Thursday, July 30, 2015

Mental Momentum

As a single footstep will not make a path on the earth, so a single thought will not make a pathway in the mind. To make a deep physical path, we walk again and again. To make a deep mental path, we must think over and over the kind of thoughts we wish to dominate our lives.
Henry David Thoreau
When you're under a great deal of pressure, it is easy, even common, to choke. The stress, being on edge, make it extremely difficult to make decisions or to look at your current trading predicament objectively. When you have a drawdown, you can feel a little disappointed, a little stunned. After you've made a series of successful trades, you feel much more powerful, as if you can relax a little bit, and when you feel relaxed, you are more creative in approaching your trading strategies. Everything seems to click and you start trading effortlessly and profitably. It is extremely difficult to feel such empowerment when you are falling behind, or stuck in a rut, not making any headway. There are two types of momentum in trading. There is profit momentum and mental momentum. Mental momentum can be just as important as profit momentum.

We feel mental momentum when we believe we have made our best effort, when we feel that we have done everything we possibly could have done. At these times, we should pat ourselves on the back for a job well done. While trading, we usually forget to give ourselves credit when we have put in a good effort. We become so focused on profits and those efforts that produce profits. In order words, we focus exclusively on performance goals, while completely forgetting about learning goals, which are equally important.


Instead of focusing only on a performance goal, focus, also on other goals that are equally important, but may not always directly produce a profit. There are many modest goals that can be achieved easily and deserve a reward upon completion. Break down the goal of making a huge profit from a few good trades into specific steps that are doable, and should be rewarded. For example, studying for 10 or 20 hours a week or learning a new trading technique is important and worthy of reward, even if the reward is just a personal sense of accomplishment. The specific goal may not immediately lead to your larger goal but it is easy to achieve, and will lead to personal satisfaction upon completion. In the long run, this alone will contribute to the attainment of your larger longer term goal of becoming a seasoned, profitable trader. The more you complete these modest goals, the more mental momentum you achieve.


Give yourself credit for all the effort you put into trading. It is tempting to feel good about your efforts only when they pay off, but you put in just as much effort putting on a losing trade as a winning trade. Regardless of whether you win or lose, you'll feel better if you reward yourself for all the work you do, regardless of the outcome. The more you reward yourself for all the work you do, the more mental momentum you will feel. This, in turn, will make you feel strong and empowered, allowing you to trade more effortlessly and profitably.
Reprint from PrudentTrader Archives 2005

Thursday, July 23, 2015

Whatever Happens, Take Responsibility

You must take personal responsibility. You cannot change the circumstances, the seasons, or the wind, but you can change yourself. That is something you have charge of.
Jim Rohn

An attribute most successful people, as well as successful traders share, is simply, no matter what happens they take personal responsibility. They operate on the belief that they create their world. The phrase you’ll most often hear from these successful people is: “I am responsible, I’ll take care of it.
Most of you, I am sure at one time or another, have purchased a stock based upon the recommendation of a stockbroker, a friend, or investment newsletter. I am also sure, that like myself, sometimes those ideas do not work out and result in a loss, sometimes a substantial loss. Most stockbroker’s and investment newsletter writers are honest, hardworking individuals, and are telling you what they honestly believe to be an outstanding investment idea or trade, at least at the time.
The one, however, who has the ultimate responsibility is you. You bought into the argument or
concept; you bear the responsibility, regardless of the results. No one held a gun to your head and said buy or sell. The position you are in, you created, if not by your physical actions, maybe by the level and tenor of your thoughts (fear, greed, etc.).
If you don’t believe that you’re creating your world, whether it be successes or failures, then you are at the mercy of circumstances. Things just happen to you. You’re an object, not a subject. If that is what you believe, its time to look for another culture, another world. Why be here if you’re just the product of random outside forces?
Taking responsibility is one of the best measures of a person’s maturity. It’s also an example of beliefs supporting other beliefs, a coherent system of beliefs. If you take responsibility, you are in control, and if you are in control, you will succeed.
 “Those who take responsibility are in power. Those who avoid it are disempowered” – Anthony Robbins.
Dan Rather once said John F. Kennedy became a true leader during the Bay of Pigs incident, when he stood before the American people and said that the Bay of Pigs was an atrocity that should never have happened, and then took full responsibility for it. When he did that, he was transformed from an able young politician, to a real leader.
By retaining responsibility, you retain the power to change the result you produce. The next time you have a bad trade, take personal responsibility for it, and learn from it. Avoid at all costs blame.  It’s not a failure, it’s a learning experience, it’s feedback.
Reprint from PrudentTrader archives

Thursday, July 16, 2015

Handling Disappointment and Regret

We must all suffer one of two things: the pain of discipline or the pain of regret or disappointment.
Jim Rohn
A powerful market influence is fear and greed but fear and greed aren't the only emotions that influence our daily trading decisions. Two other emotions; disappointment and regret can also impact what we do. It is quite normal to feel disappointed when our trades fail to meet our expectations, and regret when we think that we have made poor decisions that could have been easily avoided. We often believe, as traders, that we must always be right and that trading outcomes must meet our expectations. These core assumptions should be questioned and by doing so you will be able to cultivate a peak performance mindset more easily.

Merely changing our perspective on this issue can change how we respond emotionally to trading setbacks. If we believe setbacks are rare, and that they are awful events, then we are going to be prone to experience extreme feelings of disappointment and regret. If we however understand that setbacks and losses are inevitable, then the disappointment and regret are easily dealt with. We must remember that a single trade is just that, one trade among a series of trades. The only outcome that matters in the end is the overall performance across many trades and not the outcome of this trade.

You can control unpleasant emotions by taking the proper perspective. Humans tend to overstate the adverse effects of a dreaded outcome. And there are a few simple strategies we can use to control these emotions. If we control our risk on the trade, and plan it out carefully, the risk will be minimized and the actual potential loss will not be catastrophic. Once the risk is truly minimized, remind yourself "I'm making more out of the potential loss than it deserves; it is not going to be as unpleasant as I'm thinking it will be." 

Minimize disappointment and regret by impersonalizing the trade. Think probabilities, "This is just one of many trades, its outcome means nothing, the big picture is all that counts." Remind yourself of the relative insignificance of this trade, you'll minimize the potential regret should you lose. Avoid over-interpreting the significance of a trade; a single losing trade (or even a few losing trades) doesn't mean that you have poor trading skills; it may just be a run of bad luck. There's no point in making the outcome of a trade symbolic of your skills as a trader. And, most importantly, never put your self-worth on the line with your money. You're a professional. The outcome of the trade should not influence the positive view you have of yourself as a person.
Reprint Prudent Trader Archives 2005

Thursday, July 9, 2015

Become Disconnected

To be a champion, you have to learn to handle stress and pressure. But if you've prepared mentally and physically, you don't have to worry.
Harvey Mackay

When your self-esteem is not on the line, odds are you are trading objectively. All that is on the line then is mere money. There is an old cliché that states "Don't let your net worth define your self worth." This is not to say that making money is not important but it must be put in its proper perspective. Your overall trading over time is not dependent upon your next trade alone. The fact that your last trade was very profitable does not in and of itself make you a genius, therefore the converse becomes true, if your last trade was a loss or even part of a series of losses, it does not make you dumb or a loser. To the extent that you can trade with a logical and unemotional mindset the more effortlessly and profitably you will trade, most of the time.

This is much easier said than done. Although you will find performance is best when the outcome truly does not matter, it is very difficult to set up such circumstances. Outcomes often do indeed matter and disconnecting yourself from trading outcomes is emotionally difficult. In several research studies, it has been demonstrated that performance is hampered when outcomes are tied to your sense of self, or your ability to satisfy basic psychological or emotional needs. For example, when the outcome of a trade impacts your sense of security or identity, the pressure is on, and it will be hard to perform under the pressure. Relieving the pressure will improve your ability to perform. 

The ideal situation, for example, is a multi-millionaire who can afford to make several losing trades and lose $5,000 a day with relatively few scars. Most of us, however, are not that fortunate. Perhaps the next best scenario is the trader who has a relatively small trading account and uses the profits from it to pay monthly leisure expenses, such as gourmet dinners or extra luxury items. If the losses really don't matter, the pressure will be lessened. Most traders however are not in one of those positions. 

When traders become interested in trading for a living, that's when trading becomes really difficult. Be it the lone trader trying to support a family or the professional hedge fund manager trading clients' money. The outcomes of trades do matter. If too much money is lost, you do not survive economically. The psychological impact can be substantial. Your identity is usually closely linked to being a good provider, a successful member of society. When you lose a lot of money, your sense of self and self-esteem is diminished. In the back of your mind, you always know that should losses mount too drastically, you can actually be harmed financially and psychologically. 

So how do you disconnect yourself from trading outcomes? Preventative measures can be taken. First, one can manage risk. If you know that it is unlikely that the outcome of a series of losing trades can hurt you, you'll feel more at ease and be able to remain calm and objective. Second, you must have a sense of self that is defined in many different ways. For example, don't just define yourself as "a trader." View yourself from multiple perspectives: a good friend, a loving spouse, a caring parent, and an upstanding citizen. Multiple views of oneself will lessen the importance of maintaining the view of oneself as "the winning trader," and will ease some of the psychological pressure. The more you can disconnect your trading performance from your sense of self, the more you can trade logically, effortlessly, and profitably.


PrudentTrader Archives 2005