas in the psychology area for the past couple of months, and gives me a blue-print checklist of the habits that I should be developing. Even though I am still only in Chapter 1 of Steenbarger’s text, it is having a significant impact on my trading and how I think about my trading.
Here are links to the key trading psychology blog posts I made since late November 2014:
SUMMARIES FROM DAILY PSYCHOLOGY REVIEWS
Since creating the process/concept of the “End of Day” Checklist I have done a large number of such reviews already – ideally I am meant to do it at the end of every single trading session  – not quite there yet – but working towards it. Here’s a summary of what I have found so far:
- Influence increases from calmness , relaxation , preparation 
- Knows when to step back 
- Regularly quickly waits, reviews and checks before executing the trade 
- Takes breaks during the day – walks to the supermarket with his colleagues or workouts in the nearby gym to get that blood flowing 
- Surrounds himself with other traders and supportive friends & family 
- Eats well  , manages alcohol  and caffeine intake , sleeps well  and does a lot of sport 
- Helps to create winning mindset by body-positioning at the desk , wearing comfortable clothing , keeping well hydrated , maintaining good room temperature  and fresh air-flow , making jokes with colleagues , staying focused (not being distracted by Facebook, email, internet surfing) , maintaining a Gordon Gecko image in mind 
- Maintains a well-balanced life – with a lot of people and passions in it  – trading is not his sole pursuit
- Uses tools to neutralize himself, to set his mood into optimal trading capabilities, at the start of the trading session and keeps a check on himself throughout the session. 
- Sees his bad trading habits as his enemies, as the behaviors that are holding him back from trading successfully. 
- Uses creative tools and approaches to review and design his trading tactics. 
- Influence increases from anxiety, stress  and emotions 
- High heart rate 
- Easily distracted 
- Quickly makes decisions on the spot 
- Lets emotions of fear and greed influence trading decisions 
- Often chokes under pressure 
- Can be overaggressive  and/or ultra-conservative 
- Continues to stay in trades when a mistake has clearly been made 
- Feeds from big desire to succeed but fails to input the required preparations 
- Fails to learn lessons from things that have gone wrong 
- Like the Proficient Trader, he trades on the basis of analysis, rules and plans rather than on the basis of emotions
There’s another good summary of how each type of trader behaves detailed in the Battle of the Trader Personalities (some duplication of material).
Solution-Focus v Problem-Focus
Trader Psychologist Steenbarger strongly recommends simply doing more of what is already working – being solution-focused – rather than focusing on fixing the stuff that is not working. Every individual, regardless how tricky their life situation, will have some areas that are going allright, or God forbid, are going well. These are little ledges that can be used as initial support – which can be used as a basis for bringing change to the overall situation. Though I am sure that it is much easier said than done. Likewise every trader, regardless how terrible or non-profitable, will have some trading traits that are proficient. Rather than focusing on fixing the bad traits, focus on the ones that are going well and multiply them out. (However eventually things will still need to be addressed – for example a technically strong trader cannot succeed if they continuously use inappropriate position sizing – how do I reconcile these two views?).
Action: Give more and energy to the Proficient Trader – and put on more quantity of the good trading examples. Do less of the destructive trader and bad trading examples. = OBJECTIVE I
- Differentiation between entry and management of a trade for assessing who is in control
- Thoughts and emotions often in turmoil whilst positions are open – but they don’t influence my actions
- Calmness and clarity feeds the Proficient Trader
- Stress and anxiety feeds the Incompetent Trader
- As more trades are completed (in live and testing conditions) the less self-talk will take place over time and the more reliance can be placed on pre-determined trading plans 
Examples of good trading
- Patience – waiting for candles and/or technical patterns to finish forming 
- Accepting that I will not catch all the moves in the market 
- When in the wrong mindset (for example full of fear) – refraining from trading and sorting out the mindset first 
- Once in a trade, sticking to the trading plan and trading rules 
- Identifying targets prior to entering the trade 
- Making use of technicals – pivots , support/resistance , EMA’s , round numbers 
- Ceasing/reducing actions when not feeling good (e.g. tired, anxious, under stress) 
- Self-Laughs and usage of humor throughout a trading session 
- Awareness of one’s mental  and physical state 
- Awareness of current market conditions – pending news , choppiness , volatility levels , fundamental aspects , strength/weakness momentum 
- Treading carefully after trades where a big negative swing occurred – in the past this has often led to destructive trading 
- Scenario Planning ahead of time – e.g. what to do if price gets close to T1 and then reverses? 
- Entering at good levels to shift the odds into my favor 
Examples of bad trading
- Impatience – not waiting for candles to finish forming 
- Becoming more trigger happy as a result of already having an open position 
- Trading to make up for losing positions (whether those are closed or still open), to turn around the P&L for the current trading session 
- Jumping the gun on stop-entry orders 
- Being constrained by false beliefs and preconceived notions about an instrument (e.g. how much the DAX can rally in one session) 
How could the influence of the Proficient Trader be increased
- More of anything listed in ‘Examples of Good Trading’
- Less of anything listed in ‘Examples of Bad Trading’
- Inducing a calm state of mind and/or a calm working environment
- Focus on my actions, not the outcomes 
- Separating self-image and self-worth from trading performance 
- Seeing all of trading as a game – this will reduce pressure 
- Seeing the trading operation in perspective – I could have died or turned into a vegetable at the age of 5 – literally everything right now is one big bonus!! 
- Thus the FX operation should never stress me out to a large degree
- I am in a great position – I seem to have acquired enough technical skills, am working on the mental side, have sorted the operational aspects, have a bankroll, am loving it & am working hard – of course I am going to make it!!
- Continuously seeking more understanding of the markets  – such as correlation between asset classes and/or instruments, risk-on/risk-off, commodity-currency relationships (Oil/Gold with AUD and CAD), awareness of geo-political issues (Ukraine, Yemen, Islamic State), correlations between equity markets and Yen crosses, appreciation of the US dollar index
- Continuously seeking to improve chart analysis skills and ability to interpret price action 
Reasons for bad trading
- Worry/Anxiety of missing out on a potential move in the market
- Tiredness, exhaustion
- Stressful working environment
- Getting unsettled by Volatility-inducing events in the market (particularly when the event is not scheduled) 
Questions raised, but not [yet] answered – continue on, in blind faith, my friend
- Why am I looking for continuous feedback on my trade? Why do I care whether price is going up or down, when I am not going to let it influence my trade management in any case?
- Why do I assign so much significance to the outcome of each trade?
- How can I translate all of these psychological findings into action?
- Why do I directly link my self-image with material wealth?
- Am I being too harsh and critical on myself?
- Am I placing too much structure in my trading processes?
- Where is my motivation for trading coming from?
- Will I get bored (and then stop) the trading operation once I have mastered it?
- How could the conditions of the market change so that trading is no longer profitable/feasible?
- See also further questioned raised in Apr6 Psychology blog post
1st Challenge – execute at least 6 trades a day –OBJECTIVE II
In Chapter 1, Steenbarger makes a comparison between US and Japanese auto manufacturers – he says that the Japanese pushed their production hard hard enough in order to produce breakdowns so that they could determine the exact cause of the breakdowns and then make their machinery stronger. The breakdowns were viewed as opportunities for learning and improvement. The US manufacturers ran the production speed at speeds slow enough to avoid breakdowns. The differences in approach allowed the Japanese to make serious headway against the Americans.
By putting on at least six trades I am forcing myself to make mistakes, to be pressured, to gather experiences – these situations should be seen as opportunities to learn and improve – unlike the Japanese auto manufacturer I am risking just £100 per trade as opposed to bringing a very costly assembly line to a halt. I am also forcing myself to look for other markets/asset classes for opportunities, rather than being lazy. However at the same time I need to look for situations with positive expectancy (+EV situations). I am pushing myself to perform more and better.
By doing 30 trades a week I am collecting a lot of data, which I can put into a feedback loop, in order to make my trading better. Though that will inevitably involve swings (positive and negative) so I need to be able to handle those psychologically.
This ties directly back to the suggestions made by Ms Turquoise at the start of last week! So that was quite an insight!
2nd Challenge – Pre-Session Visualization – OBJECTIVE III
In addition to conducting post-session psychology reviews (which are proving to be tremendously beneficial) I will now also add 10min pre-session routines – during which I focus and visualize the session about to commence. I will try this out and do it every day for the month of April, and then re-assess.