2. Today's bounce from 708 to 715 is sharp, with small volumn, it's a short!
ER2 chart:
The Most Important Psychological Skill for Traders
by Brett SteenbargerLink: Part One, Part Two
A holiday weekend is a good time to review trading journals, pick apart your results, and engage in self-assessment.
If your results are not what you hoped for, an important question to ask yourself is, "Why?".
There are three basic reasons why traders don't succeed:
1) They are trading a market and time frame that lacks opportunity;
2) They are trading a method that does not possess an objective edge in the marketplace;
3) They have a promising market, time frame, and method, but are not executing it properly.
Of these reasons, #3 is the most frustrating for traders. They feel as though they have the tools to succeed, but they themselves get in the way of their own success. Many times this is because emotional factors interfere with sound decision-making.
My recent post on techniques for dealing with emotional disruptions of trading offered a number of links to articles on cognitive, behavioral, and solution-focused methods for gaining self-control. Many more articles on trading psychology are available on my personal site, and a much more detailed explanation of the relationship between psychology and trading can be found in my book. It was because interest was so high in learning self-help methods for dealing with emotional disruptions of trading that I included step-by-step self-help manuals as the last two chapters of my latest book.
My hope is that these resources will help traders become their own mentors.
After my recent post, I received several emails asking a similar question: "What is the best technique I can use for getting myself in control?"
Most psychological disruptions of trading involve either under-control or over-control: traders either become impulsive and lose discipline when frustrated (resulting in overtrading), or they become anxious and negative (and miss out on opportunity).
The key to understanding these problems, as I stress in my book, is to recognize that they are generally state-dependent. They do not occur at all times, under all conditions. Rather, they are triggered by particular events and associated emotional states. The trader who is frustrated or depressed trades differently from the trader who is in a normal, non-aroused emotional state. This is because of brain physiology: we activate different brain regions and functions under conditions of arousal vs. conditions of calm concentration.
For this reason, the most important psychological skill for traders is simply the ability to control your body's level of arousal. It is near-impossible to maintain a collected frame of mind when your body is racing in flight-or-fight response patterns or withdrawing in the face of defeat. If you can control the body, you are much better positioned to achieve cognitive and emotional control.
Three steps can help you gain rapid control if you practice them frequently:
1) Stop whatever you are doing and take a break;
2) Sit comfortably and focus your attention on something neutral. As I mention in my book, a sound and light machine is ideal for this: you simply focus on the patterns of light and eliminate (as much as possible) stray thoughts. Biofeedback games can also be effective in focusing your attention;
3) Once you have your attention fixed, regulate your breathing by taking longer, deeper, and slower breaths. The slowing and deepening of the rate of your breathing will help slow your heart rate, lower your muscle tension, and reduce other biofeedback indicators of stress.
In the beginning, you may need to do this exercise for 10-15 minutes at a time a couple of times per day. As you become more skilled, you'll find that it takes less and less time to get yourself focused and calm. Eventually, just focusing your mind and taking a few deep breaths will get the job done. But it takes steady, consistent practice.
The exercise interrupts negative patterns of thought by controlling your concentration. It also slows your body down, which in turn helps you slow down racing thoughts. Because so many negative behavior patterns are triggered by states of frustration, heading off these states by proactively engaging in this exercise is especially effective.
Take a look at your P/L. How much money have you lost by not following your rules due to emotional disruption? If that figure is significant, the investment of time you spend learning these techniques will produce meaningful returns.
In my next post, we'll take a look at how you can integrate cognitive methods into the basic relaxation exercise.
My last post explained how psychological disruptions of trading are linked to state shifts that manifest themselves emotionally, cognitively, and physiologically. Very often these shifts involve states of heightened arousal due to frustration, fear, and anger. The previous post explained how these states can be defused by combining focused concentration with deepened, slowed breathing. With consistent practice, traders can become quite adept at calming their minds and bodies and interrupting processes that interfere with good decision making.
A related skill that I describe in The Psychology of Trading is "taking your emotional temperature." This simply means that you periodically stand outside yourself as an observer and notice your thoughts, feelings, and physical state. By making this self-observation a regular practice, you can become skilled at catching state shifts as they are occurring. This enables you to utilize the focusing and breathing exercises proactively, before emotional triggers can disrupt trading decisions.
Such a proactive use of the focus and breathing is especially effective when combined with cognitive techniques. Here's how to do it:
First off, I recommend that anyone trying these methods reduce their trading size significantly. By taking P/L off the table temporarily, it allows you to focus on developing your self-control. Then, with your success in the exercises, you can gradually build back to a normal trading size. (Note that if reducing your trading size by itself eliminates your emotional disruptions, that in itself may be your problem: you may be trading too large for your account size and your personal risk tolerance.)
Second, before adding cognitive components, it's necessary to truly master the focusing and breathing from the previous post. I generally have people practicing those methods at least twice a day for a full week before adding new components. The goal is to be able to calm yourself significantly with just a focused mind and a few deep, slow breaths. This takes consistent practice.
Once you can focus and relax yourself on demand, you're ready to add a cognitive module to your self-mentoring. Before you start trading, sit comfortably and vividly imagine market situations that would normally lead you to become fearful or frustrated. For example, you can "play a movie in your head" of the market moving against you and hitting your stop-loss point. The key is imagining the market action and your stop in vivid detail--while you are doing your deep, slow breathing. Then continue your "movie" by vividly imagining yourself taking the right course of action in that situation. Imagine how you would talk to yourself in that situation and what actions you'd take in the market--again, all the while keeping yourself calm and focused, breathing deeply and slowly.
You may need to repeat your "movies" several times with variations. In all, I recommend spending at least 15 minutes with this exercise prior to the market open. What you're doing is literally training yourself to stay calm and focused (and to do the right things) in situations that used to take you out of your game. By repeating these situations in your head many, many times, you normalize them (and your response to them) and make them familiar and non-threatening. Facing a situation again and again successfully in your mind prepares you to do the right things when those situations actually occur.
Notice that this method will work, not only for trading problems, but any situation that tends to trigger you and lead to unwanted reactions. Mental rehearsals under conditions of self control are a method for extending our free will, our ability to respond to events as we wish. This is not only helpful in trading, but in all of life.
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