It is not necessary that you feel great after every single trading day. That is unrealistic. Rather, what’s important is the balance, over time, of positive and negative emotional experience. If you’re feeling badly at the end of trading days more often than you’re feeling good, that’s a clear indication that either you’re not trading well—that markets have shifted in ways that you have not adapted to—and/or that you’re not doing a sufficiently good job of advancing your learning curve with clear, achievable goals.

When you take your emotional temperature at the end of each trading day, you also can become a better observer of the specific trading behaviors that aid and damage your mood. I learned to limit my losses on trades when I realized fully—in my own experience—that outsized losses were not only reducing my annual returns, but also ruining my love for and interest in trading. I also learned to focus on trading strengths when I realized that these brought me a deep sense of accomplishment over time. The idea of trading without emotion is hogwash: as long as we care about our performance, our feelings will be engaged when we put our capital at risk and pursue our goals. That emotional engagement can work to our favor if, through our self-coaching, we sustain a positive emotional state, bringing out the best in us.

COACHING CUE

Be particularly careful to track your well-being around times of great life transition: giving birth to a child, buying a new home, moving, undergoing a separation in a relationship, experiencing a death in the family, going through a major illness, etc. Many, many times these times of transition are also times of stress and diminished well-being. Even seemingly happy events, such as giving birth, can lead to enhanced performance pressures and diminished sleep! Adverse changes in financial status are particularly challenging in this regard. Consider reducing trading risk until these situations are placed into perspective and adequately addressed.

LESSON 22: BUILD YOUR HAPPINESS

Two of the essential components of psychological well-being are joy and contentment. It is important to have positive feelings about what we’re doing, but it’s also important to enjoy a degree of contentment with our lives. Together, joy and contentment yield an ongoing sense of happiness.

As the Aristotle quote at the beginning of this chapter indicates, happiness lies at the center of life. When the Greek philosophers referred to happiness, they did not simply mean a positive, sunny mood. Instead, happiness was intimately tied to fulfillment: the sense of actualizing one’s potentials and being the person you are capable of becoming. A happy person in this sense can go through periods of sadness and loss, anxiety and frustration. Indeed, it is difficult to imagine a goal-directed life that does not encounter such obstacles. What contributes to the happiness, however, is the deep sense of being on the right path in life: the sense that you are doing what you’re meant to be doing.

In that context, the opposite of Aristotle’s happiness is not sadness, but rather a certain kind of emotional dis-ease: a vague but pervasive existential guilt that you’re letting life’s opportunities slip by; that you’re settling for less than you rightfully should. Much is written about the negative emotional experiences of anger, anxiety, and depression, but little about this kind of gnawing guilt. It is not so dramatic as a panic reaction or an anger outburst, but it can be equally damaging in its haunting corrosiveness. Day after day, week after week, month after month, to feel like you’re selling yourself short in your career, your romantic relationships, and your personal development: it’s difficult to imagine a durable confidence and self-esteem built on such a foundation.

Conversely, there is a special glow of satisfaction when you’re immersed in a truly fulfilling activity. As a psychologist, those moments when everything comes together and I’m able to make a meaningful difference in someone’s life—those are affirmations that carry me through many sessions of slow, gradual, difficult work. Similarly, to prepare a challenging trade idea, execute it with a plan, and then see it make money yields a kind of happiness that cannot be achieved by the same profits from a dumb luck trade. Pride, not as in overweening arrogance, but as an inner sense of conviction about the rightness of one’s choices, is an important manifestation of Aristotle’s happiness.

Sadly, participation in the markets does not bring this fulfillment to many traders. Yes, they feel pleasure when they make money and pain when they lose it. But they lack the deep, inner sense of satisfaction and joy possible only to those who are pursuing a calling. The reason for this is that they are hoping that profits will bring happiness, when in fact the relationship works in exactly the reverse order. We profit from our life’s endeavors when we pursue our happiness. Just as sexual conquests cannot provide the happiness of a fulfilling emotional relationship and winning a lottery cannot yield the depth of experience possible to one who builds a business, profits on trades do not provide the primary emotional fuel for a trading career. They are the happy results, not the causes of happiness.

Unfortunately, many traders pursue markets in ways that cannot lead to fulfillment. They pursue profits like a pick-up artist goes after sex. Sometimes they score, sometimes they don’t. There is nothing cumulative in their efforts, however: they no more build a career than the barfly builds meaningful relationships. Many times, traders recognize that gnawing existential guilt: they realize that hours upon hours in front of a screen are contributing little or no economic value, but also yielding no ongoing sense of meaning and satisfaction. It’s not that they’re necessarily anxious, depressed, or frustrated. They are just empty.

We can recognize the happy trader because he is immersed in the process of trading and finds fulfillment from this process even when markets are not open. I track the traffic to the TraderFeed blog daily and have long noted that the visitor count drops precipitously when markets close on a Friday and through the weekend. After all, what fun are markets if they’re not open and active? This is the mindset of the trading barfly. The happy trader finds joy in researching and understanding markets, in preparing for the next day and week, in reviewing trading results and tweaking performance, and in generating new ideas and methods. The distinction between week and weekend is as immaterial for such a trader as it would be for a dedicated artist or laboratory scientist. Indeed, it’s not uncommon for these traders to increase their reading during evenings and weekends: they are immersed in the entire process of trading, not just the process of making money from trades.

You will know you’re pursuing your happiness when you are so involved in what you’re doing that you don’t want it to be limited to business hours. When you’re in love with the right person, that love pervades all your activities, not just those in the nightclub or bedroom. When you find deep fulfillment in markets, you live and breathe markets, not just when they can pay you out. A useful self-assessment exercise to carry out during the coming week is to log your hours spent on trading outside of formal market hours and how you feel during those times. Do you get bursts of joy when you find new patterns and ideas? Do you generate a deep sense of mastery and pride when you work on yourself and improve your craft? Do your ongoing efforts at figuring out markets and enhancing your performance bring a sense of pride and satisfaction?

If you’re not spending as much time on trading outside formal market hours as during them, trading is probably not your calling. Can you imagine a priest who spent time on his religion only from nine to five? An artist who only painted when art shows were active? When trading is truly a part of you, contributing to your happiness, you’re most likely to be immersed in the activities that build skills and yield pattern recognition. So much of trading success is finding the niche that sustains such immersion. Trading can be a great job and a potentially lucrative career, but only if it’s also a calling.

COACHING CUE

Many traders confuse contentment and fulfillment with laziness and smug self-satisfaction. Out of a fear of becoming complacent, they resist the experience of contentment. As a result, traders are often not content with their progress and fall prey to frustration—and the effects of frustration on trading. You can be content with your progress to date and still be motivated to move forward. The key is setting shorter and longer-term goals, so that you can bask in satisfaction when you reach an immediate objective, but still stay hungry for the larger objectives.

LESSON 23: GET INTO THE ZONE

Most experienced traders know the feeling of being in the zone: seeing markets so clearly that the right decisions seem to be effortless. The psychologist Abraham Maslow referred to these occasions as peak experiences; researcher Mihalyi Csikszenmihalyi refers to them as periods of flow. The hallmark of being in the zone is that the performer feels at one with the performance, executing skills in a highly competent manner, seemingly without conscious effort.

The zone is not an emotional state, though it brings feelings of emotional well-being and certainly can be disrupted by negative emotional states. Entering the zone requires immersion: a total focus on what one is doing. In that sense, the zone is a state of heightened attention: it is the result of being fully focused and involved in an activity.

Note that we can behave automatically—and even in skilled ways—without being immersed in our activity and without experiencing the zone. Repetitive, routine tasks, such as driving a car on an empty road or walking a city street, don’t require particular attention and also don’t usually bring any experience of well-being. To enter the zone, one must expend mental effort at a task that absorbs all of one’s attention. Though performance in the zone may seem effortless, it is far from robotic.

Earlier—and in Enhancing Trader Performance—I emphasized the importance of niche: performing in an area that captures one’s talents, skills, and interests. A good barometer of whether you are operating within your niche is the relative proportion of time you spend in the zone while engaged in performance. For me, those flow experiences are relatively common when I’m writing. Rarely do I operate from a detailed outline. Rather, I think about a topic and let the thoughts and words flow as I type. Similarly, when I’m working with a person in counseling, I’m completely focused on what they’re saying, what it means, and how to use the information to be of assistance. It’s not at all unusual for time to fly by quickly while I’m in a meeting with someone; I’m so immersed in the interaction that I lose track of the passage of time.

I most often find a zone state in trading when I’m actively figuring out markets—absorbing myself in research—and applying those insights to short-term trades. In an important sense, it’s the puzzle-solving aspect of trading and not the placing of trades themselves that captures my attention. If I try to trade in a mechanical fashion without engaging in the problem solving, I find trading psychologically noxious. It’s like talking with people in a superficial social context. There’s no meat on the bones cognitively; my attention remains unengaged, and I stay out of the zone.

One of the most damaging psychological patterns I see among traders is that they attempt to create a counterfeit zone by trading with too much risk. In other words, traders are not intrinsically interested in markets and the process of trading, so they attempt to create interest and attention by making large wagers on trade ideas. This is problematic for obvious reasons: it exposes traders to outsized losses and potential risk of ruin. Psychologically, however, it is also ruinous. Once the trader habituates to one level of risk, a higher level is needed to grab attention and interest—much as addicts require greater doses of a drug to achieve a high. Eventually the trader who needs the excitement of risk to sustain interest in trading has to blow up. This, truly, is addiction, not passion for markets.

More on trading addictions can be found in Enhancing Trader Performance and here: http://traderfeed.blogspot.com/2006/11/dr-bretts-heartfelt-plea-when-trading.html

One of the most effective ways to exit a flow state—or prevent one from emerging in the first place—is to focus attention on oneself rather than on one’s performing. You can’t be immersed in a sexual encounter if you’re worried about your sexual performance. You can’t find the zone in an athletic performance if you’re pressuring yourself to set a record. The trader who focuses on P/L during the trade is, to that degree, no longer market focused. The dynamics of performance anxiety—thinking about the performance while you are performing—is a recipe for disaster if your goal is to operate within the zone.

When I wrote my first trading book, I decided to complete the entire manuscript before I ever had a signed contract from my publisher. I certainly wanted to see the text published, but I wasn’t writing it for royalties or recognition. The book was written for me, to clarify my thoughts and contribute to the body of knowledge within the field. When I wrote in this fashion I didn’t have to worry about how the readership would react to the ideas, whether editors would like my work, etc. I could just focus on the writing. It is very, very difficult to need to perform well and to stay absorbed in the performance. The surest way I could have ruined my writing experience (and my books) would have been to split my attention between generating/writing ideas and speculating about how those ideas would be received. Once performance becomes an acute need, not just a genuine desire, it is nearly impossible to place the outcome of performance in the back of your mind and solely focus on performing.

So it is for the trader. If a trader needs to make money, it is difficult to weather market ups and downs and stay focused on the execution of trade ideas and plans. If today’s trade is needed to provide tomorrow’s food and shelter, there can be no zone: anxiety naturally takes over whenever profits are threatened. Similarly, if I become psychologically attached to profitability, basing my self-esteem and identity upon my trading results, I no longer control my trading experience: market movements are likely to control how I feel. The experience of flow requires a basic level of control over what we are doing.

Perhaps a different analogy will illuminate the issue. My wife Margie and I recently invested a good amount of money in tax-free bonds, taking advantage of a situation in which their yields had skyrocketed above the corresponding yields on (taxable) Treasury instruments and certificates of deposit. Our plan was to lock in these positions as investments, not as short-term trades. Over time, we felt, we would benefit from attractive yields and possible capital appreciation as tax-free yields fell into line with those of taxable instruments. We could make this investment comfortably because it represented less than 10 percent of our savings. Our remaining capital was diversified in other investments, working for us even as our bonds might move against us in the short run. We could stay focused on our overall investment plan because we were so diversified that we didn’t need any one position to perform wonderfully.

Diversification, in life and markets, reduces performance pressure and allows us to become immersed in what we are doing.

Similarly, a trader who risks a small portion of her account on a trade can stay focused on executing an overall trading plan, because there is no acute need for that position to work out—and no acute threat if it fails to work.

This is a psychological paradox: To best focus on any single performance, it helps to be diversified among performances. If I have a successful experience as a father, husband, and psychologist, I don’t need my books to sell well or my trades to make money. It is precisely that emotional diversification that enables me to stay focused on my writing and trading and achieve satisfying returns from them.

As your own trading coach you don’t need to spend more and more time, effort, and emotion on markets. Indeed, if you place all your psychological eggs in the trading basket, it is a sure way to burn yourself out and stay out of a performance zone. Rather, you can best coach yourself by ensuring that trading is one among many fulfilling activities within your life. Other eggs might go into the baskets of spiritual interests, artistic activities, athletic pursuits, social life, intellectual life, family, community, and hobbies. If your life is full in those ways, you are best able to weather ups and downs in trading performance. You no longer need trading to work at any particular point in time, so you become more able to focus on the process of trading and generate and execute good trades.

So this is your assignment: Give yourself a grade for how much interest and satisfaction you’ve been achieving from the areas of life mentioned above. How diversified are you in your sources of well-being? Then select one area for cultivation to improve your emotional diversification. Not only will you find a new source of enjoyment and accomplishment, you will also lay the psychological groundwork—the inner sense of security and fulfillment—to find and stay in your performance zone.

COACHING CUE

Take short breaks from the trading screen. These breaks can be a great way to renew concentration and step back from difficult markets. Some of the best breaks are ones that are wholly absorbing, that get you into a different zone than trading. Physical exercise is one example, talking with people you enjoy can be another. I find myself wholly absorbed when I play with my cat Gina or when I swim in our pool. The activity completely takes my mind away from what I had been doing and lets me return with a new perspective. Switch gears—absorb yourself physically and/or emotionally—after you’ve been cognitively immersed in markets. These breaks can provide some of the most effective trades.

LESSON 24: TRADE WITH ENERGY

One of the important dimensions of psychological well-being is energy. Happiness, enthusiasm, motivation, and general contentment are difficult to sustain when you feel mentally and physically run down. Fatigue is the enemy of concentration; physical vibrancy fuels a positive, energetic mood.

We are like laptop computers running on batteries: after sustained operation, we run down. Concentration and attention require effort; eventually we drain our mental reserves and lose focus. This leads to trading mistakes: missing opportunities, overlooking important pieces of data, forgetting key aspects of trading plans. When we are run down, we’re also most likely to fall back into old—and often negative—habit patterns. When we’re drained, we might find ourselves eating out of boredom, becoming unusually irritated when things don’t go our way, or getting caught up in negative ways of thinking.

Think of it this way: it requires sustained focus to remain goal-oriented. To actively direct ourselves, we need an alert, active mind. When we become fatigued, we lose this active direction. We become passive, responding to events rather than making them happen.

This distinction between active and passive trading is all-important. The active trader is one who researches markets, identifies distinct areas of opportunity, and consciously executes and manages trades to maximize that opportunity. For the active trader, nothing is left to chance: where to pursue opportunity, where to sit back, where to take profits, where to limit losses—all are preplanned. This takes time, energy, and a sustained focus. Good trading, in this sense, is pure intentionality: it is a directed act of will.

When we are physically drained, we lose the ability to sustain this intentional focus. We neglect our research; we fail to calibrate risk and reward. We fall back on simple heuristics and enter trades based on simple reasoning—chart patterns or price levels—that may well lack any true risk/reward edge. Worse still, when we’re run down, we become emotionally reactive and find ourselves chasing price highs or lows or robotically enacting rules (fade weak stocks in a strong market) without taking the time and effort to assess the broader context our decisions (an trending day to the upside).

Managing your energy during the trading day may take little more than ensuring that you:

• Get proper sleep and proper quality of sleep. Interrupted sleep can deprive you of important stages of sleep and leave you feeling un-rested, even though you’ve spent a full number of hours in bed.

• Eat properly. Highs and lows in blood sugar can make it difficult to sustain concentration; an excess of caffeine and sugar may provide temporary jolts, but can also lead to distracting rebound effects.

• Maintain your mind properly. I’ve seen alcohol and drugs take a fearsome toll on traders over time, as partying the night before leads to diminished performance the next day. Conversely, those who are focused and intentional in their personal lives tend to see this carry over into their trading.

• Maintain your body properly. Physical exercise is one of the most neglected facets of a trading plan. Hours upon hours sitting in front of a screen do not promote aerobic fitness. Over time, we lose conditioning—and our energy batteries lose their charge.

• Take the breaks. Not many people can stare at a screen and follow market action continuously through the day without losing focus. Breaks during slower market action can replenish the energy and concentration needed when markets become busier.

A trading career is a marathon, not a sprint: the winners pace themselves.

None of the above considerations is earth shattering, but it’s amazing how poorly many traders score if they incorporate the five factors above into a daily checklist. We prepare our trades, but we often fail to prepare ourselves for trading. How can we stick to disciplined trading decisions if we’re inconsistent in our personal discipline?

When you are your own trading coach, you cannot afford to run yourself into the ground by working so hard that you can no longer work. Nor can you so neglect your physical state to such a degree that, like that laptop battery, your memory effects lead you to lower and lower energy states with each recharging. Your assignment is to track your daily profits and losses simply as a function of two factors: your energy level (high or low) and your trading mode (active/planned or passive/unplanned). Add a simple checklist to your trading journal to help you see the correlations among your physical state, your concentration level, your intentionality, and your trading results.

If you lack energy, you will lack focus; if you lack focus, you’ll lack intentionality; if you lack intentionality, you’ll lack the ability to follow trading plans.

Unless you calculate and appreciate these correlations for yourself, you’re unlikely to sustain the motivation to address—with consistency—the five areas above. Once you see that your energy level is directly correlated with the quality of your trading (and with your trading results), you will prod yourself to build a daily routine that addresses sleep, eating, exercise, and a healthy lifestyle. You’ll also be able to overcome guilt or fear over leaving the screen and realize that opportunity is not just a function of moving markets: it’s also a function of your ability to capitalize upon those markets.

COACHING CUE

Many traders neglect their family lives (spouse, children) in their absorption into their work. The resulting guilt and distraction from those unmet needs wind up interfering more with performance than the time it would have taken to spend the quality hours together. The mental rejuvenation from vacations—even weekend holidays—can renew family relationships and energize work. If you’re too worn down for your personal life, you’re probably not operating with good efficiency in your trading. It’s not necessary to have a totally balanced life—few of us do—but if your life feels unbalanced, that will undermine energy, concentration, optimism, and effort.

LESSON 25: INTENTION AND GREATNESS: EXERCISE THE BRAIN THROUGH PLAY

One of the core concepts underlying The Psychology of Trading book is intentionality. We can define intentionality as the ability to sustain purposeful activity over time. The ability to sustain attention and concentration, coordinate a sequence of activities toward a chosen end, and persistently try different approaches toward solving a problem until a solution is reached: all of these are manifestations of intentionality.

As noted earlier, there is an intriguing connection between intentionality and psychological well-being. In studies of flow, Mihalyi Csikszentmihalyi found that these moments of being “in the zone” result from a complete absorption in one’s activities. It is when we are completely focused on what we’re doing that we reach a state in which performance seems almost effortless and completely natural. This is a highly pleasurable state and, among creative individuals, becomes a psychological reward in its own right. In a real sense, the creator’s passion for her work represents a passion for the flow state. Exemplary performance thus provides its own rewards: a psychological feedback system that lies at the heart of greatness.

This helps to explain researcher Dean Keith Simonton’s findings that great individuals across a variety of disciplines are unusually productive. They have mastered the art of working within their performance zones, so that sustained effort becomes a desired end in itself. Their productivity is a byproduct of a kind of positive addiction: a pursuit of the high of the performance zone for its own sake.

As Elkonon Goldberg notes in his excellent text The Executive Brain, the various facets of intentionality—attention, planning, reasoning—are functions of the brain’s frontal cortex. His research also suggests a surprising degree of plasticity to the brain: utilize brain functions and you exercise those brain regions and strengthen their functions, much as going to a gym builds our muscles and endurance. At any given point in time, we may possess a relatively fixed quantity of intentionality: we can only exercise the brain so much before we become fatigued with the effort and need to rest. Over time, however, we can build our brain’s capacity for intention by exercising those frontal cortex functions. Just as lifting weights is the best way to build our strength, engaging in sustained, directed effort is the best way to cultivate our intentional capacities.

When we pursue goals in an effortful manner, we build intentionality and free will.

One would think that trading should be an excellent form of mind exercise for this very reason. That is not necessarily the case, however. We can click a mouse and place trades without engaging in effortful, directed thought. This is the passive trading described in the previous lesson. When we trade without focused intent, we fail to use our mental muscles. At a broader level, when we live our lives on autopilot, those muscles atrophy. All of us know individuals who seem to drift from activity to activity, seemingly heedless of the longer-term consequences of their actions. They spend money and become mired in debt; they jump into relationships and reenact past conflicts. Gurdjieff described this as a tendency to live mechanically, as if we are stimulus-response machines. We see this among retirees: after functioning passively over time, even small efforts become taxing. Life becomes mechanical; the capacity for intentionality has atrophied.

Just as exercising one muscle group will not develop other ones (or building aerobic capacity will not confer muscular strength), cultivating one form of intentionality does not necessarily raise our self-directed capacities in others. Good examples of this are high-frequency day traders who develop an amazing capacity to sustain attention in front of a screen, as they track bids and offers, upticks and downticks, through the day. These same traders are often unable to sustain the kind of mental effort needed to observe themselves over time or systematically review markets to identify trends and themes. Clearly, we’re most able to sustain concentration and effort during activities that interest us and that fit with our skill sets. The creative talent who stays in the flow is partly able to achieve this state because he sticks to the performance niche we discussed in the last chapter: a sphere of talent, skill, and interest. Outside of those niches, the sheer effort needed to produce results, the frustrations of not getting those results, and the boredom from operating outside our values and interests all conspire to interrupt flow and disrupt intention.

This is the dynamic described in Enhancing Trader Performance: talents lead to interests lead to immersion in skill building leads to competence leads to further flow and the eventual development of elite performance. It is the interplay between the flow state and the development of intentionality that creates accelerated learning curves: without flow, talents have no place to go; they never evolve into elite skills.

Many traders fail to succeed because they are operating outside of the niches defined by the intersection of talents, interests, and skills. Because they attempt something that doesn’t intrinsically interest them and that doesn’t play to their distinctive abilities, they rarely encounter flow states: their trading brings little well-being. Without the flow, these traders lack the motivational impetus to sustain efforts, and that prevents them from cultivating intentionality. Then they wonder why they can’t stick to trading plans or why they sabotage themselves with impulsive trades.

The learning curves of elite performers cultivate intentionality as they build skills, which means that—over time—elite performers can do more with their skills than others.

What is the first step in performance development? The most common response is practice, and that is important, of course. But before practice, there should be play. Play tells us which activities are fun and which are not. When we play with something, we discover its joys and frustrations: its intrinsic interest for us. Most traders who have not found their niche have never played with markets. They haven’t tried to trade different styles, different instruments, and different time frames. They don’t know what it is like to hold positions for weeks—or for only a few minutes. These traders can’t appreciate the difference between trades made from rapid pattern recognition and those made from rigorous analysis. They try to imitate other traders, or they take the path of least resistance and trade from superficial chart or indicator patterns. Elite skills can never develop in such a learning environment; intentionality is stunted.

Elite performers never stop playing. Artists sketch; athletes play in scrimmages; actors improvise. Play is a means of self-discovery, and sometimes we discover passions and talents we didn’t know we had. Your assignment for this lesson is to pick a market, trading style, or time frame different from your usual one and conduct paper trading in parallel to your usual trading. Your paper trading should document real trade ideas and real-time tracking of P/L. The simulated trades should be managed as real ones, with profit targets, stop-losses, and decisions about adding to or reducing positions.

For example, I maintain a separate, small trading account where I play with longer-term trading ideas. It’s a way to test out my research and discover possible edges with very small amounts of money at risk. A majority of ideas in this sketchbook account may fail to bear fruit, but it only takes one promising effort to open new doors to opportunity. This keeps my mind and trading fresh; it also helps me stay in touch with the market’s larger picture when placing bread-and-butter shorter-term trades. Most of all, it tells me which trading ideas and strategies truly capture my interest and imagination: which may form the promising basis of a new niche. When you play with trading, you avoid stagnation; you also discover niches that will sustain intentionality and performance. That’s how you build a trading career—and that’s how you build the mental muscles that propel performance to ever-higher levels.

COACHING CUE

If you structure your trading preparation like you would structure physical work-out routines, then every day you are adding a bit to your capacity to sustain intention. I recently observed a trader enter a trade with a strong idea. He was stopped out, but reentered the same trade on a fresh signal. That was stopped out also. He entered a third time and then rode a trend for a very large winner. His resilience was a function of his persistence: his ability to sustain purpose over time, even through fatigue and discouragement. His diligent preparation each day conditioned him to make extra efforts when it counted, at a time when most others would have given up on the idea. When you put effort into trading development, you not only prepare the mind, you condition the will.

LESSON 26: CULTIVATE THE QUIET MIND

When we think of psychological well-being, we naturally think of joy, pleasure, and vigor. A different facet of well-being is serenity: a mind free of distracting thoughts and feelings. In many ways, serenity is vital to elite performance: a mind at peace is one that can be fully focused on market patterns.

Most of us spend too much of our time assaulted by stimuli to achieve a high degree of serenity. Social interaction, television, radio, music players, cell phones, billboards, and computers: much of our day is spent in a me’lange of sights and sounds. Each calls to our attention, entertaining us from without, but leaving us ever more challenged to stimulate ourselves from within.

In the absence of the ability to generate our own stimulation, many of us equate the absence of stimulation with boredom. Boredom is an empty state, a frustrated state in which there is no-thing of interest. Upon reflection, however, we can see that boredom betrays a kind of inner emptiness, an inability to find objects of interest in our inner and outer worlds.

The aversion to boredom is the source of many trading problems. To erase boredom, traders will manufacture trades, overtrading—and sustaining losses—in the process. Traders will take unusual risks and size positions too daringly to sustain their excitement and interest. It is ironic that many traders consider emotion to be their enemy, when in fact it is the boredom of quiet markets that they particularly dread.

But the aversion to boredom damages trading in a much more subtle way. As I stressed in the Enhancing Trader Performance book, trading expertise hinges on the ability to detect and act on patterns that occur within noisy data. Experiments with implicit learning suggest that we can detect complex patterns in situations without being able to verbalize the specific nature of those patterns. This occurs routinely when we sense a market behaving differently from usual, or when we get an uneasy feeling about a conversation. Little children assemble grammatical phrases without knowing the rules of grammar: they’ve encountered so many examples of proper speech that they know what sounds right—and what sounds wrong. They, like traders and conversationalists, develop a feel for patterns and deviations from those.

This gut feeling, the basis of all valid intuition, is not mere hunch. It’s the result of countless repetitions of complex patterns. When I first drove a car, I could barely stay in my lane. With experience, I now anticipate potential accidents several cars ahead of me. Many times I tap my brake or raise my alertness before I’m consciously aware of the troubling situation. If we needed to rely on explicit reasoning for all life’s activities, we would never be able to respond quickly to danger. Evolutionarily, it makes sense for us to be able to develop a feel for reality, as well as a conceptual grasp.

Access to intuition requires a still mind; highly intuitive people are not bored by stillness and, indeed, thrive on it.

When our attention is divided and we are distracted, we lose our feel. This is because the implicit pattern recognition manifests itself as a felt sense, a subtle kind of awareness. If I am not attending to those subtle cues of mind and body, I will miss signals altogether. In such a state, we cannot pick up on nuances of conversations or small, but significant shifts in traffic patterns. We lose valuable information, and we lose much of our ability to react quickly based upon internalized patterns.

Worse still, in a chronically distracted state, we never sustain the attention in the first place to internalize complex market patterns.

This is why serenity—the quiet mind—is so important. With a quiet mind, we can attend to the subtle cues of pattern recognition. Undistracted, our antennae are extended, able to pick up signals of situations that feel right and those that don’t. The experienced trader has seen so many markets and perceived so many relationships among market variables that she learns to trust these gut signals. It is neither mystical nor irrational. Just as a horse whisperer can become one with the horse, understanding the most subtle communications, an experienced trader can hear the whispers of markets.

But if the mind is noisy, the whispers are drowned out.

Those who fear boredom never achieve the still mind.

The two essential steps in achieving a quiet mind are a still body and focused thought. This is where biofeedback can be extremely helpful for the trader: it provides a structured method for learning to quiet the mind. The biofeedback that I use currently is the emWave unit from Heart Math (www.heartmath.com). It provides measures of both heart rate and heart rate variability (HRV). The user’s finger goes into a small sensor, which is connected to a computer with the biofeedback software. The HRV readings are displayed in a chart; as readings rise, the chart readings become like sine waves. Lower readings create jagged, nonrhythmical patterns. The goal is to keep the patterns as sine wave-like as possible. There is also a feature that displays the proportion of high, medium, and low HRV readings over time, accompanied by audio beeps. You can thus close your eyes (for instance, while engaging in guided imagery) and still track your HRV. Even children can use the unit by clicking on video game features that play the game by keeping HRV readings high.

After a while using the biofeedback, you learn that keeping yourself still, focusing your attention, and keeping your breathing deep and rhythmical is the best way of generating high HRV scores. (Users can set the software for various levels of difficulty to build skills.) The emWave is thus a training tool—teaching users to control mind and body—and a way of tracking focused attention over time. There are other, similar units available (for example, Journey to the Wild Divine); ease of use and the appeal of the graphical interface will dictate most traders’ preferences. If I had to invest in a single psychological tool to aid trading, this kind of biofeedback unit would be my choice. It is highly portable and can even be used in real time during trading, with the feedback screen minimized but sound enabled.

Biofeedback is a tool for training yourself to control the arousal level of mind and body.

When you are your own trading coach, it’s important to keep your mind in shape much as an athlete stays in proper conditioning. I find that 5 to 10 minutes each morning prior to the start of trading is useful in bringing a quiet mind to trading. During that time, you stay completely still in a comfortable seated position and breathe deeply, slowly, and very rhythmically. Your eyes can be closed throughout and you can focus your attention on your breathing, on soothing imagery, or on quiet music through headphones. The key is staying in that Yoda state described in The Psychology of Trading: very relaxed, yet very alert and focused. As you practice this each day, you build skills, so that you can eventually quiet your mind on demand, with only a few deep, rhythmical breaths. This is enormously helpful during hectic times during the trading day, keeping you out of situations in which you become impulsive and reactive in the face of moving markets.

Just as you prepare for the day’s trading by studying recent market action, reviewing charts, and identifying areas of opportunity, it makes sense to engage in mental preparation to build the mind-set needed to capitalize on your ideas. Your assignment is to devote a portion of each morning to mental preparation and the generation of a quiet mind. If you have difficulty sustaining the effort or reaching that Yoda state, consider incorporating biofeedback into your morning routine, much as athletes work out daily on treadmills and weight machines. Mastering your mind state is a key component of mastering performance: if you can sustain serenity during the most boring market occasions, you’ll be well prepared to catch moves when trading picks up.

COACHING CUE

If placing trades is your major source of stimulation in financial markets, you’re bound to overtrade. By cultivating collaborative relationships with peer traders and developing routines for generating trade ideas and themes, you need not face boredom during slow markets. Other markets, other time frames: for the dedicated trader, there is always something of interest.

LESSON 27: BUILD EMOTIONAL RESILIENCE

Three traders place the exact same trades; all of them lose money. The first trader becomes discouraged, curses the market, and gives up for the day. The second trader reacts with frustration, vows to get his money back, trades more aggressively, and loses a bundle on the day. The third trader pulls back, reassesses her strategy, waits for a clear area of opportunity, and places a good trade that brings her even on the day.

What is the difference among these traders? The research literature in psychology refers to it as resilience: the ability to maintain high levels of functioning even in the face of significant stresses. A resilient person, for example, can lose his job, but still function well at home and implement an effective strategy for finding new work. The individual who lacks resilience is thrown for a loop by the lost job. This interferes with other areas of life and makes it difficult to find new opportunity.

A key reason why many people lack resilience is that they take negative events personally. Some portion of their self-worth is connected to their individual life outcomes. When events go well, they feel good. When they encounter roadblocks, they become discouraged, doubtful, and frustrated. Instead of dealing directly and constructively with the blocks, they react to the emotions triggered by their personalizing of events. An inspiring example of resilience is author Viktor Frankl’s survival in a Nazi concentration camp. He set about writing a book (first on scraps of paper, then in his mind) during his internment, giving him a purpose: a reason to keep going. Others who experienced the same horrific conditions lacked such purpose and ultimately perished. The larger part of persistence is nurturing a reason to persist, a greater purpose and vision.

The survivors are those who have a vision and purpose greater than themselves.

I recently researched a new pattern that I wanted to trade and saw an opportunity in early-morning trading. I vacillated between placing a small-sized trade and one more normal in size. I thought about the trade going against me and realized that I didn’t really want to lose money on a relatively untested idea. With the smaller trade, I didn’t care about the implications of the profitability of the trade for my portfolio. A larger trade could dent my week’s performance, and that would have been frustrating to me. So I placed the small trade, observed the pattern in real time, made a small profit, and started the process of integrating the pattern in my usual trading.

In selecting trade size, I was letting my psychological resilience dictate my risk taking. When I traded to my resilience level, I kept myself in a favorable state regardless of the trade’s outcome. “How will I feel if I’m stopped out?” dictated my trading size. To be sure, this can be taken to an unhealthy, risk-averse extreme. We can take so little risk on trades that we severely diminish potential returns. The key is to know yourself and especially the limits of your resilience. Occasionally I’ll fantasize about placing an über trade on a promising idea and taking a mammoth profit. I realize, however, that such a trade can overwhelm my resilience. As soon as the position went against me—even in a normal, expectable adverse excursion—I would be stressing about the dollars lost. Undoubtedly this would prevent me from managing the trade effectively.

Successful traders learn to build their resilience over time and adapt to stresses that at one time might have been overwhelming. That small trade I recently placed would have qualified as a large trade back in the late 1970s when I placed my first trades. Now it is emotionally inconsequential. Experience builds adaptation: we can generally handle familiar situations with a high degree of resilience.

When we master one level of challenge, we build resilience for the next level.

The most effective way of to build emotional resilience is to undergo repeated, normal drawdowns and see—in your own experience—that you can overcome those. Our losses provide us with the deep emotional conviction that we can weather losses and ultimately prosper. Someone who has undergone many life setbacks and bounced back acquires the confidence that he can land on his feet in almost any situation. The trader who experiences repeated drawdown, only to later hit fresh equity highs, knows that she has nothing to fear during normal performance pullbacks.

When you are your own trading coach, your challenge is not only to sustain a high level of resilience, but also to build that resilience over time.

A worthwhile exercise is to expand on the routine from my recent trade and vividly visualize the worst-case scenarios for trades that you place. In other words, once you set your stop level, visualize how you would feel and how you would respond in that worst-case scenario. Most importantly, figure out what your next course of action might be, including your possible next trade. In other words, mentally rehearse the resilient behavior that you want to cultivate. You can think of this as play-acting the role of a highly resilient person. As you rehearse resilience and act on the rehearsal, that role becomes more a part of you. To paraphrase Nietzsche, you’re finding your greatness by play-acting your ideal.

In trading, we develop ourselves. Every gain is an opportunity to overcome greed and overconfidence. Every loss is an opportunity to build resilience.

Beware: resiliency does not mean that you jump into subsequent trades after you sustain losing ones. Rather, the resilient trader is one who can sustain well-being even after normal, expectable losing trades. When you lack resilience, you become backward-looking and respond to the last trade rather than the next market development. The resilient trader remains proactive, even in the face of loss. A resilient trader might thus stop trading or resume trading following a loss; it’s the following of basic, time-tested plans and strategies—and not impulsively running toward or away from risk—that defines authentic resilience.

COACHING CUE

If I ask a trader how well he is doing and I receive a dollar figure as a reply, I usually know there’s a problem afoot. Experienced traders think of their returns in percentage terms, not absolute dollars. Thus, for example, they might think of cutting their risk if they’re down 5 percent on the year or limit their risk on a trade to 25 basis points (0.25 percent of their portfolio value). If you calibrate yourself in dollar terms, you will find it difficult to increase your trading size or to get larger as you grow your portfolio. Standardize your view in percentage terms and you make yourself more resilient; a $20,000 loss on a $2,000,000 portfolio won’t feel significantly different from a $500 loss on a $50,000 portfolio. Similarly, when you cut your trading size, you’ll standardize your risk management if you’re calibrated by percentages, rather than let losses run because they seem small in absolute dollar terms.

LESSON 28: INTEGRITY AND DOING THE RIGHT THING

Many of the lessons in this book begin with a discussion of a trading issue and then proceed to suggestions about what you can do about the issue. This lesson will actually start with the recommendation and then work backward from there. Your assignment is to read Ayn Rand’s novel The Fountainhead. If you’ve read it previously, the assignment is to reread and review it.

For those not familiar with the book, The Fountainhead is the story of architect Howard Roark, who is an unorthodox creative genius. He faces stiff opposition to his ideas, including the ambivalence of the woman he loves. Throughout, he must decide whether to abandon or compromise his ideals, especially as he sees lesser talents succeed commercially by pandering to public fashion. In many ways, The Fountainhead is a study in integrity and the difficulty and importance of doing the right thing.

There can be no self-esteem without a self: a well-defined sense of who one is and what one stands for. There are many false substitutes for self-esteem, including the approval of others and the size of one’s trading account. Ultimately, however, self-esteem is a function of knowing yourself and remaining true to your values: possessing a vision of what can be and remaining faithful to that vision.

Many traders have no more vision than a desire to make money. There’s nothing wrong with making money, of course, and for those who do so through the independent efforts of mind, such earnings are a rightful source of pride. Traders who attempt to latch onto holy grails instead of independently relying on their planning and judgment, however, substitute the desire for a quick, easy score for the more difficult challenge of developing competency in reading and acting on market patterns. Someone who consummates a long-term courtship and someone who hooks up for a one-night stand engage in the same physical act, but the meaning is completely different. One is an expression of esteem; the other is often a flight from self.

In so many fields, we never see the fruits of our labors; we’re part of a larger team and process. Trading is unique in that we alone are responsible for what we earn, and we see each day the outcomes of our efforts.

When you read The Fountainhead, it’s instructive to reflect on how Howard Roark would approach the field of trading. Would he join a proprietary trading firm that frantically searches for stocks in play, robotically fading moves or chasing strength or weakness? The mere thought is ludicrous. Would he attend a few seminars or read a couple of books and trade the same untested chart patterns as other beginners? It’s unthinkable.

No, Howard Roark the trader would be a keen student of markets, just as Roark the architect was a devoted student of building materials and methods. He wouldn’t trade a single method in all markets, just as he didn’t repeat the same design to fit all housing sites. Rather, he would carefully consider each unique situation and tailor the strategy to fit the present context. Roark the trader would work from carefully considered plans, just as he worked from blueprints that he had developed from scratch. In short, Roark would approach trading the same way he approached architecture: as an expression of his creative vision and the sheer joy of giving birth to something new and valuable.

Most of all, Roark the trader, like the architect Roark, would stand for something. He would have a view of markets and how and why markets move, just as he had a view of design and building. It would be his view, not something borrowed slavishly from tradition or current fads. The odds are good that this view would be unconventional and meet with more than a little skepticism by the self-appointed gurus of trading. That wouldn’t matter. Roark the trader would remain faithful to his framework. When confronted with the choice of following the crowd versus act on his convictions, he wouldn’t hesitate to do the right thing.

Every great trader I have known has an outlook and a set of methods that are distinctively his own.

For that reason, economic success for trader Roark would be a tangible indicator of his efficacy and the rightness of his efforts. It is effect, not cause. He doesn’t trade to simply make money any more than he builds to sell homes and office buildings. Roark the architect built because that was what he was meant to do. Even when he didn’t have clients, he was designing buildings in his mind and in his sketches. Similarly, trader Roark would be tracking and investigating markets even if he wasn’t placing orders. His work is an extension of who he is; his profits are the result of years of effort and integrity.

One’s work could entail raising a child, building a business, designing a high-rise structure, or developing a unique framework for analyzing and trading financial markets. Each, to be accomplished well, requires sustained, dedicated effort; a vision of what can be; and a willingness to pursue that vision even when it’s more comfortable to slide by. This is the true source of emotional resilience: a pride and esteem so deep that one is unwilling to compromise oneself in the face of setbacks and disappointments.

What about your trading is uniquely yours? What have you developed that most distinctly distinguishes you as a trader? What is the vision behind your trading? That is your core, your essence as a trader. When you’re trading well, you’re remaining true to that essence, and that will serve you well during the most challenging times. If you can’t provide detailed answers to these questions, are you truly ready to be risking your capital? Will you really have the confidence to weather adversity, with only borrowed ideas and methods to draw upon? Read Chapter 9 of this book carefully; you’ll see that experienced traders build a career from their work from figuring markets out for themselves and then remaining true to their ideas and to the evidence of their senses.

COACHING CUE

This lesson shows why it is so important to follow one’s trading plans. The plans may not be perfect, and they may not work well at times. If, however, you are to build confidence in your judgment and train yourself to act with integrity, there’s no alternative to following the ideas you believe to be correct. You cannot build confidence by abandoning your convictions and contradicting your perceptions. The clearer you are about your market views, mapping out your actions under various scenarios and your rationales for trades, the easier it will be to act on your judgment and see, in your own experience, your own progress and growth.

LESSON 29: MAXIMIZE CONFIDENCE AND STAY WITH YOUR TRADES

A great deal has been written about risk management and the importance of stop-losses. A stop-loss, ideally, is that point that tells you that your initial trade idea is wrong. Traders establish firm stops that are closer to the point of entry than the price targets and help ensure a favorable risk/reward profile to each trade. You can generally tell a professional trader by the way she closes out a losing trade. The exit is automatic, not a cause for consternation. Loss is an accepted part of the game. The good traders learn from those losses and use them to revise market views. A losing trade, as a result, can set up the next winning trade.

Much harder for many traders and far less remarked upon is something we might call stop-profits. Traders who religiously adhere to stop-losses can find it difficult to let profits run on winning trades. They stop those profits out prematurely, reducing the reward portion of the risk/reward profile. Over time, these traders have trouble succeeding, because their winning trades end up being not much larger than their losers—and sometimes smaller.

There are a few reasons that traders tend to cut profits short. One reason is that they fail to identify profit targets as clearly as stop-loss points. Such targets may be based on a number of factors, such as the market’s overall volatility, the presence of distinct support and resistance levels, and the time frame of the pattern being traded. Many of my trades, for example, are based on historical analyses of the probability of hitting particular price levels (previous day’s high or low; pivot point levels based on the prior day’s high-low-close); those levels then serve as targets for setups. It is much easier to stick with a trade when there is a firm target in mind, just as it’s easier to get work done when you have a clear goal in mind. Without a predefined target, it’s easy to get caught up in the tick-by-tick ups and downs of the market, acting on fear and greed unrelated to the initial trade idea.

Another culprit in those stop-profit scenarios is a lack of confidence in one’s trade ideas. One of the important advantages of testing one’s trading setups is that you can estimate the historical odds of a market acting in your favor. That knowledge can provide the security necessary to see the trade through to its ultimate target. When trade setups and patterns are borrowed from others without prior testing (either through one’s own paper trading or through historical analysis), it is difficult to have a deep, inner sense of confidence in the ideas. As markets experience normal retracements on the way to a profit target, those adverse excursions become difficult to weather. Instead of seeing them as potential opportunities to add to the trade at good prices, it’s easy to perceive them as threats to paper profits.

Finally, a trader’s risk aversion may play a role in prematurely stopping out profits. Suppose you have a choice between taking a sure $1,000 profit versus a 75 percent chance at $1,500 and a 25 percent chance at $500. Over time, taking the 75 percent chance will make you more money. Nonetheless, at any given point in time, a person may feel that it’s foolish to walk away from a sure $1,000. In such a situation, the decision is made as much for the trader’s peace of mind as for overall profitability. Similarly, traders may set stop-profit levels to achieve a sense of certainty, not to maximize returns.

Seeing a trade through to its target requires an unusual degree of security and ability to tolerate uncertainty. As the trade moves further in your favor, you have more money in paper profits that you’re exposing to future risk, even if the risk/reward picture remains favorable. This ability to sit through a trade’s uncertainty as profits accumulate requires particular confidence in the initial trade plan. Ironically, it takes more confidence to stay in the trade as it goes in your favor than if it remains in a narrow range, simply because more paper profits are at stake.

It usually takes more confidence to sit in a winning trade than to enter it.

So how does one achieve the level of confidence needed to sit through good trades? Often it’s not the loss of the paper profits per se that are the real threat for traders. After all, if a trade moves your way and you prudently raise your stop-loss level to breakeven, you’ll never get hurt by a sudden, unusual adverse excursion. As disappointing as it may be to lose a paper profit, it’s hardly, in itself, a threat to one’s account.

Rather, the threat to traders lies in how they would process such a retracement. In many cases, their attitude would become quite negative in the face of lost profits. They might criticize themselves for the missed opportunity or lapse into an uncomfortable state of frustration. Instead of viewing the reversal of a gain as nothing lost—simply a scratched trade—they treat it as a situation calling for blame. It’s the self-blame and the discomfort of second-guessing that traders are avoiding, not the (paper) dollar loss itself. “You’re never wrong taking a profit,” is an attitude that speaks more to this psychological reality than to the logical necessity of taking larger winners than losers.

Traders often think they’re managing a trade when they exit prematurely, when in fact they’re managing their thoughts and feelings about that trade.

A large part of confidence is trust. You have confidence in your marriage because you trust your spouse. You have confidence in your driving because you trust your ability to maneuver the car under changing road conditions. If you don’t act on your trade ideas—that is, by not seeing them through to their planned conclusion—you actually undercut your confidence by never allowing yourself to develop trust in those ideas. Just as mistrust of a spouse cannot lead to security in a marriage, a failure to trust your time-tested ideas cannot bring confidence to your trading. You can only endure the uncertainty of the trade that moves in your favor by seeing—in your own experience—that the discomfort is indeed endurable, and that you gain far more than you lose by sticking with your planned trades.

As your own trading coach, it’s important that you instill both trust and confidence in your trading. This can be accomplished in two ways:

• Instill the confident mindset. Before trading starts, you want to mentally rehearse how you would talk to yourself in the event that you have to scratch a trade after having a paper profit. Specifically, you would rehearse a mindset of “nothing ventured, nothing gained”—it’s okay to scratch a smaller percentage of trades if that allows you to let a larger percentage run—rather than a self-blaming, frustrated mindset. Prepare yourself in advance for adverse excursions so you remove much of their threat value.

• Build on small change. A useful brief therapy principle is to start making large changes by just starting with small changes. If you do just a little of the right thing, you will provide the feedback and encouragement necessary to expand those efforts. In the case of trading, this is easy: even if you take much of your position off ahead of a planned target, leave a small piece of the position on to either hit the target or scratch out. This preserves profits and assuages risk-aversion while it enables you to have the firsthand experience of seeing your ideas through to their conclusion. Over time, you can leave on larger pieces and build performance that way.

Confidence is not just a function of how you think, but also how you act. If you act in a way to trust your judgment, you’ll have the opportunity to see your judgment work out—and that will build confidence. The stop-profit scenario, unfortunately, is a stop-confidence one as well. If you act with confidence—even in small measure—you coach yourself to self-trust and a deeper internalization of that confidence.

COACHING CUE

The flip side of the impulsive trader is the perfectionist. I’ve seen many traders come up with great trade ideas, only to never participate in them because the market never came to their desired entry levels. Coming up with a big, winning idea and then seeing it work out without you on board can be supremely frustrating. Don’t let the perfect become the enemy of the good. If you have a fantastic idea—for instance, you see a market break out and enter a trending mode—get on board with at least a small piece of your maximum position size. If it’s a good trend, you can always add to the position later on countertrend moves; if it’s not a good trend, you can exit with a modest loss. But always try to let your trading positions express your convictions: you always benefit psychologically when you act on your confidence.

LESSON 30: COPING—TURN STRESS INTO WELL-BEING

We have seen that stress does not need to become distress if it is balanced with generous amounts of well-being. People can endure high levels of challenge, pressure, and uncertainty if their work is meaningful to them and they experience rewards tied to their efforts.

We can think of coping as a set of strategies for handling stressful situations so that they don’t become distressful. By coping effectively with the risks and uncertainties of markets and the demands of the learning curve, traders can go a long way toward maintaining a favorable emotional balance.

Psychological research tells us that there is no single most effective coping strategy. Rather, people with different personalities and needs employ different coping patterns to best handle situations. When you are your own trading coach, it is important to know how you cope best with trading stresses, so that you can activate these strategies on demand.

This knowledge is especially crucial because, at times of greatest stress, we often lapse into old, well-worn coping patterns that may have worked at one time, but may not be appropriate to the current situation. An avoidant coping pattern may have worked in past work situations involving interpersonal conflict, but would be disastrous if employed in the middle of a losing trade in a fast-moving market. Doing what comes naturally is not necessarily the best strategy for handling stress. As we will see in Chapter 5, those past, overlearned modes of coping are often what keep us locked into cyclical problem patterns.

One example that I commonly encounter involves traders who utilize highly confrontive coping strategies. Many traders have aggressive personalities and succeed by facing challenges head on. This can work quite well in situations where one must negotiate a business deal or handle a piece of bad news. In the markets, however, the aggressive response is not always the best one. When facing a series of losing trades—something that happens to all of us—traders can become more aggressive and confront the situation by trading more and larger. This way of handling frustration leads a trader to take maximum risk when he is seeing the market least clearly—a virtual formula for catastrophic drawdowns.

You can often recognize failed coping strategies when you look back on your actions and wonder what could possibly have led you to behave that way.

So how can you know which coping strategies work best for you in particular situations? Below is a checklist that will help you sort out your different ways of handling trading problems. For this lesson’s exercise, I’d like you to think back to several situations in which you’ve handled trading problems effectively and several situations in which you’ve handled them poorly. Next to each coping strategy, place a checkmark if it’s a mode of coping that you utilized when trading well. Then, next to each item on the list, place a circle if it’s a mode of coping that you utilized when trading poorly. Here we go:

1. I reached out to others for ideas or feedback _.

2. I took steps to make sure I didn’t overreact _.

3. I stepped back from the situation and figured out what to do next _.

4. I tried to not make a big deal out of the problem _.

5. I looked for what I could take away from the situation that would help me in the future _.

6. I made a concerted effort to tackle the problem there and then _.

7. I recognized my mistake and took action _.

8. I decided to stop trading for a while and regain perspective _.

Once again, the key is not to figure out the right and wrong coping strategies, but rather the ones that have worked best for you—and the ones that have been associated with problem patterns in your trading.

One important dimension of coping is action/reflection. Some people benefit most by taking prompt action to own and address challenges; others step back, get themselves under control, put things in perspective, think through plans, and/or consult with others. Another key dimension is problem-focused versus emotion-focused coping. Some traders respond best to situations by first venting and getting things off their chest, reaching out to others for input and support, and working actively to dampen negative emotions. Other traders fare best by putting feelings aside, analyzing situations, and engaging in active problem solving to address problems.

Often traders run into problems when they fail to enact their best coping strategies. The analytical trader can get hurt when he finds himself venting emotion and confronting problems without prior reflection and planning. The trader who thrives on social support and feedback from others is unlikely to cope effectively if she becomes discouraged and isolates herself from valued peers.

If you contrast your best and worst coping—the times when you’ve handled trading problems most and least effectively—you identify what you need to do to sustain a favorable balance between well-being and distress.

When you track how you cope when you are trading well, you create a mental model of your best ways of handling trading challenges. This model can then become a script that you can draw on during times of difficulty. Make a coping checklist a part of your daily journal; it will alert you to behavior patterns that you can build on for the next market challenge.

COACHING CUE

Think of your best and worst coping patterns as being sequences of actions, not just isolated strategies. Thus, for instance, when I’m coping well, I first take steps to calm myself and get focused; then I engage in concrete problem solving. I best cope with losses by analyzing them to death—figuring out what went wrong—and then drawing positive learning lessons from those. When I’m coping poorly, I don’t calm myself, and blame myself instead, adding a second bad trade to the first as a way of making up for the loss. In my poor coping mode, I don’t analyze my losers, instead turning my attention to more promising markets, instruments, or setups. That ensures that I’ll learn nothing from my loss—and that my error will repeat itself at some juncture. Think of coping as sequences of behaviors, so we can develop mental blueprints for the actions we need to take in the most challenging market conditions. This helps ensure that trading stress does not generate performance-robbing distress.

RESOURCES

The Become Your Own Trading Coach blog is the primary supplemental resource for this book. You can find links and additional posts on the topic of stress and distress at the home page on the blog for Chapter 3: http://becomeyourowntradingcoach.blogspot.com/2008/08/daily-trading-coach-chapter-three-links.html

One of the early texts summarizing research into positive psychology is Well-Being: The Foundations of Hedonic Psychology, edited by Daniel Kahneman, Ed Diener, and Norbert Schwarz and published by the Russell Sage Foundation (1999). Another worthwhile reference work is the Handbook of Positive Psychology, edited by C.R. Snyder and Shane J. Lopez and published by Oxford University Press (2003) and, by those same authors, Positive Psychology: The Scientific and Practical Explorations of Human Strengths (Sage Publications, 2006).

How our emotions affect our health and well-being is the topic of James W. Pennebaker’s edited text Emotions, Disclosure, and Health, published by the American Psychological Association (1995).

A number of free articles covering topics of stress, coping, and emotions in trading can be found in the section “Articles on Trading Psychology” at www.brettsteenbarger.com/articles.htm.