Steps toward
Self-
Improvement
The Coaching Process

Success does not consist in never making mistakes but in never making the same one a second time.

What are the core processes of self-coaching? What concrete steps can we take to make changes in our trading to improve performance? These are some of the topics we’ll tackle in this chapter. Much of this chapter comes from research over the past several decades that has illuminated common effective ingredients across all counseling and therapy approaches. An interesting finding from that research is that all of the major approaches to counseling appear to be more effective than no counseling at all, but no single approach consistently shows better results across a range of people and problems. Not only do the major modes of helping seem to work equivalently, they also seem to work for many of the same reasons. Those reasons capture the essence of what creates change—and what can fuel our efforts to become our own trading coaches.

LESSON 31: SELF-MONITOR BY KEEPING A TRADING JOURNAL

Self-monitoring refers to methods that you use to track your own patterns of thought, feeling, and behavior over time. Self-monitoring is the foundation for many of the other self-coaching techniques described in this chapter, because it tells us what we need to change. We can’t alter a pattern if we’re not aware of its existence. Very often in brief therapy, the first homework exercises involve self-monitoring. Just as observing market patterns precede our ability to trade them, becoming aware of our own patterns is the first step in changing them.

One of the most common ways to monitor oneself is through the use of trading journals. Active intraday traders might make entries during a midday break and at the end of the trading day; others might simply write in the journal at the end of each day in which they are making trading decisions. The key is to catch your patterns as soon after they occur as possible, rather than rely upon fallible memory.

Note that self-monitoring is not a change technique in itself, but it often leads to changes. Once you see your patterns with crystal clarity—including their costly consequences—it becomes much easier to interrupt them and prevent their future occurrence. At other times, self-monitoring may alert you to patterns that you didn’t know were present. This is exceedingly valuable, as it lays the groundwork for change that otherwise would have been impossible.

Any time you systematically review your performance over time—and the factors associated with successful and unsuccessful performance—you’re engaging in self-monitoring. For example, I reviewed my recent trading results trade by trade and found that I was taking larger point losers on small trades than on my larger ones. This review led to the realization that, when trades were quite small, I was not as vigilant in setting and sticking to stop-loss levels. Although the total dollar loss for each small trade was not huge, over time the small losses added up. This led me to establish a new routine for setting and sticking to stop-losses with small trades by explicitly writing out my risk/reward ratio for each trade before I placed the order. The self-monitoring made me more conscious of what I was doing, which in turn kept me trading well.

Self-monitoring is the foundation on which all coaching efforts are built.

My experience is that the best predictor of failure in the trading profession is the inability to sustain self-monitoring. This inability leaves traders unable to clearly identify their problem patterns, and it prevents them from reflecting and learning from their efforts at change. Goals without self-monitoring are but mere good intentions; they never translate into concrete actions to initiate and sustain change.

Why would a trader, seemingly desirous of success, not sustain efforts to monitor her own thoughts, emotions, and/or trading performance? I believe it’s because many traders are motivated by trading and making money, not by a desire to understand themselves and markets. This is an important distinction. To paraphrase coach Bob Knight, they are motivated to win, but not motivated to do the work it takes to become a winner. In the best traders, self-mastery is a core motivation. It’s why they continue trading long after they could have comfortably retired.

The most common format for beginning a regimen of self-monitoring is keeping a journal. The basic components of a self-monitoring journal might look as follows:

Divide your journal page into three columns. The first column describes the trade that was placed, including the trade size and the time of day. If you scale into a single position, you would treat that as a single entry in the journal. Similarly, if you enter several positions to capitalize on a single trade idea (e.g., you want to be long precious metals, so you buy three different mining stocks), those would also be incorporated within a single journal entry. The first column might thus summarize what you did for each trade idea, how much you risked on the idea, when you placed the trades, the prices that you paid, and how you placed the trades (e.g., all at once or by scaling in; executed at the market or with limit orders). If you are a high-frequency trader, consider the possibility of automating your trade monitoring with tools such as StockTickr (www.stocktickr.com) or Trader DNA (www.traderdna.com).

The second column would summarize the outcomes of the trades, including the prices and times of your exits, your P/L for that trade (or trade idea), and how you exited the trades (e.g., all at once or scaling out, at the market or by working orders).

The third column would include all of your behavioral observations for that particular trade or trade idea: what you were thinking, how you were feeling, your preparation for that trade, your degree of confidence in the trade, etc. In other words, the third column takes a look at you and your state of mind, thought patterns, and physical state during the trades. The third column could also include observations about how well you entered, managed, and exited the trades. Whatever stands out for you—good or bad—about the trade would be included in that third column.

Keep your trading journal doable; many efforts at self-monitoring fail because they become onerous.

For a trader such as myself who only place, at most, a few trades per day, such a journal is relatively easy to keep. Prop traders who make dozens of trades per day or more, however, are likely to find such a journal to be onerous. One of the best ways to sabotage self-monitoring efforts is to make them so burdensome that you won’t sustain the effort. If you’re an active trader and cannot automate your monitoring of trades, you can streamline the journal in one of several ways:

• You can create a single entry for the morning trading and a second entry for the afternoon’s trading, with the columns simply summarizing your positions, your P/L for the A.M. or P.M., and your associated observations of your trading at those times.

• You can create entries for selected positions only that stand out in your mind either because they were quite successful or quite unsuccessful. If you sample from your trades in this manner, make sure that you include best and worst trades, so that you can observe positive and negative patterns. These are the trades from which we learn the most.

• If your trading is complex, with many positions, hedges, and a flowing in and out of risk exposure over time (like a market maker or a very active portfolio manager), you can simply summarize your day with a single journal entry. The first column would review your major trading ideas, the second column would note P/L, and the third column would include your self-observations.

There is no single self-monitoring format perfect for all traders; the key is to adapt the format to your needs and trading style. The real work comes when you’ve accumulated enough entries to notice patterns in your trading: the factors that distinguish your best trades and days and those that accompany your worst trading. How to analyze your self-monitoring journal will be the focus of the next lesson. For now, however, your task is simply to sustain self-awareness: to be an active observer of your own trading process.

When you are your own trading coach, there is always a part of you that stands apart from your decision-making and execution, observing yourself and exercising control over what you do and how you do it. The real value of the trading journal is that it structures the process of self-awareness and helps make it more regular and automatic. If you were walking on a familiar street, you would hardly think about how you walk, everything would be on autopilot. If, however, you were taking the same walk in a minefield, you would be exquisitely self-aware, conscious of every step that you took. Trading is neither a walk in the park nor a minefield . . . perhaps it’s more like a walk in a beautiful, but somewhat dangerous park. You want to be absorbed in the walk, but alert and aware at the same time. That is the function of the trading journal: it enables you to monitor yourself, even as you are immersed in what you’re doing.

COACHING CUE

A great insight into journal keeping is offered by Charles Kirk (www.thekirkreport.com) in Chapter 9, who enters his observations into a database program so that he can readily retrieve journal entries on various topics. This is an effective way of monitoring specific trading challenges over time.

LESSON 32: RECOGNIZE YOUR PATTERNS

One of the keys to brief therapy is the creation of a concrete focus for change. One of the reasons that older forms of therapy took so long to implement—including years of psychoanalysis—was that they attempted broad personality changes. Our understanding of personality traits and their biological, hereditary components helps us to be a bit more modest in our aims. No form of coaching or counseling will restructure a person’s personality; nor should it. The goal of coaching is to help people work around their weaknesses and build their strengths, so that they can express their basic personalities and skills as constructively and successfully as possible.

You cannot change your personality, but you can change how it is expressed.

Many self-described coaches lack formal training in psychology and especially lack the experience and grounding of licensed helping professionals. They acquire a cluster of self-help methods and try to fit all problems to those. The result is a canned set of solutions for any given problem. This can be disastrous. The patterns that interfere with trading often lie well outside canned, self-help nostrums. One successful trader I recently met at a conference presentation was having a poor trading year and was even considering retiring. She complained of a loss of enthusiasm and excitement about her trading, as well as weight gain and more negative feelings about herself. She had seen three prior coaches and therapists, all to no avail. After a short discussion, I obtained enough information to suggest that she obtain a blood workup from her primary care physician. She did so, and the results suggested a low level of thyroid activity. Once she received proper hormonal supplementation, her mood and energy level returned, her concentration improved, and she resumed her successful career.

How many traders lose their careers because they never understand the patterns that underlie their problems?

You might ask the question, “How can I, as a trader relatively uneducated in applied psychology, ever hope to identify obscure patterns such as low hormone levels? If experienced coaches and counselors miss the pattern, how can I detect it?”

Ironically, I think that you’re in better shape than most commercial coaches to identify and act upon unusual patterns that interfere with good trading. I could readily make the recommendation for the trader because I was not seeking her business. She was not paying me for my services and I did not stand to gain by making one recommendation versus another. (Note: my coaching is limited to a limited group of proprietary trading firms, hedge funds, and investment banks; I don’t take on individual traders as clients.) Most coaches who focus on retail traders, on the other hand, need to constantly drum up business. It is not in their self-interest to raise a possible course of action (such as blood tests and thyroid medication) that doesn’t lead to further services and additional fees. As a result, they focus on solutions that they can provide (i.e., that will bring them additional business). When all you have is a hammer, Maslow once remarked, you tend to treat everything as nails.

As your own trading coach, you have no such conflicts of interest. You can learn pattern recognition for yourself and diagnose your own concerns. If the problem still eludes you, even after you’ve reviewed your journal extensively, send an e-mail to the special address reserved for this book (coachingself@aol.com; see the Conclusion) and I will do my best to point you in a promising direction. But I think you’ll be pleasantly surprised to find how readily you can tackle your own challenges once you learn a few basic techniques.

Once you learn to coach yourself, you have the skills to guide your development across a lifetime.

So let’s see how you can become expert in recognizing your own patterns, building on the trading journal described in the previous lesson. Reviewing your journal entries, you want to divide them into two clusters: those describing your most successful trading and those that capture when you were trading at your worst. The first cluster will reveal what we call solution patterns; the second cluster alerts you to problem patterns. Many times, the difference between the solution and problem patterns will themselves point you to practical actions you can take to improve your performance. For instance, you might notice that during your successful trading you’re more patient entering trades and take fewer trades, each with smaller size. When you’re less successful, you trade more often and with maximum size.

The comparison between best and worst trading will also alert you to differences in your coping with market challenges. You may find, for example, that when you’re trading well, you tend to be very problem-focused. When you are less successful, you trade while you are confused or frustrated, without waiting for clearly defined opportunity.

The key is to look for patterns, not just isolated instances of good or poor trading. For each good day of trading, you might jot down several things you did right and then see which entries appear day after day. Similarly, in reviewing the poor trading days, you would write down the key mistakes you made and observe which ones appear over time.

Your trading strengths can be found in the patterns that repeat across successful trades.

If you cannot find patterns that stand out, you may need to monitor your trading over a longer period, so that you have a rich sample of good and poor trading days. You’re looking for common elements that jump out at you; don’t be too quick to read subtleties into the patterns. The best things to work on are the ones that are most salient—that hit you between the eyes. For instance, when I have done the pattern-recognition work and compared my best and worst trading, I found stark differences in the sizing of my trades (initial positions neither too large nor too small performed best); the timing of the trades (positions too early in the morning or later in the afternoon underperformed those made after the market sorted itself out in the first minutes of trade); and the duration of my trades (better performance when held shorter, with clear targets and stops). I also found that I traded best when I had a clear longer-term picture of the market to guide shorter-term entries and trades. My absolute worst trading occurred when I held a strong view at the start of the market day and did not modify the view as the day progressed, continuing to trade against a market trend.

Notice how each of these patterns focuses a trader on what to change, which is the first step in deciding how to make changes. Many times, traders fail to make changes because they aren’t clear on what to change. They rely on vague generalizations (“I need to be more disciplined”) rather than identify specific behaviors to work on. By conducting detailed comparisons between your best and worst trading, you can find a focus for your self-coaching efforts and channel your energies in the most constructive directions. If you know your patterns—those that bring you success and failure—you’re generally halfway home in making lasting changes. Below are some patterns to be especially aware of as you review your journal:

• Emotional Patterns—Distinct differences in how you feel when you’re trading well and when you’re trading poorly, particularly before and during trades.

• Behavioral Patterns—Notable differences in how you prepare for trades and manage them during your best and worst trading episodes.

• Cognitive Patterns—Meaningful differences in your thought process and concentration level during and after your best and worst trades.

• Physical Patterns—Differences in how you are feeling—your energy level, physical tension and relaxation, and posture—when you’re trading at your best and worst.

• Trading Patterns—Differences in the sizing of trades, times of day when you’re trading, mode of entering and exiting trades, and instruments being traded as a function of good versus poor trading.

COACHING CUE

Many times you’ll observe more than one kind of pattern, and many times those patterns will be linked. For example, your cognitive patterns may lead to particular emotional patterns, which are then linked to specific trading patterns. Think of patterns in sequence—as a kind of positive or negative cascade—not as either/or phenomena. Excellent coaches see not only patterns, but also patterns of patterns. Here are some of the most common patterns among traders to watch out for:

• Placing impulsive, frustrated trades after losing ones.

• Becoming risk-averse and failing to take good trades after a losing period.

• Becoming overconfident during a winning period and taking more marginal and/or unplanned trades.

• Becoming anxious about performance and cutting winning trades short.

• Oversizing trades to make up for prior losses.

• Ignoring stop-loss levels to avoid taking losses.

• Working on your trading when you’re losing money, but not when you’re making money.

• Becoming caught up in the market action from moment to moment rather than actively managing a trade, preparing for a next trade, or managing a portfolio.

• Beating yourself up after losing trades and losing your motivation for trading.

• Trading for excitement and activity rather than to make money.

• Taking trades because you’re afraid of missing a market move, rather than because of a favorable risk/reward profile for your idea.

LESSON 33: ESTABLISH COSTS AND BENEFITS TO PATTERNS

A huge step forward for traders who seek to mentor themselves is to know the patterns of behavior, thought, and emotion associated with successful and unsuccessful trading. Still, it is necessary, but not sufficient to produce lasting change. This is because knowing a pattern is different from having—and sustaining—the motivation to alter that pattern. It is in the motivational arena that many of our change efforts, personal and professional, fall short. We need only to look at the dismal record of people’s attempts to diet, eat in healthy ways, or exercise regularly to see that knowing what you need to do and actually doing it are two different things.

When you are your own trading coach, your challenge is to motivate change, just as a sports coach motivates a team to keep them working hard and sustaining practice efforts. If keeping a journal and tracking your patterns of good and bad trading is nothing more than a routine exercise—another item on a to-do list—it will not inspire motivation, and you will not sustain the efforts. Stoking the desire to make changes is difficult, especially when trading is going reasonably well. “If it ain’t broke, don’t fix it,” is a formula for eventually lacking fixes when things do break.

But there’s a more important reason for sustaining self-coaching efforts. When you’re trading well is precisely the time you want to be the most self-aware of your strengths, so that you can maximize your earnings at those times. The true competitors and most successful participants in sport, warfare, and games of skill such as chess are the ones who possess the killer instinct: they have a sense for when they have the advantage, and they press that advantage to the hilt. Making modest money when you are trading well is a great way to ensure poor returns when you’re not seeing markets as well. For many traders, it’s the relatively few, large gains from the best trading periods that contribute most to overall profitability.

The measure of self-coaching is how hard you work on trading when you’re making money.

It’s as important to work on yourself when you’re trading well as when you’re trading poorly. It’s not that you want to fix what isn’t broken; rather, you want to crystallize what you’re doing right so that you can do more of it and capitalize fully on it. Conversely, when you’re trading poorly, you don’t want to lapse into discouragement and defeat. Maintain the journal and the pattern recognition efforts to keep you in a constructive mode, even when all you may be able to do for the moment is to cut your risk when your negative patterns surface. That is still progress.

So how do excellent traders (and competitors in any field) sustain the motivation to operate at elite levels of performance? An important driver of that motivation is an intense competitive drive and a ferocious desire to win. The traders I’ve worked with personally who have been consistent, high earners have traded quite differently and viewed markets in radically different ways. Some traders have been loud and outgoing; others have been cerebral. Some have been uncannily intuitive; others have been analytically insightful. The common feature among all of them, however, has been their intense competitive nature. They compete against peers, they compete against markets: most of all they compete against themselves. They derive pride and validation, not just from making money, but also from getting better, which is what keeps successful traders in the game long after they could have retired comfortably.

The lesser traders? They trade to not lose; they trade to keep their jobs. They don’t hunger to become more than they are; they want to do well, not to be their best.

The drive for self-improvement is different from the desire to make money and is far more rare.

These successful traders can sustain their drive by staying mindful of the costs of their negative patterns and the benefits of their positive ones. When a successful trader decides to avoid a particular trade or market, it’s often because of a specific recollection that this idea has caused past losses. By staying emotionally connected to the pain created by their worst trading, traders stoke their motivation to avoid trading mistakes. Similarly, knowing their strengths is not just an abstract awareness for successful traders, but an emotional connection to the pride and sense of accomplishment over doing well.

A best practice in self-coaching—and a great assignment for this lesson—is to not only summarize the patterns of your best and worst trading, but to actually write down and visualize the costs associated with the most negative trading patterns and the benefits that accompany the best patterns. In other words, you don’t finish your journaling until you achieve a state in which you are emotionally connected to the things you are writing about. You will want to change your negative patterns when you get to the point of hating those patterns and becoming disgusted with the ways in which they’ve set you back. You’ll want to build on your positive patterns when you see and feel their benefits. When you’re coaching yourself well, journaling is an emotional exercise, not merely a cognitive one.

There is little to be gained from abstract positive thinking. Reciting such affirmations as, “I will be a successful trader” is empty at best, self-delusional at worst. The reason such positive thinking doesn’t work is that it is not connected to the day-to-day conduct of your trading. It’s not enough to simply make yourself feel good, and, indeed, there can be real value in feeling so bad that you’ll never repeat a mistake again. What is helpful is to associate the best emotional experiences of trading—your greatest moments of joy and achievement—with the specific practices that brought you such happiness. It is also tremendously helpful to re-create the pain of your worst trading with concrete vows to never go there again.

Think of football, basketball, and tennis coaches. Every practice session teaches skills, offers feedback, and supplies motivation. It’s not a bad formula for self-coaching as well. You are most likely to change a negative thought or behavior pattern when you associate it with concrete costs and consequences; you’re most likely to motivate a positive behavior by attaching to it specific, felt benefits.

COACHING CUE

Efforts at self-change break down when people start to make exceptions and allow themselves to revert to old ways. To accept exceptions, you have to accept the old, negative patterns. It’s when our old patterns become thoroughly unacceptable that we are most likely to sustain change. When you keep a journal, you want to cultivate an attitude, not just jot down bloodless summaries of what you do. If you don’t see plenty of emotion words in your journal—constructively expressed—the odds are that your journal will summarize your changes but not motivate them.

LESSON 34: SET EFFECTIVE GOALS

Successful coaching requires a focus for change. Many self-help efforts among traders fail because they are unfocused. One day the trader writes in a journal about position sizing and works on that; the next day he emphasizes emotional control; and the following day he stresses taking losses quicker. By jumping from one focus to another, no single direction is sustained.

This is problematic because most learning does not occur all at once. We know from research that learning typically requires many trials and considerable feedback. If we think about important skills that we’ve learned—from using a computer to driving a car—we can see that trial and error has been the norm. I can study a map of a new city for a long time and learn quite a bit, but I ultimately only learn to find my way around by driving on various roads, following signs, getting lost, and recognizing landmarks. If we pursue this learning intentionally—organizing our trials over a concentrated period of time with immediate feedback throughout—we can greatly shorten our learning curves. It’s easier to learn to play a piano by practicing every day and taking lessons every week than by engaging in occasional efforts spread over years.

The training of an Olympic athlete is a study in proper skill development: intensive work on specific aspects of performance, accompanied by plenty of coaching feedback and corrective efforts.

When we lack a specific focus for change and jump from one trading goal to another from day to day, we don’t really enter a learning curve: there is nothing cumulative in our efforts. As your own coach, you need to establish—and also sustain—a specific direction to guide your growth and development. This is the key to effective goal setting. If motivation provides the energy for self-improvement, goals supply the aim, the channeling of that energy.

When you recognize a problem pattern, it is not the same as establishing a goal for self-work, though the former usually will guide the latter. A problem pattern alerts you to what you’re doing wrong. Goal setting requires an awareness of new patterns of thought, feeling, and/or action that will replace the problem pattern. A goal states what you are going to do or not do in specific situations. If you have constructed your trading journal and pattern-identification exercises in the ways suggested in recent lessons, many of your goals will naturally follow from the patterns associated with your best trading. Your overarching goal will be to trade in the way that you typically trade when you’re trading well.

Notice that I am defining goals in a process sense, rather than as absolute outcomes. This is very important. Many traders think of such goals as making a million dollars or being able to trade for a living. These outcome goals may be motivating, and definitely have their place, but they do not focus a trader on what she needs to do today and tomorrow to become better. Traders on a short time frame do not have full control over their outcomes: a trader can make good decisions, placing all odds in their favor, only to lose money when markets behave in an anomalous fashion. What traders can control is the process of trading: how they make and implement decisions. The most effective daily goals emphasize trading well, not making oodles of money.

The same logic guides athletic coaches. A coach may stress the goal of victory over the next opponent, but the day-to-day practices will emphasize such fundamentals as swinging at good pitches (baseball), making the extra pass (basketball), and blocking effectively on running plays (football). These process goals provide the ongoing focus for practice over time and ensure that coaching leads to effective learning. Every coach is, at root, a teacher. When you’re your own coach, you guide your own learning efforts.

Effective goals target effective trading practices that break trading down to component skills and then set targets for these, one at a time.

As you examine your journal entries for the patterns that distinguish your best and worst trading, the question you want to ask is, “What is the difference that will make the greatest difference in my trading?” Stated otherwise, your question is, “What are the one or two ways I can trade more like my best trading and less like my worst trading?” The answer to these questions will form the basis for your best process goals—and will guide your self-development efforts from day to day and week to week. Goals should not be so specific that they only apply to a limited set of circumstances (“I want to be a market buyer when put/call ratios hit 100-day highs”), and they should not be so broad or vague that they don’t guide concrete actions (“I want to trade less often”). The best goals are ones you can work on every day for a number of weeks. If you do not work on a goal day after day for at least several weeks, it’s unlikely that you will turn your new patterns into positive habits.

As mentioned earlier, you don’t want to focus on too many goals at once. I’ve generally found three to be as many as I can work on with consistent intensity—and many times I will focus on fewer objectives. This means that a good self-coach will prioritize needed changes, emphasizing those differences that will most make a difference. A great exercise to try is to close your eyes and imagine yourself as a great trader. Visualize yourself as the best trader you can possibly be—or maybe visualize an absolutely perfect trading day. What are you doing differently from your usual trading when you’re the great trader? How is your trading different on the perfect day than on poor one? In your visualizations, try seeing yourself doing all the right things when you’re trading well. What are you doing? How are you doing it? Those visions, made highly specific, will form the backbones of your goals.

COACHING CUE

Make it a point to get to know successful traders who have had plenty of market experience. Many times you can form effective goals by simply trying to emulate their best trading qualities.

LESSON 35: BUILD ON YOUR BEST: MAINTAIN A SOLUTION FOCUS

To this point, the lessons in this chapter have emphasized the importance of tracking the patterns associated with both your trading shortcomings and your trading successes. It is common to focus on the former only. When we use coaching to build strengths rather than simply shoring up weaknesses, that solution focus produces surprising—and surprisingly rapid—results.

For more on the solution-focused approach to change, check out The Psychology of Trading

There are several reasons why a solution focus is helpful for traders who seek to coach themselves:

• Motivation—It is easier to stay motivated and optimistic when we emphasize what we’re doing right, not just where we fall short. Imagine a sports coach who only harped on players’ weaknesses. Over time, that would be demoralizing. When the focus is strengths, coaching can be empowering and inspiring without ignoring changes that need to be made or the urgency of making those changes.

• Goal Setting—Knowing what you’ve done wrong, in and of itself, does not tell you what you need to do right. When you focus on your best trading, you can identify specific patterns that are associated with your success and turn these into concrete goals for future work.

• Bang for the Buck—Working solely on improving weak areas is unlikely to create strengths; at best, you’ll take a deficient area and bring it to average. It’s making the most of strengths and learning how to work around shortcomings that produces optimal performance results.

One of the reasons I emphasize the importance of paper (simulation) trading and playing with different trading styles and markets is that this experience enables you to observe your own strengths firsthand. Many, many times, traders stumble across their performance niches when they discover something they’re good at. If you don’t know your strengths, it’s unlikely that you’ll be able to systematically build on them and turn them into drivers of elite performance.

But you might wonder, “How do I stay solution focused if, day after day, I’m in a slump and losing money?” It is difficult to stay connected to our strengths when our failings are written all over our P/L summaries!

We’ve seen that this question is a particular challenge when we identify winning days as good trading and losing days as bad trading. This thinking makes it difficult to observe and appreciate good trading when we’re not making money. But traders can trade well—they can take setups with demonstrated edges, size positions well, and manage the risk of their trades—even if trades happen to go against them. After all, even a 60 to 40 edge per trade ensures that a trader, over time, will have sequences of consecutive losing trades and/or days. If you define good and bad trading in terms of process, not just outcome, you can observe strengths during performance slumps and also you can detect flaws even when you’re making money.

To keep yourself solution-focused, you want to ask yourself, “What did I do well today? What about this trade did I do right?” You’ll find that, over time, your performance is varied. Not all trades are poorly conceived, poorly executed losers. If you lost less today than the past several days, what did you do better? If you had a number of winning trades during several losing days, what distinguished those winners? Focus on the improvements in your trading and then isolate the specific actions you took to generate those improvements. These actions can be meaningful additions to a daily to-do list.

“What did I do better this week than last week?” is a great starting point for guiding next week’s efforts. Do more of what works—it’s the essence of the solution focus.

Another technique for sustaining the solution focus referenced at the end of the last lesson is to identify a mentor or trader you respect and ask yourself how he would be trading a particular idea. Sometimes it is very helpful to try out solution patterns that you borrow from others. Over time, you adapt these patterns to your own ways of thinking and trading, so that they become distinctly yours. For example, I’ve worked with quite a few hedge fund portfolio managers and have learned from them the importance of thinking thematically about markets: observing various sectors and asset classes and creating narratives that guide a longer-term perspective. The specific themes I track and the time frames I monitor are completely different from theirs, but there is a similarity of process. When I’m not trading well, I can model their processes and place myself more in line with market’s trends.

Still another way to keep the solution focus is to make special note of mistakes that you don’t make in your trading. These notes represent exceptions to problem patterns. If there’s a mistake you’ve made lately, it helps to hone in on occasions when you haven’t made the mistake. What are you doing differently at those times to avoid the mistake? Perhaps you’re anticipating the problem and consciously doing something different. Maybe you’re avoiding the mistake by following a particular rule or practice. Whatever helps you do less of the wrong things can also form the basis for solutions.

Look to situations in which you don’t make your worst mistakes. Many times those situations hold the key to avoiding problem patterns more consistently.

The real power of the solution focus is that, when you discover what you do during your best trading, those positive patterns are uniquely yours. Instead of ceding the role of expert and guru to others, you’re turning yourself into your own guru by finding the best practices that are unique to you. You become your own role model. This is one of the most promising facets of self-coaching: by discovering who you are at your best, you can create goals that are specific, unique, and relevant to you. The learning, as a result, will be more relevant and empowering, reinforcing strengths as you build them.

A great assignment is to review your trading journal and assess the ratio of problem entries (writings about your bad trading) to solution entries (writings about what you’re doing best). If the ratio is lopsided in favor of the problem focus, consider structuring your writing to force yourself to address a few basic questions:

• What, specifically, am I doing best in my recent trading?

• How, specifically, am I avoiding old trading mistakes when I’m trading well?

• How, specifically, am I trading like my idea of the ideal trader during my best trading?

A good sports coach never loses sight of a player’s potential, even when correcting weaknesses. The challenge of self-coaching is never losing sight of your strengths, and then working daily on how you can maximize them.

COACHING CUE

We have solution markets as well as solution patterns of behavior: specific markets and market conditions that facilitate our most successful trading. Knowing these intimately is very helpful in allocating risk to your trade ideas. It can also be helpful in staying out of certain kinds of trades and emphasizing others.

LESSON 36: DISRUPT OLD PROBLEM PATTERNS

As you continue your journaling over a period of weeks or longer, you will become attuned to your problem patterns. Usually, a trader does not have 10 different problems. Rather, he may have one or two problems that manifest themselves in 10 different ways. For instance, a trader may grapple with missing good trades, occasionally ignoring stop-loss levels, sizing positions too conservatively, and cutting winning trades too quickly. These examples may seem like different problems, each requiring a different coaching plan and process. As the trader examines his or her journals, however, they’re likely to find that a single problem pattern—anxiety related to negative self-talk—is responsible for all of these. It’s not that the trader has many problems (though it may certainly feel that way); it’s that there is a single, core problem that affects many aspects of the trading process.

As you can see from the above example, self-coaching requires that you not only detect patterns but patterns among the patterns. It’s these patterns of patterns that usually form the core focus of coaching efforts. This means that if you can accurately identify the core pattern, many different trading difficulties can fall into place in a reasonable period of time. Once the trader in our example learns to master anxiety and not channel it through self-defeating self-talk, he will miss far fewer opportunities, become more consistent in sticking to stop-loss levels, take appropriate risk, and let trades progress toward their designated targets.

Asking yourself, “What is the common denominator behind my different trading mistakes?” begins the process of finding patterns of patterns.

Often the core pattern will involve a feeling state that recurs for the trader and that disrupts good decision-making. For example, the trader may lapse into periods of anxiety, frustration, or self-defeat. How this feeling state impacts trading may vary from day to day, which is what produces the multiple manifestations that lead traders to think that they have dozens of problems. By tracing each trading problem back to a particular cognitive (thinking) or emotional (feeling) state, we can then identify the events that typically trigger that state and design effective coaching interventions to tackle those situations and triggers. Often, a trader will know what he is doing wrong, but won’t know the right thing to do. This issue occurs when traders have not been sufficiently solution-focused. They know, for instance, that they should not double down on losing trades to make money back, but they don’t know how to reenter a trade and exploit good research after having been stopped out of an initial position. This situation requires two important coaching steps: 1) interrupt the problem pattern so that it does not disrupt trading; and 2) develop rules and procedures for a possible solution pattern (which will form the theme of the next lesson).

Because traders don’t always have solutions readily at hand and need to stop bleeding losses, interrupting problem patterns is often a first coaching objective. “Above all else, do no harm”—the Socratic oath in medicine—is relevant here. The ability to stop doing wrong things won’t, by itself, generate good things, but it can keep you solvent long enough to find solutions!

Change starts when you stop yourself from doing what doesn’t work.

A major point from The Psychology of Trading is that the key to disrupting problem patterns is to alter the state that you’re in when those problems first appear. This means that it’s important to become vigilant to the emergence of patterns, recognizing the characteristic ways that they appear. For example, some of my worst trading occurs when I focus on my P/L as the trade is unfolding. This focus may lead me to tolerate larger than normal losses in a small position, because it’s not hurting me, or it may lead me to take profits too quickly on a large position to book a sure gain. I’ve learned that if I start counting profits during the trade, I need to refocus my attention. I accomplish this by turning briefly from the screen, fixing my gaze on something nearby, and taking a few deep breaths. Once I’m in a new state—more calm and focused—I find it easier to be detached from the P/L and let the trade unfold in its planned manner.

Another quick way of shifting state is simply to walk away from the screen temporarily and engage in a quick activity unrelated to trading. Some activities might be a few stretches or exercises; talking with a fellow trader; or getting something to eat or drink. Often, doing something different enables you to approach situations differently: the new activity helps you shift your frame of thinking and feeling. I find this activity particularly useful after taking losses: a quick walk outdoors, getting away from markets, allows me to return to the screen with a fresh perspective.

When you change your physical state, you alter how you experience the world and process information.

Still another mode of state shifting is to write in a journal or talk aloud during a particular situation. The latter is especially useful if you’re trading alone and won’t be a distraction to others if you process information aloud. If you write or talk about what is happening and give voice to what you think and feel at the time you’re thinking and feeling it, you shift from being a person immersed in experience to being a person observing his own experience. If you’re an active trader, in and out of markets quickly, you may not have time to write out journal entries and observe yourself in that manner. Talking aloud, however, can be accomplished while still watching the screen; in fact, that’s how many traders in Chicago work with me during the trading day: they talk aloud about what is happening while they are engaged in trading.

To use my example from above, if I talk aloud my thoughts about my P/L while I’m in a trade, that alerts me to the fact that I’m no longer focused on the trade itself. If I hear myself talk about something other than the management of the present trade, it kicks me into a different mode and pushes me to make an effort to get back to the market itself. This shift becomes easier and easier as traders learn to make self-observation a habit.

When you talk aloud your thoughts and feelings, you no longer identify with them; you listen to them as an observer.

A good self-coaching question to ask yourself is: How different would your P/L be if you could eliminate the 5 percent of your largest losing trades? Often, this percent by itself would make a huge difference to a trader’s profitability. By interrupting the patterns that accompany those large losers that result from bad trading (not just being wrong on an idea), you can “above all else, do no harm.” It’s usually a particular emotional state or pathway of thinking that triggers the bad trading. If you recognize the state and thoughts as they’re occurring, you can stop yourself and, at the very least, avoid disaster.

This recognition would make a wonderful goal to work on in your trading. Choose just one negative pattern that has accounted for many of your largest losing trades and then identify the common triggers for that pattern. Then select one method for interrupting the pattern when you notice one of the triggers occurring—even if that method is doing nothing more than placing no more trades until you regain emotional equilibrium. A good coach knows when to take his player out of the game for rest and a lesson. When you are your own trading coach, sometimes you need to do something similar. Remember: the goal is not to trade; the goal is to make money. Sometimes the best way to make money over the long haul is to ensure that you keep your money when all the wrong patterns are firing.

COACHING CUE

If I say something in a frustrated tone or make a frustrated gesture while I’m trying to get into a trade, while I’m managing a trade that’s already on, or while I’m trying to exit, that is my signal that I need to interrupt an emerging pattern. I typically will slow my breathing considerably and focus on my breathing as I’m continuing with my business. As soon as is practical thereafter, I take a short break from the screen and don’t enter any new positions until I have figured out why I’m frustrated, what that tells me (about me and/or the market), and how I want to factor that into my trading. If you use frustration as a cue to interrupt patterns you are prevented from acting mindlessly on the frustration, but also you are set up to become mindful of the reasons for the frustration.

LESSON 37: BUILD YOUR CONSISTENCY BY BECOMING RULE-GOVERNED

One of the major goals of coaching yourself is to turn positive trading behaviors into habit patterns. This is crucially important. You don’t want to have to think and make yourself do the right things each time opportunity occurs. Rather, you want to do the right things automatically. Effort and energy you spend thinking about what to do—and trying to make yourself do it—is taken away from markets themselves. When you can do the right things automatically, your concentration can be wholly focused on what you are doing. That is essential if you’re going to be sensitive to subtle market shifts in supply and demand.

Rules are the bridge between new behavior patterns and acquired habits. Children are not born with a developed sense of ethics and responsibility. They are taught rules by parents and teachers that are eventually internalized. Some of that internalization occurs by observing role models over time; much of it results from turning the desired behaviors into explicit rules that can be rehearsed. Such mental rehearsal allows people to keep old behavior patterns in check and make conscious efforts to engage in new ones.

We see such dynamics at work when traders are learning to control losses. Instead of exiting trades when the pain of loss is too great—a pattern that comes all too naturally—a trader will create a rule-based stoploss level. The rule may be accompanied by other thoughts that emphasize the importance of the rule, the losses that will follow from not following the rule, and the benefits of adhering to the rule. In such an instance, traders choose to refuse to do what they feel like doing at the moment. Rather, they seek to be rule-governed. That is what keeps us driving on the proper side of the road, even when we’re in a rush. Rules are checks on our impulses; they keep us doing the right things even when we’re not inclined to act in our own best interests or the interests of others.

We follow social rules without even thinking about the rules of proper social behavior because we’ve repeated the right behaviors so often and have internalized the rules so thoroughly over time. That’s the goal with trading rules.

Trading is especially challenging, because the normal human response is rarely the one that makes money. One exercise from the TraderFeed blog examined periods of time that were up on a one-month, one-week, and one-day basis and compared those with periods that were down over those three time frames. In the first situation, almost anyone would identify the trend as rising; in the second situation, it’s a clear downtrend. Had you bought the market after the up periods, however, you would have severely underperformed the market averages. Had you sold after the down periods, you would have lost considerable money. The obvious strategy fails precisely because it is so obvious. By the time a trend is readily apparent; all the momentum and trend followers are aboard. They’re the ones scrambling to get out when the tide turns, leaving traders who acted on the obvious with losses.

When we create rules, we put a brake on those normal human tendencies. A rule might be as simple as “only buy if the market is down over X period.” Surprisingly, in the broad stock market, such a simple rule works pretty well on average. Another rule might be, “Never enter a trade unless you first measure risk (stop-loss level) and reward (profit target) and have a reward-to-risk ratio of 2:1 or better.” Such a rule would restrain a trader who is tempted to jump aboard late in a market move.

What traders call setup criteria often are simply rules for getting them into trades. When the criteria are not established as firm rules—and mentally rehearsed as such—there is a tendency to violate the setups. This violation often occurs because of the fear of missing a profit opportunity or because of risk aversion after a prior loss or series of losses. When the setups are structured as rules, trading may not be mechanical, but it can be much more consistent. Most frequently, the inconsistent trader is the one with the loosest rules.

Rules aid trading consistency.

When you are your own trading coach, you not only formulate your rules, but also must do so in a way as to maximize the odds that you will actually follow them. The key to successful rule-creation is the recognition that rules are more than thoughts that go into your head. A good rule also comes with feelings attached: an awareness of both the consequences of violating the rule and the benefits of following it. What keeps a diabetic person faithful to a diet or an eager child patiently waiting her turn to answer a question in class? It’s not just the thought of the rule, but also the immediate sense of what would happen if the rule were violated. When people think, “I can get away with it,” the rule loses its force: it’s merely a set of empty words and good intentions.

This, then, is the secret to formulating trading rules, whether they relate to entries, exit, position sizing, stop-losses, diversification, or idea generation: whenever you write down the rule or mentally rehearse it, make sure that you are emotionally connected to that rule. Make yourself relive situations in which you’ve violated the rule. Focus your attention on successful episodes of trading in which you followed the rule. Make the rule more than a guideline; it should represent a belief and conviction. The best rules feel like must, not just should.

Your assignment is to take a thorough trading inventory of your trading rules. How many do you really have, and how explicit are they? Do you just remind yourself of them passively, or do you rehearse them with belief and conviction? If you’re like most traders, you’ll find that you have many loose guidelines, but few firm rules. That means that you haven’t really drilled down to identify the patterns behind your best and worst trading, which really form the backbone of all good rules.

Rules should reflect best practices in trading.

Remember: you can’t follow a discipline that you never formulated in the first place. The clearer the rules and the more you feel them, the stronger they will serve as brakes to your impulses and guides to your best behavior. Rules are not straightjackets; they free you up to be your best. Think of professions in which consistency is a virtue: airline pilots landing an aircraft, surgeons making incisions, racecar drivers maneuvering in a pack. The best performers are rule governed: they are keenly aware of the dangers of ignoring the rules of their profession. It is in the internalization of their rules that they achieve flawless execution. That is your goal in coaching yourself: to make rules so routine that they make extraordinary performance the norm.

COACHING CUE

Rule-following is a great basis for self-evaluation. Creating checklist report cards to track your rule governance helps ground you day to day in best practices. Among the rules you should consider formulating and tracking for self-assessment are:

• Rules for position sizing.

• Rules for limiting losses, per trade, per day, per week, etc.

• Rules for adding to existing positions.

• Rules for when you stop trading or limit your size/risk.

• Rules for increasing your size/risk, per trade, per day, etc.

• Rules for entering and exiting positions.

• Rules for preparing for the trading day/week.

• Rules for diversification among positions.

Not all these rules will apply to all traders; the key is to focus on the rules that capture your best trading and turn those into report cards for daily/weekly self-assessment and goal setting.

LESSON 38: RELAPSE AND REPETITION

The greatest enemy of coaching is relapse. It is relatively easy to initiate change, but quite difficult to sustain it. Our old patterns are what come naturally: they’re what we’ve been doing day after day, year after year. Those patterns are overlearned; they have been repeated so often that they have become automatic. If change efforts are not sustained, the automatic patterns naturally fill the void.

What this means in practice is that there is a certain series of stages to any change process:

Phase One—We repeat old patterns automatically, experience consequences, and try to avoid the consequences as much as possible.

Phase Two—Consequences of old patterns accumulate and we develop an awareness of the need to change, though we may not know how to change and may have ambivalent feelings about change.

Phase Three—We can no longer accept the negative consequences of our old ways and commit ourselves to making changes by trying to think and act differently.

Phase Four—We slide back into old patterns periodically when our change efforts lose momentum, creating oscillating periods of change and relapse.

Phase Five—We engage in new patterns sufficiently often that they become automatic, greatly reducing the relapse into old ways.

So let’s take a practical example: In phase one, we are in an unfulfilling romantic relationship, but minimize the problems and try to go on from day to day. In phase two, we recognize that the problems are there, but wrestle with the question of whether we really want to rock the boat and raise concerns with our partner. Phase three brings clear awareness of the need for change and discussions at home to work out problems. Phase four sees periods of good times, interrupted by resumptions of the problematic interactions, perhaps aided by couples counseling. In phase five, we keep working on the counseling exercises, changing patterns of communication, until there are new and more constructive ways of engaging each other that have become routine.

This step-wise scheme suggests that relapse is not merely a problem, it is a step on the road to change. Few people change patterns all at once and for all time. More often, there is a tug-of-war between the old, overlearned patterns and the new, constructive ones we’re working on. This tug-of-war occurs precisely because the new patterns have not yet been overlearned: it takes conscious effort to enact them. Early in the change process, we don’t think about change; in the middle phases, we have to think about change in a very conscious manner. Only late in the process do the new behaviors come more naturally and automatically.

In every change process, there is an intermediate phase in which old problem patterns coexist with new, positive ones. Relapse at this stage is the norm—not necessarily a sign of failure.

So what enables us to make the transition from effortful change to an internalization of new patterns so thorough that those patterns become second nature? If you think back to when you learned to drive a car, there was a period when you had to consciously focus on every aspect of driving, from signaling and making turns to changing lanes. Only with repeated experience did these activities become automatic, freeing you up to focus on road conditions when necessary, converse with passengers, and locate unfamiliar destinations. Similarly, repeated experience with new cognitive, emotional, and behavioral patterns in trading is what cements these patterns and frees you up to focus on markets. Relapse is overcome through repetition.

Only when new behaviors have been repeated many times, in many contexts, do they begin to become automatic, overcoming the tendency to relapse.

We saw in the lesson dealing with goal setting that, as your own trading coach, you don’t want to set a goal one day, another goal the next day, and still a different one later that week. This is a common flaw with many trading journals. Traders take steps to initiate change—phases three and four above—but fail to cement the changes through repeated experience. It is far better to focus on one or two changes and institute those with regularity over a period of weeks and months than to try to make many changes in a short period of time.

Your assignment, following the discussion of rules from the previous chapter, is to review your current trading goals and assess how well you sustain work on them day after day. Ideally your goals—and the changes you attempt to make—should be expressed in such a manner that you will necessarily have to work on them each and every trading day. One way to foster this consistency is to generate a daily report card, in which you grade yourself on your enactment of the behaviors you try to cultivate. The goal is to achieve good grades each day, not just hit your targets on a particular occasion.

COACHING CUE

Engage in an important goal-oriented pattern as your first activity of the day to build momentum for a purposeful day. I’ve worked with traders who stuck with their trading goals much better after they began programs of physical fitness. Their fitness work forced them to be goal-oriented to start their day, which carried over into their trading. You’re not just training yourself to trade better; you’re training yourself to sustain change efforts across all facets of life.

LESSON 39: CREATE A SAFE ENVIRONMENT FOR CHANGE

In the last lesson, we took a look at the importance of repetition in cementing new patterns of thinking, feeling, and behaving. The single most common reason why skilled traders fail to coach themselves to higher levels of performance is that they initiate changes, but fail to sustain them. As soon as they make improvements, they relax their efforts and fall back into old ways. A successful coach knows when the opponent is on the ropes and doesn’t let up. When you have a positive experience, you want it to be a motivation for further positive experiences, not a cue for complacence. The best coaching efforts develop a kind of momentum in that way, adding success to success and sustaining a sense of mastery and accomplishment.

The problem with experience is that it takes time. Particularly if you’re a longer-time-frame trader, many weeks or months of trading may pass before you have the opportunity to build a large base of new experience. If only you could multiply your experience, you could accelerate your learning curve. Changes that would otherwise take months could be accomplished in a few weeks.

The way that coaches in sports and the performing arts multiply experience is through repeated practice. A team might only play opponents on the weekend, but will practice every day to prepare for the games. Similarly, actors and actresses will rehearse their lines every day before opening the curtains for the actual production. During those practice sessions, performers condense the coaching process: they learn what they’re doing right and wrong, make conscious efforts to repeat their positive performances and correct their faulty ones, and eventually reach the point where their efforts become natural and automatic. Practice is valuable, because it creates a safe environment for making mistakes. The game won’t be on the line or the play won’t be ruined if a performer tries something new and it falls flat in practice.

Rehearsal speeds the learning curve.

Practice can be very helpful to your efforts to coach yourself. If you identify a specific change to make, the place to begin is in simulated trading where no capital is at risk. This can occur in several different ways:

• Simple Chart Review—Sometimes the changes you make to your trading involve decisions regarding how you would enter, exit, or manage risk. When those are your goals, you can review charts and simply talk aloud the decisions you’d be making at each juncture. This lacks the realism of real-time trading (and cannot substitute for real-life experience), but it does slow the decision-making process down to the point where you can try new things in a very conscious, reflective manner. My favorite way of engaging in the chart review is to advance the chart on my screen one bar at a time and then talk aloud my perceptions and decisions. This is like first learning to drive a car by driving very slowly in a large, empty parking lot. It gives the learner plenty of time to crawl before walking and running.

• Simulated Trading—My charting software comes with a simulation feature in which I can place orders and track my profits and losses over time. This is helpful because you’re making decisions with real market data in real time, but placing no capital at risk. By trading in simulation mode, you can gain many days’ worth of experience in a single day. You can also focus your attention on the most problematic and challenging market occasions, concentrating your skill rehearsal in contexts that most call for your new patterns.

• Trading with Reduced Size—Not all of the changes I seek in my own trading are revolutionary. Some are evolutionary tweaks. Recently I altered the criteria by which I set profit targets, allowing me to hold certain trades for a bit longer. I reduced my trading size in half when I traded with the new criteria, knowing that the extended holding times would, by themselves, be uncomfortable for me. Once I developed a comfort level with the lowered size—and made my mistakes with the smaller risk exposure—I then gradually returned to my prior level of risk.

Learning is best started in very safe environments and only later tackled in riskier situations. If you violate safety and security, you create distractions that interfere with learning.

Note that if I were to make radical changes in my trading—say, switch from trading equity indexes to trading agricultural commodities—I would need an extensive period of time with chart review and simulation prior to putting any capital at risk. Those more substantial changes take longer to internalize; there is a more extensive learning curve. On average, we’ll make more mistakes when we attempt large changes rather than small tweaks. When you are your own coach, you provide more security and safety for big change efforts; the smaller pattern shifts can proceed with live trading and reduced risk exposure.

One of the greatest mistakes traders make is to make a change once or twice and then jump immediately into larger risk-taking, giddy with the prospects of new returns from new habits. It is not unusual in my coaching and trading experience for trading results to get worse before they get better when tackling meaningful changes in trading practice. Just as you wouldn’t learn how to use the car’s brakes and gearshift in a couple lessons and then jump into highway driving, you don’t want to greatly alter your decision-making process while running full risk. As the Enhancing Trader Performance book stresses, the worst psychological mistake you can make is to traumatize yourself. If you create large drawdowns in your account because you weren’t prepared for your changes, the result will be damaging to both your trading performance and to your self-coaching. You want to structure the change process as much as possible to provide frequent successes and no emotionally damaging losses. This is how you sustain confidence and self-efficacy, even as you make your mistakes.

Many traders are too eager to trade. They crave excitement and profits and find it difficult to trade in observation, simulation, and reduced risk modes. This short-circuits the process of generating repetitions that cement new patterns. Once traders undergo losses while making changes, they become self-doubting and pull back from their change efforts. Instead of generating success and confidence, traders learn to fear change. An important key to coaching yourself is to turn yourself into a generator of concentrated experience by making maximum use of practice and feedback. We often seek change after periods of loss; it’s human nature to want to jump back into markets and regain the lost capital. But the goal is to instill the right trading behaviors, not to make money back all at once. If you internalize the right patterns, the results will naturally follow.

Your assignment is to embed concentrated learning into your schedule by allocating time for daily rehearsal of new skills and patterns. An excellent goal is to generate two day’s worth of learning experience into every day by rehearsing new patterns outside of trading hours as well as during them. Replay market days, either in video mode or through a simulation platform that has a replay feature, to accomplish this goal.

I know from the traffic statistics on my blog and others that traders spend less time gathering market information after the close of trading and especially during weekends and holidays. Traders use the hours outside of trading to get away from markets. No one argues with the need for and desirability of life balance, but a nine-to-five approach will work no better in trading than it would in running a business or building a career as an artist, scientist, or athlete. When you read about elite performers in any field, one fact stands out: they are not the clock punchers. They are absorbed in their interests and, as a result, learn far more than others. They develop new skills and competencies far more readily than their peers simply because they multiply experience.

Many traders back away from the screen when they have trading problems, thereby reducing their experience. During the worst drawdowns, you want to minimize your trading and risk exposure, but maximize your work on markets.

When you create safe environments for changing yourself and your trading, you mimic the learning behaviors of the greats, from concert pianists to chess champions to Olympic athletes. When you start with practice that encourages errors and learning from them, development becomes a joy, not a burden. This is self-coaching at its finest.

COACHING CUE

The video recording of markets for later review is an excellent way to multiply experience. Replaying the market day allows you to watch patterns unfold again and again under different market conditions. Reviewing market moves that you missed sensitizes you to future occasions of opportunity.

LESSON 40: USE IMAGERY TO ADVANCE THE CHANGE PROCESS

The previous two lessons have emphasized the importance of repetition in cementing new ways of behaving and unlearning old patterns. By creating new opportunities to rehearse fresh skills, insights, and behavior patterns we accelerate their internalization, freeing our minds for the basic tasks of trading.

A huge advantage of the human brain in this context is the ability to generate experience virtually, through the use of imagination. If we vividly imagine a specific trading situation and visualize ourselves, step-by-step, enacting a new way of handling that situation, the mental rehearsal approaches the power of actual experience. You do not have to trade to rehearse many trading-related behaviors. By creating realistic situations in our minds and using imagination to summon our desired patterns, we can also cement these patterns.

A technique that makes use of this kind of visualization is the stress inoculation approach first described by Donald Meichenbaum. By mentally summoning stressful market scenarios and imagining in detail how we want to respond to these, we inoculate ourselves against those stresses by priming our coping mechanisms. This mental preparation can be applied to a range of situations, from ones that are psychologically challenging to those that require new trading methods.

Our coping is mobilized when we imagine anticipated stressful situations, preparing us for when those situations actually occur in trading.

The key to making effective use of imagery is ensuring that the imagery is vivid and evokes real feeling. Unlike a simple verbal repetition of a trading goal, imagery has the power to evoke the emotions associated with situations. This imagery turns the verbal recitation into a much closer approximation of trading experience. When we vividly imagine a trade going through our mental stop-loss level before we can execute an exit, we summon some of the fearful or frustrated feelings normally associated with unexpected loss. While we experience a mild version of the trading emotions (imagery can rarely fully duplicate actual experience), we can rehearse our best practices, keeping ourselves planful and disciplined in the face of stress. This mild exposure to the trading stress is like the body’s exposure to a weak form of a virus: it inoculates because it is strong enough to arouse adaptive responses, but not so strong as to pose a major threat.

Few psychological techniques are as recognized and recommended as imagery, and few are executed as poorly. There are several facets of effective imagery exercises:

• Specificity—It’s not good enough to imagine a stressful situation, such as losing money or missing an opportunity, in the abstract. The imagery should be very specific and guided, visualizing a specific market and market situation, specific price levels, and specific market action. It is the realism of the imagery that enables the exercises to serve as substitutes for actual experience.

• Dynamism—The imagery should be more like a detailed, realistic movie rather than a broad, static snapshot. If you read a newspaper description of a situation, your reaction isn’t as strong as it would be if you were to see the same situation dramatized in a movie. The dynamic nature of imagery is essential to its realism, which in turn is essential to the inoculation process. Flat, unconvincing images won’t arouse our coping, and they surely won’t be effective approximations of real trading experience.

• Elaboration—If I had to identify the most common shortcoming in people’s use of imagery as a change technique, it would be their tendency to cut the imagery work short. Longer, more elaborated exposures to imagined challenges are more effective than very brief exposures. Indeed, if the exposures are too brief, you may unwittingly reinforce the pattern of fleeing from stresses! The best practice is to imagine a situation from beginning to end in elaborate detail—and then repeat the scenario until it no longer evokes emotion. This practice not only reinforces coping, but mastery and success.

An interesting technique from the behavioral literature is flooding: prolonged exposure to imagined situations that are highly stressful. Traders learn to stay in control even during a flood of stressful imagery, so they prepare themselves for most anything the markets throw at them.

• Variation—Traders commonly imagine a challenge scenario, evoke the imagery, and then quickly move on to something else. As we’ve already seen, repetition cements learning. By failing to use the principle of repetition in the area of imagery, traders open themselves to the risks of relapse. Once you evoke a detailed, realistic trading scenario and how you would handle it and once you repeat the scene to the point of mastery, you then want to create variations on the scenario. For instance, you might begin by imagining a frustration associated with a fast-moving market. If your goal were to learn new coping patterns during periods of frustration, you would master this first scenario and then create variations, such as frustrations associated with slow markets or not getting filled on orders. Vary the scenarios and you can generalize your learning and make it increasingly applicable to actual trading conditions.

• Consistency—Any single imagery session will not affect behavior over days and weeks. It is the daily repetition of the sessions that yield enduring results. Many traders derive some benefit from initial imagery work and then promptly return to business as usual. Consistency in the use of the exercises ensures that the new patterns you’re rehearsing will remain top of the mind over time. Frequent use of imagery work is a great way to sustain mindfulness about change and the need for change.

When you are your own trading coach, you want to see and feel yourself to be successful, not just engage in occasional thoughts of success. In your internal world, you can practice skills, engage in new thought patterns, and achieve goals with consistency long before you actually accomplish all of those in live trading. Your assignment is to generate powerful, elaborate imagery scenarios of stressful, challenging market situations; the thoughts, feelings, and behavior patterns associated with those; and the specific steps you want to take to master those situations. When you construct your guided imagery, you want to feel the emotions of fear, greed, frustration, and boredom and imagine yourself tempted to engage in your usual, negative patterns in response to those states. In your imagined scenario, you will vividly envision yourself keeping those negative patterns in check and purposefully enacting your best practices. Thus, for instance, you might imagine yourself tempted to add to a position when it goes through your stop-loss level, but checking that temptation and instead acting on the stop.

Imagination for the trader is the equivalent of a practice field for an athlete: a place to prepare for performance by creating simulated performance situations.

You will be the trader you are capable of being in your imagery work and practice long before you consistently enact those ideals in your daily trading. There is no reason to take months or years to change behavior patterns when you can make every day an experience of concentrated learning. Much of successful self-coaching is the result of a creative and tenacious use of imagery and practice.

COACHING CUE

Use your imagery to imagine yourself as the kind of trader you aspire to be: the risk taker, the disciplined decision maker, the patient executioner of ideas, the canny trader who learns from losing trades. If you create a role and an image of yourself in that role, you enact scenarios that, over time, become part of you.

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 coaching processes at the home page on the blog for Chapter 4: http://becomeyourowntradingcoach.blogspot.com/2008/08/daily-trading-coach-chapter-four-links.html

Much of the framework discussed in this chapter comes from research into helping processes in brief therapy. Standard reference works in this area include the chapter on “Brief Therapy” written by Dewan, Steenbarger, and Greenberg for the volume Textbook of Psychiatry (Fifth Edition, Volume 1), edited by Robert E. Hales, Stuart C. Yudofsky, and Glen O. Gabbard (American Psychiatric Publishing, 2008) and the chapter on “Brief Psychotherapies” by the same authors for the reference work Psychiatry (Third Edition), edited by Allan Tasman, Jerald Kay, Jeffrey A. Lieberman, Michael B. First, and Mario Maj (Wiley, 2008).

An excellent framework for thinking about making the most of strengths is the Gallup research described in Now, Discover Your Strengths, written by Marcus Buckingham and Donald O. Clifton (The Free Press, 2001). See also the popular management text Good to Great, written by Jim Collins (Harper Business, 2001).

A full description of solution-focused work can be found in my chapter “Solution-Focused Brief Therapy: Doing What Works” in The Art and Science of Brief Psychotherapies, edited by Mantosh J. Dewan, Brett N. Steenbarger, and Roger P. Greenberg (American Psychiatric Publishing, 2004).