Anybody who has seriously looked into trading the market has heard the familiar refrain, “psychology plays a huge part in your success”. What does that mean? In essence, it means that the thoughts you have, the emotions you have, your “confidence quotient” and how you deal with them all, in the end, will dictate whether you end up finding success in trading or packing up your charts and calling it quits.
What is a “confidence quotient”?
It is simply how high is your confidence in executing your trade plan even when faced with the inevitable loser. Do you know that if you give ten traders the exact same trade strategy, you will get 10 different results?
Remember The Turtle Traders?
The Turtles were a group of ordinary people who answered an ad for trading apprentices in the newspaper in 1983. You can find the entire story on the internet but it was simply a dispute between two traders with one believing traders were born and the other believed traders could be taught. In the end, 13 people were in the group who, once they learned the strategy, would be given an account between $500,000 to $2 million to trade. One of the first big trades was in heating oil.
Keep in mind that all the traders were given everything they needed to trade including the markets, position sizing, stops, exits….everything. For one reason or another, the only trader who followed the rules and was fully vested in the trade was Curtis Faith. The trade was big and Faith made some large money for his trainers and over the course of four years, he made approx $31 million. Curtis had the confidence to follow the strategy as written. He was not shaken out. He did not fall victim to fear and greed.
13 traders. 13 different results.
Thoughts are things
I do not know where I first heard that but when I started to understand it, things changed. Not just in trading but in other aspects of my own life. Why do many ultra successful musicians, actors, business people or sports athletes end up battered, broken, in rehab or washed up? On the outside, they appear to have it all.
- The money
- The fame
- They appear happy
We never really know the demons they and others have in their minds. It is clearly enough though to take all that they have worked for, away. It is no different for the average person or the trader. If you are sitting in front of your computer and your strategy gives a buy signal, do you act? What happens when you are in a trade and you get taken out? What about when the trade gets stopped out and then goes in your direction? How do you react?
We can list a host of other issues:
- Draw downs
- Margin calls
- Over trading
- Strategy jumping
- Ignoring your trade plan
All of these happen to the majority of traders. The trading highway is littered with broken people and blown out accounts. The failure rate is ultra high. If psychology is so important, we can assume that those that fail, did not get a handle on this extremely important factor.
Many people use the analogy of a professional athlete. There are many football and hockey players but only a select few that make the big leagues. I think that is very simplistic. Much like in trading, supply and demand rule the roost when it comes to the sports, entertainment or even the business world. There may be many qualified people (supply) but only so many spaces (demand). Many fall through the cracks.
Trading is different. The markets do not conspire to pick and choose who will succeed. That is all on you.
Review Old Pictures
Ever had that experience where you see a photo of yourself and think “I’ve put on some weight!” How about hearing yourself recorded and not even recognizing your own voice? Until you are faced with it, there are some qualities you have that you do not even know about. In trading, you are well advised to know a lot about yourself.
One of the most important things to know is what that little voice in your head is saying when you trade. How do you know unless you consciously listen? Exactly. That brings me to the point of this entire post.
One thing that turned my trading around was actually recording my screen and my externalized thoughts while I traded and would then review my progress.
- What constitutes this setup?
- Where is my stop?
- Where is my profit target?
- What am I thinking if the trade is against me?
- What am I thinking if the trade is going my way?
- How do I feel with a winner?
- How do I feel with the loser?
You get the point.
The entire trading session was screen captured with the exact thoughts I was having being spoken and recorded. Believe me when I say it was a very interesting exercise. It taught me that I had a lot of negative things to say when the trade was not working out. Believing and knowing that thoughts are things, I was simply setting myself up for future failure. I learned that this one trade is just one, a small percentage of all the trades I would and will eventually take. There are so many other things that I learned about myself but that is not the point.
The point is what will you learn about yourself if you take up the task?
Get Started For Free
It is very easy…and free. The answer is Camstudio. http://www.camstudio.org
Easy to install and use, Camstudio is an outstanding screen capture tool that will enable you to record your charts and voice for your entire trading session to review your trading behavior. There are plenty of instructions to enable a trouble free install.
As well, the FAQ section will help with issues such as high CPU usage (lower the capture rate). You don’t need a movie quality recording so just keep it basic.
I have personally passed along this tip to many traders. To a person, they have found this to be an invaluable tool in helping them move forward with their trading.
There is a catch to all of this.
Once you have identified some of the issues you have (such as anger when you get stopped out), you must be willing to work on that part of your character.
There are plenty of authors out there such as Douglas and Van Tharp that have made trading psychology and dealing with the negative their entire business model.