A Little Psychology...

Well, it’s been a while since my last post (been busy with repairing the shack I called home this past year, moving out, working on stuff for the Trading Pitt, etc.) but I decided now is a pretty good time to think about where our head needs to be at as traders, especially in markets that have been as wild as the ones the world’s been experiencing lately.

I’ve spent a good chunk of today reading Andrew Menaker’s blog (which can be found at http://www.andrewmenaker.com/ideas/blog/), and he always offers great self-evaluation ideas and food for thought.  One of his latest post talks about the need to be right.  This need is kryptonite to a trader.  The feeling of being correct is almost like a high for some people, and they constantly need to feel it.  Problem is, most of the best traders aren’t even correct half the time.  So to be successful, it’s absolutely essential we can deal with being wrong and don’t let our predictions dictate whether or not we are profitable.

Think about everything that’s been going on in the markets lately.  The nauseating roller coaster we’ve been on has opened the door for everybody to provide their opinion on what will happen next.  Many have been wrong, some have been right, some haven’t had a clue what’s been going on.  This is exactly the type of situation where we all need to be flexible as traders.  Use of if/then statements is absolutely key.  Sure, you always want to do a thorough analysis that provides you with a good idea of where the market might go but you need to have a Plan B if it doesn't go as planned.  As Menaker says, there is "a subtle but critical difference between anticipation and prediction." Traders who anticipated moves but ultimately took what the market gave them profited during the past two weeks; traders who made unwavering predictions got sauced.

Another great little post from Menaker's blog talked about trading the market or your P/L.  Its been said a million times but tons of traders, especially beginners, still struggle with it.  We CANNOT trade worrying about how much money you make or lose.  I'm still working on this concept myself.  I can't tell you why, but most of us (especially beginners) trade differently when we know we've lost money or are losing money.  The best way I've learned to deal with this is to completely remove your P/L from the screen.  Obviously, we still need to respect daily stop out and tolerance limits, but hiding your P/L allows you to concentrate more on price action and objectively make and manage our trades.   Try it if you don't believe me, I can guarantee that you will feel a lot more relaxed and confident when your not worried about your account.  

School will be starting up for me in about two weeks, so I'll be back to trading live during the days.  I hope to start doing a chart of the day and posting video reviews of my trades as often as possible.  I hope everyone has a great, relaxing weekend!

Embracing Failure

"I've missed more than 9,000 shots in my career.  I've lost almost 300 games.  Twenty-six times I've been trusted to take the game winning shot, and missed.  I've failed over, and over, and over again in my life; that is why I succeed."

-Michael Jordan

Michael Jordan is the best basketball player ever (go ahead and try to argue that if you disagree).  When you look past his 6 championship trophies with the Bulls along with countless MVP awards, scoring championships, and other accolades, you see that he was cut from his varsity team in high school and how he came up short of a title in each of his first 7 professional seasons.  Michael Jordan became the best because he faced a lot of failure throughout his career.  If you look through the history books, you'll see that just about any highly successful person has failed on their way to the top.

As traders, we face failure more often than most people.  If you trade intraday, I'm willing to bet within the past week or two you've had at least one day where your timing was just a little bit off or your setups just didn’t work out like they normally do.  While it’s easy to get frustrated and down on ourselves, we should really be thankful for the days of failure the market gives to us.  

If we are going to be consistently profitable traders, we need to learn to cope with failure as well as make the most of our failures.  Humans are naturally inclined to be more sensitive to failure than success.  In order to cope with failure, we first need to accept that EVERYONE faces tough times; we’re not alone in out struggles.  The faster we realize that some degree of failure is unavoidable, the better we will be able to accept it when that time comes. Another way to cope with failure is to keep a level head when you’re losing as well as when you’re winning.  Don’t get to high on yourself when your winning, and don’t get too down when you lose.  Just move onto the next trade and focus on performing the best you can.  Many of us will make hundreds or thousands of trades in the long run, so a handful of losses may seem unbearable in the short term but means virtually nothing in the long run.  When you’re struggling, reach out to other traders and just talk to them.  Chances are they’ve been in the same position before (or worse).  They made it through, and so can you.  Every trader loses sometimes, but our main goal must be to live to trade another day.  If we lose all the money in our accounts, then we physically can’t trade.  Cutting position size, following strict stop out rules, and not trading frustrated or forcefully are great ways to minimize your losses and ride out the tough periods.  If you can’t be in the right state of mind when you’re trading, it’s best to just step away and not trade until you get your head straight.

There are plenty of ways to capitalize on your failures and make yourself better in the process.  Filming your screen and reviewing certain situations that you struggle with is one great way to do this.  Things seem to move slower the second or third time around, so you can really focus on where you made your mistakes and why they happened (This has become my favorite method of reviewing my trades; its great!).  The next time a similar situation arises, you’ll be able to remember back to your past experience to avoid the same mistake this time around.  Document all your trades on paper, too.  Be detailed, and be brutally honestly with yourself.  If you did something stupid, writing it down helps you take full accountability for it.  Another great way to improve on your failures is visualization.  Put yourself back into the situation that caused the failure.  Remember the thought process you were using when you made your decisions and correct yourself where you were wrong.

Bottom line, failure is unavoidable.  I’ve been reading the Market Wizards books this summer, and nearly every single one of the world’s best traders have had periods of failure.  They didn’t allow these times to ruin them; instead they turned them around and used them as learning experiences.  If we do the same, we will only be setting ourselves up for future success.  Have a great rest of the weekend, Happy Father’s Day, and best of luck in the upcoming week!