The Daily Trading Coach

by Brett N Steenbarger

  Start a blog as a great way to journal your ideas and interact with others about them.

  Don’t Panic

  “These are the famous words found on the cover of the Hitchhikers Guide to the Galaxy by Douglas Adams,” Chris explains. “They are so true in trading. If you panic, your instincts take over, and these instincts will surely cause the maximum possible damage to your account. If the market suddenly starts to drop big time and you are long, don’t be frozen; believe what you see and act. Or decide not to act and execute your contingency plan. You need to have a plan for every situation. Usually you will pay for every lesson the market gives you. How much you pay is totally up to you . . . So if I’m suddenly in an unwanted position, I look at the chart and see if I like the position or not. If not, I’m out. Simple as that. Otherwise I manage the trade. But never ever allow panic to take over.”

  Chris’s lessons are the result of hard-won experience. His attitude of taking full responsibility for all aspects of trading lies at the heart of self-coaching: you are the author of the story of your trading career. Your actions will determine the plot and ending of that story. One of Chris’s lessons that I like best is the notion of standing up after being beaten down. His success came as a result of resilience: he lost small amounts of money many times before he started to trade well and trade larger. Your assignment for this lesson is to create a disaster plan for your trading that explains how and when you will cut your trading size/risk when you are not trading well, but also how you will stand up and persevere with your best trading ideas to bring yourself out of drawdown. The best traders are quick to pull in their horns when they’re not trading well, but they are not quick to give up on their trading. If you develop and follow your disaster plans, you take responsibility for your trading and place yourself in control of your market participation. As Chris notes, we cannot repeal uncertainty, but we can avoid the poor decisions that come from panic and lack of preparation.

  COACHING CUE

  Make sure your trading journal highlights important lessons learned, so that it becomes a constructive tool for review months and years later. The value of a journal is in its review, not just its initial writing. If you ensure that every journal entry has a lesson for the future, you also ensure that today’s learning can enrich tomorrow.

  LESSON 83: CULTIVATE SELF-AWARENESS

  Trevor Harnett enjoys an interesting perspective on the trading world. He is a seasoned trader, and he is someone who runs a software firm that provides tools for traders. As a result, he has observed his learning curve, but also the curves of traders who utilize his Market Delta software (www.marketdelta.com). While Market Delta incorporates a number of charting features, the heart of the program is its ability to separate volume traded at the market’s offer price and volume transacted at the bid. This distinction enables traders to obtain instantaneous readings of short-term sentiment. This is very valuable for intraday traders, and it provides a useful execution tool for longer timeframe traders.

  Michael Seneadza is a full-time trader and author of the Trader Mike blog (www.tradermike.net). When I first entered the world of blogging, Michael’s was one of the very first blogs I read regularly. It seemed to me that he had a fine grasp for short-term trading, including the news items that move markets. His blog posts the stocks he’s following for the day, as well as market and news updates. Michael keeps it real—his site is devoid of hype and self-promotion—which helps account for its popularity. I grouped Trevor and Michael together for this lesson because they both touched on an important facet of self-coaching: being self-aware and acting as one’s own psychologist.

  When I asked Trevor for the three things that have most contributed to his self-coaching, he replied, “Upon looking back at my trading career, the three factors that have influenced my trading the most are 1) the environment I put myself into, 2) the discipline I exercised as a trader and else where in my life, and 3) self-awareness in terms of personality and how I viewed the markets.” Let’s take a look at those.

  Environment

  When Trevor started trading, he made sure that he was close to the action and rented an office in the Chicago Mercantile Exchange building. “I had plenty of desire but little knowledge and few friends or mentors to show me the way,” Trevor explains. “Being in an environment with lots of seasoned traders was important to me.” Trevor learned most from these traders’ mistakes. “A majority of what I learned by being around other traders was what not to do,” Trevor pointed out. “I learned valuable lessons from other traders, but the lessons that have kept me trading over the years are the lessons I learned from other traders on not what to do. For me, being in an environment that consisted of more than just my own experiences increased my rate of learning tremendously. I was able to share in others successes and defeats and learn from what they did right and wrong. To me this was invaluable because some of the experiences they had to endure were ones that I hoped to never find myself in. I could see what happened and try and learn from the situation.”

  I find this theme again and again with successful professionals: much of their success comes from the accelerated learning curve afforded by being in the right settings. Trevor’s experience suggests that it’s not necessary to be employed by a trading firm to find that environment. Just being around experienced peer professionals can multiply learning experience.

  If you want to experience yourself as successful, place yourself in settings and situations where you can interact with successful people.

  Self-Awareness

  Trevor emphasizes the importance of knowing yourself as a trader. “For me,” he explains, “when I entered into trading in 1998 after graduating from college everyone was telling me pit trading was what I needed to do. I had always been much more of an introvert and very proficient on the computer.” He quickly found pit trading not to his liking and became involved in the emerging electronic Globex trading platform. He also recognized that his trading style was naturally risk-averse and stayed within his comfort zone. “My personality was much more oriented to taking frequent trades and keeping my losses under control,” Trevor recalls. “This worked very well for me because very rarely would I have a day that would get away from me.” We hear many generalizations about the best or right way to trade. Trevor’s insight was that his trading had to fit who he was. His success came from sticking to his basic strengths and interests.

  Discipline

  “This makes or breaks traders from what I saw,” Trevor points out. “When you are trading your own money with no risk manager breathing down your neck, you better have discipline. Without it, it will be just a matter of time before you blow up and are unable to recover.” Indeed, this discipline is what makes the learning curve possible. “I was often early on many trades because I lacked the patience to let the trade play out,” Trevor explains. “Fortunately I had the discipline to work my way out of the trade and try over.” This is an excellent point: discipline doesn’t mean not making mistakes; it means making mistakes the right way. Particularly when you’re building your competence and confidence, it’s important to learn how to “work your way out of the trade.” Positive experience can build optimism, but it’s the ability to work out of difficult situations that yields the confidence that you can handle most anything the market can throw your way.

  First and foremost, good traders are good risk managers.

  Michael described his three most valuable steps in self-coaching as: 1) keeping a detailed trading journal; 2) becoming an amateur trading psychologist; and 3) listening to trading affirmations. This reflects a balance that I see among many experienced, successful traders: always working on their trading, and always working on themselves.

  Keeping a Journal

  “The thing that’s helped my development the most,” Michael explains, “is keeping a proper, detailed trading journal. I’ve always prided myself on my ability to remember and learn things solely by memory. Writing things down just seemed like unne
cessary work . . .That all changed a few years ago when I hit a rough spot and decided to reassess things. I went back to basics and did things according to the advice of what I’d read in all those books over the years—mainly create a detailed business plan and keep a journal. In just a few weeks of keeping a detailed journal, a few self-defeating behaviors jumped out at me. I was amazed at how those behaviors never registered with me previously. For example, I discovered that I had a bad habit of adjusting my initial stop-losses too soon. That often resulted in stopping myself out of winning trades at breakeven. Fixing that one thing has added considerably to my bottom line.”

  I have experienced the same thing: in keeping records of my trading, I learn things about my performance that I had never recognized earlier. Often, it’s just a few tweaks to what you’re doing that makes the difference between breakeven and profit.

  The advice you see repeated in one trading book after another is often the best advice, because it’s the result of years of experience.

  Becoming an Amateur Trading Psychologist

  “I had picked up bits and pieces about trading psychology over time,” Michael notes, “but it wasn’t until I read a book dedicated to the topic that things really jelled for me. The book I read was Trading in the Zone by Mark Douglas. The book crystallized all those bits and pieces I’d picked up, as well as forced me to take a look at my own beliefs and behaviors. It’s one of those books in which I get something different each time I read it. Long before I read Trading in the Zone, I knew logically that trading was nothing but a game of probabilities. I knew all about expectancy and that I could still make money, even if I had more losing trades than winning trades. Yet there was a disconnect between my knowledge and my actions while actually trading. The book made it very clear to me that I needed to accept that I won’t know, nor do I need to know, how any given trade is going to turn out. It made me realize that, as long as I stuck to my business/trading plan and kept taking good setups, I would make money over time.”

  When we become our own psychologists, we bridge the gap between what we know and what we feel.

  Listening to Trading Affirmations

  “A few years ago, I purchased a CD called Trader Affirmation from the Day Trading Course site (www.DayTradingCourse.com/cd/),” Michael recalls. “The CD has about 30 minutes of someone reading a list of affirmations to help the trader’s state of mind. I try to listen to the affirmations at least twice a week, usually while I’m showering in the morning. The affirmations help me to remember all the things I’ve read in the aforementioned book on trading psychology. Listening to them has been a great help in keeping my head on straight.” To be honest, I’ve never been a big fan of the whole idea of positive thinking and affirmations (I haven’t heard the CD that Michael uses), but I have to say that what Michael says makes a great deal of sense. It’s not enough to read a book on trading psychology and file away the lessons. Rather, you need to repeat those lessons in order for them to sink in. That has become a part of Michael’s weekly routine, helping him cement his efforts at becoming his own psychologist.

  Your assignment for this lesson is to identify and implement one weekly routine to help you internalize sound trading practices. This routine could be listening to a CD (or even your own self-recorded messages), or it could be a structured review of your trading journal with a colleague. The idea is to make right thinking and right action a regular part of your experience, so that you become your ideals.

  COACHING CUE

  Check out Michael’s insights into trading journals at http://tradermike.net/2005/08/on_trading_journals/ and http://tradermike.net/2005/08/thoughts_on_day_trading/#moving_stops. See also Charles Kirk’s insights in this chapter.

  LESSON 84: MENTOR YOURSELF FOR SUCCESS

  Brian Shannon is a trader and an educator of traders. His AlphaTrends blog (www.alphatrends.blogspot.com) utilizes video to illustrate trading patterns each day, a unique resource for developing traders. He has captured many of the principles from these videos in his book Technical Analysis Using Multiple Timeframes. Brian’s work is a great illustration of what I call contextual thinking: placing observed patterns into larger contexts to gauge their meaning and significance. I find that many short-term traders run into problems when they become so focused on the patterns over the past few minutes that they miss the larger picture of what the market is doing from hour to hour, day to day. By gauging patterns within larger contexts, we stand a greater chance of aligning ourselves with longer timeframe trends.

  Corey Rosenbloom is a full-time trader who chronicles his work in his Afraid to Trade blog (www.afraidtotrade.com). What I like most about Corey’s work is that he blends an awareness of trading psychology with an understanding of the psychology of markets. His site provides a number of trading insights, as well as insights into the minds of traders. I grouped Brian and Corey for this lesson because both described the ways in which they mentor themselves—guide their own learning processes—as part of coaching themselves for success.

  Brian’s response to my query about the three things that have been most valuable to his self-coaching reflects his trading as well as his teaching. Let’s take a look.

  Tuning Out Opinions

  Brian stresses that he doesn’t completely ignore what he hears from others, but he’s learned to emphasize his own views from what he’s learned over the years. “The edge in trading is so small and quite often elusive that it is imperative to understand market dynamics/structure and where my personal edge lies,” he points out. This is very important: As Brian’s videos illustrate, he is extremely open to information from the markets, but he filters out opinions. He has learned to rely on his own judgment and experience to maintain his advantage in the marketplace. This reliance is essential in building and maintaining confidence. It’s difficult to imagine sustaining the resilience to weather drawdowns if you don’t have a basic trust in how you process information and make decisions. It is better to make a mistake with your own judgment—and learn from that—than to make a lucky trade based on the tips of others.

  Review

  When you view markets and review them day after day, week after week, you develop an intimacy with market relationships and trading patterns. An internalization of this intimacy is what traders refer to as a feel for markets. It is not mystical inspiration; it’s the result of repeated exposure to information under proper learning conditions. Brian explains, “I review hundreds of stocks using multiple timeframes in an attempt to find what I believe to be the lowest risk/highest potential trades according to my entry and exit parameters.” This review provides him with good trade ideas, but it also feeds a learning curve. After so much review across multiple timeframes, he has learned what a good stock looks like. This internalized expertise helps him deploy his capital in the most efficient manner possible.

  We learn our patterns—and the patterns of markets—through intensive review. It is the intensity of the review that enables us to internalize those patterns and become sensitive to their occurrence.

  Mental Checklist

  Here I’ll let Brian speak for himself: “This one is somewhat new and came about as a result of letting my guard down on a few occasions earlier in the year, which resulted in losses which were larger than what I would normally take. Each day before the market opens I go through a mental checklist of: how do I feel (tired, anxious, excited, etc.) to identify any possible weakness before I commit money. I also try to visualize how I will react to what I view as either normal or abnormal trading conditions. I am trying to spend more time on the mental preparation than I have in the past and it seems to be working well for me.” Time and again, I find that this is what winners do: they learn from their losses and adapt. Trading requires an active mindset; it’s a bit like patrolling enemy territory, where you have to be on the alert for surprises at all times. If you’re not prepared—and haven’t rehearsed that preparation—you won’t be able to act on instinct when those surprises hit. Brian let d
own his guard, and he was surprised. He created a mental checklist and incorporated visualizations of what-if scenarios and sharpened his active focus, anticipated what could go wrong, and enhanced his results.

  Corey’s three best practices for self-coaching were: 1) find a trading partner/group; 2) think in terms of concepts; and 3) keep an idealized trade notebook. All three practices reflect the progression of his learning as a trader.

  Find a Trading Partner/Group

  “The first thing I learned when I began trading full-time,” Corey recounts, “was that trading could be an extremely lonely, isolating experience. It can be difficult to sustain motivation when you’re the only one who knows what you’re doing, and friends and family may not understand what trading is all about. Trading can be quite difficult, and it is immensely helpful to have at least a handful of solid friends or colleagues who understand your strengths and weaknesses while supporting one another for mutual benefit, such that the whole is greater than its parts. I began writing the blog initially as a way to reach out to others who had similar experiences . . .That has made an ultimate difference in my trading, mostly from the interactions and idea-sharing with others, which has broadened my awareness . . . I also have one experienced trader locally with whom I meet almost every evening to discuss the day’s events and share ideas and study markets. This interaction has challenged us both, and we bring a combination of skills that benefit us academically (combined research), emotionally (motivation), and financially (improved trading tactics).”