One of the most common ways to monitor oneself is through the use of trading journals. Active intraday traders might make entries during a midday break and at the end of the trading day; others might simply write in the journal at the end of each day in which they are making trading decisions. The key is to catch your patterns as soon after they occur as possible, rather than rely upon fallible memory.
Note that self-monitoring is not a change technique in itself, but it often leads to changes. Once you see your patterns with crystal clarity—including their costly consequences—it becomes much easier to interrupt them and prevent their future occurrence. At other times, self-monitoring may alert you to patterns that you didn’t know were present. This is exceedingly valuable, as it lays the groundwork for change that otherwise would have been impossible.
Any time you systematically review your performance over time—and the factors associated with successful and unsuccessful performance—you’re engaging in self-monitoring. For example, I reviewed my recent trading results trade by trade and found that I was taking larger point losers on small trades than on my larger ones. This review led to the realization that, when trades were quite small, I was not as vigilant in setting and sticking to stop-loss levels. Although the total dollar loss for each small trade was not huge, over time the small losses added up. This led me to establish a new routine for setting and sticking to stop-losses with small trades by explicitly writing out my risk/reward ratio for each trade before I placed the order. The self-monitoring made me more conscious of what I was doing, which in turn kept me trading well.
Self-monitoring is the foundation on which all coaching efforts are built.
My experience is that the best predictor of failure in the trading profession is the inability to sustain self-monitoring. This inability leaves traders unable to clearly identify their problem patterns, and it prevents them from reflecting and learning from their efforts at change. Goals without self-monitoring are but mere good intentions; they never translate into concrete actions to initiate and sustain change.
Why would a trader, seemingly desirous of success, not sustain efforts to monitor her own thoughts, emotions, and/or trading performance? I believe it’s because many traders are motivated by trading and making money, not by a desire to understand themselves and markets. This is an important distinction. To paraphrase coach Bob Knight, they are motivated to win, but not motivated to do the work it takes to become a winner. In the best traders, self-mastery is a core motivation. It’s why they continue trading long after they could have comfortably retired.
The most common format for beginning a regimen of self-monitoring is keeping a journal. The basic components of a self-monitoring journal might look as follows:
Divide your journal page into three columns. The first column describes the trade that was placed, including the trade size and the time of day. If you scale into a single position, you would treat that as a single entry in the journal. Similarly, if you enter several positions to capitalize on a single trade idea (e.g., you want to be long precious metals, so you buy three different mining stocks), those would also be incorporated within a single journal entry. The first column might thus summarize what you did for each trade idea, how much you risked on the idea, when you placed the trades, the prices that you paid, and how you placed the trades (e.g., all at once or by scaling in; executed at the market or with limit orders). If you are a high-frequency trader, consider the possibility of automating your trade monitoring with tools such as StockTickr (www.stocktickr.com) or Trader DNA (www.traderdna.com).
The second column would summarize the outcomes of the trades, including the prices and times of your exits, your P/L for that trade (or trade idea), and how you exited the trades (e.g., all at once or scaling out, at the market or by working orders).
The third column would include all of your behavioral observations for that particular trade or trade idea: what you were thinking, how you were feeling, your preparation for that trade, your degree of confidence in the trade, etc. In other words, the third column takes a look at you and your state of mind, thought patterns, and physical state during the trades. The third column could also include observations about how well you entered, managed, and exited the trades. Whatever stands out for you—good or bad—about the trade would be included in that third column.
Keep your trading journal doable; many efforts at self-monitoring fail because they become onerous.
For a trader such as myself who only place, at most, a few trades per day, such a journal is relatively easy to keep. Prop traders who make dozens of trades per day or more, however, are likely to find such a journal to be onerous. One of the best ways to sabotage self-monitoring efforts is to make them so burdensome that you won’t sustain the effort. If you’re an active trader and cannot automate your monitoring of trades, you can streamline the journal in one of several ways:• You can create a single entry for the morning trading and a second entry for the afternoon’s trading, with the columns simply summarizing your positions, your P/L for the A.M. or P.M., and your associated observations of your trading at those times.
• You can create entries for selected positions only that stand out in your mind either because they were quite successful or quite unsuccessful. If you sample from your trades in this manner, make sure that you include best and worst trades, so that you can observe positive and negative patterns. These are the trades from which we learn the most.
• If your trading is complex, with many positions, hedges, and a flowing in and out of risk exposure over time (like a market maker or a very active portfolio manager), you can simply summarize your day with a single journal entry. The first column would review your major trading ideas, the second column would note P/L, and the third column would include your self-observations.
There is no single self-monitoring format perfect for all traders; the key is to adapt the format to your needs and trading style. The real work comes when you’ve accumulated enough entries to notice patterns in your trading: the factors that distinguish your best trades and days and those that accompany your worst trading. How to analyze your self-monitoring journal will be the focus of the next lesson. For now, however, your task is simply to sustain self-awareness: to be an active observer of your own trading process.
When you are your own trading coach, there is always a part of you that stands apart from your decision-making and execution, observing yourself and exercising control over what you do and how you do it. The real value of the trading journal is that it structures the process of self-awareness and helps make it more regular and automatic. If you were walking on a familiar street, you would hardly think about how you walk, everything would be on autopilot. If, however, you were taking the same walk in a minefield, you would be exquisitely self-aware, conscious of every step that you took. Trading is neither a walk in the park nor a minefield . . . perhaps it’s more like a walk in a beautiful, but somewhat dangerous park. You want to be absorbed in the walk, but alert and aware at the same time. That is the function of the trading journal: it enables you to monitor yourself, even as you are immersed in what you’re doing.
COACHING CUE
A great insight into journal keeping is offered by Charles Kirk (www.thekirkreport.com) in Chapter 9, who enters his observations into a database program so that he can readily retrieve journal entries on various topics. This is an effective way of monitoring specific trading challenges over time.
LESSON 32: RECOGNIZE YOUR PATTERNS
One of the keys to brief therapy is the creation of a concrete focus for change. One of the reasons that older forms of therapy took so long to implement—including years of psychoanalysis—was that they attempted broad personality changes. Our understanding of personality traits and their biological, hereditary components helps us to be a bit more modest in our aims. No form of coaching or counseling will restructure a person’s personality; nor should it. The goal of coaching is to help people work around their weaknesses and
build their strengths, so that they can express their basic personalities and skills as constructively and successfully as possible.
You cannot change your personality, but you can change how it is expressed.
Many self-described coaches lack formal training in psychology and especially lack the experience and grounding of licensed helping professionals. They acquire a cluster of self-help methods and try to fit all problems to those. The result is a canned set of solutions for any given problem. This can be disastrous. The patterns that interfere with trading often lie well outside canned, self-help nostrums. One successful trader I recently met at a conference presentation was having a poor trading year and was even considering retiring. She complained of a loss of enthusiasm and excitement about her trading, as well as weight gain and more negative feelings about herself. She had seen three prior coaches and therapists, all to no avail. After a short discussion, I obtained enough information to suggest that she obtain a blood workup from her primary care physician. She did so, and the results suggested a low level of thyroid activity. Once she received proper hormonal supplementation, her mood and energy level returned, her concentration improved, and she resumed her successful career.
How many traders lose their careers because they never understand the patterns that underlie their problems?
You might ask the question, “How can I, as a trader relatively uneducated in applied psychology, ever hope to identify obscure patterns such as low hormone levels? If experienced coaches and counselors miss the pattern, how can I detect it?”
Ironically, I think that you’re in better shape than most commercial coaches to identify and act upon unusual patterns that interfere with good trading. I could readily make the recommendation for the trader because I was not seeking her business. She was not paying me for my services and I did not stand to gain by making one recommendation versus another. (Note: my coaching is limited to a limited group of proprietary trading firms, hedge funds, and investment banks; I don’t take on individual traders as clients.) Most coaches who focus on retail traders, on the other hand, need to constantly drum up business. It is not in their self-interest to raise a possible course of action (such as blood tests and thyroid medication) that doesn’t lead to further services and additional fees. As a result, they focus on solutions that they can provide (i.e., that will bring them additional business). When all you have is a hammer, Maslow once remarked, you tend to treat everything as nails.
As your own trading coach, you have no such conflicts of interest. You can learn pattern recognition for yourself and diagnose your own concerns. If the problem still eludes you, even after you’ve reviewed your journal extensively, send an e-mail to the special address reserved for this book ([email protected]; see the Conclusion) and I will do my best to point you in a promising direction. But I think you’ll be pleasantly surprised to find how readily you can tackle your own challenges once you learn a few basic techniques.
Once you learn to coach yourself, you have the skills to guide your development across a lifetime.
So let’s see how you can become expert in recognizing your own patterns, building on the trading journal described in the previous lesson. Reviewing your journal entries, you want to divide them into two clusters: those describing your most successful trading and those that capture when you were trading at your worst. The first cluster will reveal what we call solution patterns; the second cluster alerts you to problem patterns. Many times, the difference between the solution and problem patterns will themselves point you to practical actions you can take to improve your performance. For instance, you might notice that during your successful trading you’re more patient entering trades and take fewer trades, each with smaller size. When you’re less successful, you trade more often and with maximum size.
The comparison between best and worst trading will also alert you to differences in your coping with market challenges. You may find, for example, that when you’re trading well, you tend to be very problem-focused. When you are less successful, you trade while you are confused or frustrated, without waiting for clearly defined opportunity.
The key is to look for patterns, not just isolated instances of good or poor trading. For each good day of trading, you might jot down several things you did right and then see which entries appear day after day. Similarly, in reviewing the poor trading days, you would write down the key mistakes you made and observe which ones appear over time.
Your trading strengths can be found in the patterns that repeat across successful trades.
If you cannot find patterns that stand out, you may need to monitor your trading over a longer period, so that you have a rich sample of good and poor trading days. You’re looking for common elements that jump out at you; don’t be too quick to read subtleties into the patterns. The best things to work on are the ones that are most salient—that hit you between the eyes. For instance, when I have done the pattern-recognition work and compared my best and worst trading, I found stark differences in the sizing of my trades (initial positions neither too large nor too small performed best); the timing of the trades (positions too early in the morning or later in the afternoon underperformed those made after the market sorted itself out in the first minutes of trade); and the duration of my trades (better performance when held shorter, with clear targets and stops). I also found that I traded best when I had a clear longer-term picture of the market to guide shorter-term entries and trades. My absolute worst trading occurred when I held a strong view at the start of the market day and did not modify the view as the day progressed, continuing to trade against a market trend.
Notice how each of these patterns focuses a trader on what to change, which is the first step in deciding how to make changes. Many times, traders fail to make changes because they aren’t clear on what to change. They rely on vague generalizations (“I need to be more disciplined”) rather than identify specific behaviors to work on. By conducting detailed comparisons between your best and worst trading, you can find a focus for your self-coaching efforts and channel your energies in the most constructive directions. If you know your patterns—those that bring you success and failure—you’re generally halfway home in making lasting changes. Below are some patterns to be especially aware of as you review your journal:• Emotional Patterns—Distinct differences in how you feel when you’re trading well and when you’re trading poorly, particularly before and during trades.
• Behavioral Patterns—Notable differences in how you prepare for trades and manage them during your best and worst trading episodes.
• Cognitive Patterns—Meaningful differences in your thought process and concentration level during and after your best and worst trades.
• Physical Patterns—Differences in how you are feeling—your energy level, physical tension and relaxation, and posture—when you’re trading at your best and worst.
• Trading Patterns—Differences in the sizing of trades, times of day when you’re trading, mode of entering and exiting trades, and instruments being traded as a function of good versus poor trading.
COACHING CUE
Many times you’ll observe more than one kind of pattern, and many times those patterns will be linked. For example, your cognitive patterns may lead to particular emotional patterns, which are then linked to specific trading patterns. Think of patterns in sequence—as a kind of positive or negative cascade—not as either/or phenomena. Excellent coaches see not only patterns, but also patterns of patterns. Here are some of the most common patterns among traders to watch out for:• Placing impulsive, frustrated trades after losing ones.
• Becoming risk-averse and failing to take good trades after a losing period.
• Becoming overconfident during a winning period and taking more marginal and/or unplanned trades.
• Becoming anxious about performance and cutting winning trades short.
• Oversizing trades to make up for prior losses.
• Ignoring stop-loss levels t
o avoid taking losses.
• Working on your trading when you’re losing money, but not when you’re making money.
• Becoming caught up in the market action from moment to moment rather than actively managing a trade, preparing for a next trade, or managing a portfolio.
• Beating yourself up after losing trades and losing your motivation for trading.
• Trading for excitement and activity rather than to make money.
• Taking trades because you’re afraid of missing a market move, rather than because of a favorable risk/reward profile for your idea.
LESSON 33: ESTABLISH COSTS AND BENEFITS TO PATTERNS
A huge step forward for traders who seek to mentor themselves is to know the patterns of behavior, thought, and emotion associated with successful and unsuccessful trading. Still, it is necessary, but not sufficient to produce lasting change. This is because knowing a pattern is different from having—and sustaining—the motivation to alter that pattern. It is in the motivational arena that many of our change efforts, personal and professional, fall short. We need only to look at the dismal record of people’s attempts to diet, eat in healthy ways, or exercise regularly to see that knowing what you need to do and actually doing it are two different things.
When you are your own trading coach, your challenge is to motivate change, just as a sports coach motivates a team to keep them working hard and sustaining practice efforts. If keeping a journal and tracking your patterns of good and bad trading is nothing more than a routine exercise—another item on a to-do list—it will not inspire motivation, and you will not sustain the efforts. Stoking the desire to make changes is difficult, especially when trading is going reasonably well. “If it ain’t broke, don’t fix it,” is a formula for eventually lacking fixes when things do break.
The Daily Trading Coach Page 15