CHAPTER 9

Lessons from
Trading
Professionals
Resources and Perspectives
on Self-Coaching

 

 

Anyone who fights for the future lives in it today.

—Ayn Rand

 

 

 

In this chapter, I sought the perspectives of experienced traders who share their views on the Web. The question I asked them was simple:

“What are the three things you have found most helpful in mentoring /coaching yourself as a trader?”

I think you’ll find their outlooks worthwhile, and I know you’ll benefit from checking into the resources these traders provide. To coach yourself, you don’t need to reinvent wheels. The guidance of those who have come before you can be invaluable. Think of this chapter as lessons in the best practices of self-coaching. Look for the themes emphasized by a majority of the contributors; these themes include the best of the best practices.

LESSON 81: LEVERAGE CORE COMPETENCIES AND CULTIVATE CREATIVITY

We encountered Henry Carstens when we took a look at profits and losses as a function of one’s trading metrics. Henry’s web site (www.verticalsolutions.com) is filled with valuable information for discretionary traders, but his distinct specialty is the design of trading systems. Henry eats his own cooking: he builds and trades his own systems, manages money for clients with his systems, and develops trading systems for other traders and trading firms. When I posed the question to him of what he has found most helpful in coaching himself, he quickly offered three responses:

1. Leveraging core competencies and interests

2. Learning about learning

3. Collaboration and work ethic

Let’s take a look at each.

From childhood, Henry learned about building and the use of machinery from his grandfather, Floyd Grahm. “I am, and have always been, a heavy equipment operator,” Henry observes. Out of his fascination with machines and moving things around, Henry tried his hand at a different kind of building: he built a machine that traded. After building several such machines, he figured out a way to quantify rates of change in market behavior. When he tossed aside all but one of his machines, Henry developed others, so that his machines would never rust and become obsolete. His core competence and interest is building: markets just happen to be the earth he is currently moving. Henry leveraged what he knows and loves and found success and fulfillment.

Success is found by leveraging distinctive interests, talents, and skills: doing what you love, and doing what you do well.

Note, however, that the flip side of building is destroying. Sometimes you have to take down a structure to erect a new one; you have to remove a mound of earth to lay a foundation for something new. It was Henry’s willingness to put aside his old machines and develop new ones that provided him with his edge. It’s not about finding a perfect system and taking cash from it like an ATM. It’s about having the integrity to acknowledge when ideas are no longer working and having the desire to be the best machine operator possible.

With respect to learning about learning, Henry credits his chess lessons with grandmaster Nigel Davies for helping him become sensitive to patterns and their nuances. “What I learned from those lessons was the power of nuance—the cascading insights brought by experience and the continuous pursuit of a single objective,” he explains. Henry has learned to scan markets like he scans a chessboard for moves. “I continually search for the next insight now, the nuance that means just a bit of an edge for just a little while longer.”

I’ve observed this interdisciplinary cross-fertilization among many successful traders. Those traders with mathematical backgrounds learn to quantify value and divergences from value. Those with athletic training use their experience to guide their training and direct their competitive drive. My own work in psychology has sensitized me to the ways in which human behavior is patterned. This work has been a tremendous aid in recognizing similar patterns in markets. Coaching yourself begins with knowing yourself, and especially knowing your distinctive strengths: how you best process information, how you think, what you love. It is difficult to imagine being successful at trading if your market activity does not tap into these core competencies and values.

Finally, Henry identifies collaboration and a strong work ethic as key to his self-development. “A diverse network of people with broad and similar interests in trading both pushed and supported me,” Henry explains. “The very strong work ethic I got from my grandfather always makes me do just a little bit more.” The keys here are that the network is diverse—providing input from many angles to aid creativity—and the network is both challenging and supportive. I’ve often been asked why I don’t charge money for my blog content. The answer is that, in developing a community of readers, I also cultivate the diverse network described by Henry. Readers push me to think more deeply about markets, and they support my efforts at learning more. All of us tend to fall into the trap of operating within our comfort zones. We benefit when those who care about us also push us to move beyond those self-imposed boundaries.

Like many successful creative individuals, Henry exemplifies what I call an open source approach to networking. When others share ideas and research with him, he freely passes his work on to them. This approach is very common among professional portfolio managers, particularly the successful ones. A surprising number of traders, however, are convinced that they must keep their work secret. The result is that they become isolated and stagnant. “When a colleague sends me something that I build upon or that sets me off on a new and interesting direction, I always try to reciprocate with a relevant finding or study as way of thanks,” Henry points out. “What I give up in secrecy comes back many-fold in strong relationships and flow of ideas that are the lifeblood of the creator.”

The trader must be a creator if his business is to avoid stagnation.

I cannot emphasize this latter point strongly enough: as a trader, you are only as strong as your flow of ideas. Those ideas are your lifeblood: the novel mutations that will enable you to evolve and adapt to changing market conditions. Success in trading is a kind of evolution; without creativity and the ongoing flow of ideas, extinction is a real threat—as it is for any business that fails to keep up with the marketplace.

Your assignment for this lesson is to set a goal and plan for becoming just a bit more creative in your approach to markets. You don’t have to be a system developer to learn about learning, build upon your distinctive strengths, and fertilize your creativity within a network of colleagues. For your assignment, I encourage you to add just one source of new ideas that will add to and challenge your own. This source can be a web site, a newsletter, or a peer trader—but it should be a source that you can consult as a regular part of your generation of trading ideas. Henry freely shares his experience on his site, including a framework for testing trading ideas; making use of the fruits of his self-coaching will be invaluable for your own.

COACHING CUE

When we’re successful, our work expresses who we are. Henry emphasizes that he is a builder and creator. How does your trading express who you are: your greatest talents and interests? Identify the recent times in the markets when you have been your happiest and most fulfilled. What made those times special? How can you bring those special elements into your trading more regularly?

LESSON 82: I ALONE AM RESPONSIBLE

Chris Czirnich, author of the Globetrader blog (www.globetrader.blogspot.com), was one of the first contributors I considered for this chapter. Uniquely among market writers, Chris is sensitive to the psychology of trading. His blog consistently combines market insights and psychological ones; it’s a useful resource.

I posed the three-pronged question to Chris, asking him what has been most helpful for his self-coaching as a trader. The floodgates opened and Chris came up with 10 ideas, not three. His response was so well considered that I decided to summarize all 10 of his insights and their implications for self-coaching:

1. Being able to observe myself.

2. Discipline.

3. Having an edge.

4. Accepting that I alone am responsible.

5. There is no holy grail.

6. Having trust in myself.

7. Being able to stand up again, after being beaten down.

8. Being lucky from time to time.

9. Keeping a trading journal and writing a blog.

10. Don’t panic.

Building the External Observer

“The external observer is a concept I came across after reading your first book,” Chris explains. “It allows me to see myself trading, to observe and interact in case I’m in a position from a teacher’s perspective. It allows me to argue about my trade, to see the pros and cons, to notice price behavior I might miss otherwise. It’s an invaluable resource in a trade because it is not affected by emotions and will guide me, even in a fast-moving market. I rely on it to always know what I should do. I might override it, but it is the clear voice in a turbulent market, where I can always turn to find the safe way out.”

 

Maintaining Discipline

 

“Discipline is so elusive, so difficult to maintain, and yet it is something without which you won’t succeed at trading,” Chris explains. “Am I a disciplined trader? Alas no, unfortunately not, but after all these years I have learned that I have to follow certain rules or I will do a lot of damage to my account. Let’s look at a concept that every trading book tells you is wrong and will lead to disaster: adding to a losing position. Admit it, you have done it at times, because you were certain that you were right and the market was wrong. My biggest loss came from adding to a losing position; still on a range day, adding to a losing position is the way to trade, because otherwise, you will die the death of a thousand stops. Yes I add to losing positions, but now I have the discipline to stick to the twice wrong and I’m out rule. Meaning, if the add-on does not work, I’m out. Of course you can be wrong and a trade signal might go against you, but if you have two signals in a row that go against you, then you have to take a step back and see why your signals aren’t working properly.”

Rules promote discipline.

Having an Edge

“Without an edge you are doomed,” Chris asserts. “Very simple. Of course you might throw a coin and trade a 50:50 chance system. But only a professional will have the discipline to stick to the necessary money management rules to trade a 50:50 system successfully. Having an edge means you can statistically prove that your trading system works, that it would have paid your commissions and costs of doing business and made you profits in the long run. You might be a mechanical trader, you might trade fundamentals, you might trade price action or some arcane indicator or a combination of all of them. It all comes down to one thing only: You must be able to prove to yourself that your trading system works and will make you profits in the long run. If you can’t prove that to yourself, if you don’t understand the mechanics behind your trading system, then you won’t trust your trading system and you will not be able to trade it. The best trading system will produce losses in the hands of a trader who does not believe that that trading system works.”

I Alone Am Responsible

“I came to trading because I came into real financial difficulties after some clients of mine went bankrupt and did not pay their bills” Chris recounts. “Trading seemed the solution to me, because only trading gave me the promise of instant payment, of knowing that when I did it right I would get paid. But that promise came with a responsibility I did not fully understand: I alone am responsible for any action taken. There is no one but me to blame, if I have a red day, a red week, a red month or year. Each and every day I can look back and tell you where I was wrong, what trade I should have taken, where I missed the opportunity to make it back. It’s only me who is responsible. And if I alone am responsible, then there can’t be any guru to whom I can turn to tell me what to do. I trade my system. I can tell you what I do, but whether you will be able to use that knowledge depends on you alone.”

The need for a guru confesses an absence of self-guidance.

There Is No Holy Grail

“The charts of the best traders have price bars only or they trade without charts at all, like many forex traders,” Chris explains. “They are not magicians, but they follow the price of the instruments they trade for such a long time, they no longer need indicators or charts. But if you ask them, they will tell you that there is divergence on price and that a bottom or top might be near, that right now will be a great buying or selling opportunity. All these traders have looked at charts, they have used all the common and not so common indicators or oscillators or volume analysis and after a while they removed them from their charts until they were back at the beginning looking at a bare chart, but now knowing that there is no holy grail among these indicators. Nothing will give you 100 percent winning trades, so it’s futile to search for it. You need to focus your efforts somewhere else to succeed.”

Having Trust in Yourself

“I’m a discretionary trader,” Chris points out. “This means that I have certain trade rules, which provide me with a trade setup, but I decide on a, let’s call it gut feeling whether I take the trade or not. I have tried a few times already to build a successful mechanical trading system, but I was never able to boil my trade rules down to a mechanical system that I could trust enough to trade. On the other hand I have accepted that my subconscious mind is a better computer than my mechanical skills will ever be. Maybe if I tried my hands at neural nets, I could come up with a working mechanical trade system, but then I would not understand the rules any longer and that means I would not trust it enough to trade it. The subconscious mind will not give clear instructions; it communicates through feelings. You need to learn to listen to them, if you want to use its power. But if you do, it can be a nearly unlimited resource you shouldn’t ignore. To teach or program your subconscious mind to do its job, you need to invest a lot of screen time. You need to expose it to as many situations as possible . . . to develop that trust in yourself, the trust that you will always do what’s right for you.”

If you don’t trust yourself or your methods, you will not find the emotional resilience to weather periods of loss.

Standing Up after Being Beaten Down

“Being bankrupt, having a real bad day: yes it happens,” Chris explains. “Many traders trading for their own account will have gone through such a slump not once but multiple times before they manage to develop their account. When I started trading, I had lost a huge amount of money in funds. I had trusted the fund managers to do a good job; instead they did a lousy job and I decided I could do better! It wasn’t easy. Somewhere I read that if you can’t trade 1 futures contract successfully, why do you think you can trade 10 contracts successfully? That was a statement I could accept and actually still follow to this day. So I gave myself a $3,000 account and started trading futures. (I never encountered the problems I had in my trading when trading in demo mode, so I traded real most of the time). I went bankrupt (actually below $2,000, which was the limit I had to maintain to continue trading) at least five times. I funded my account with about $20,000 over the last seven years and made it all back within three months, when I finally got it right. I’m not out of the woods today, but I have started taking out money for my living from my account. I still have days where I screw up big time and need to build myself up again; where I need to question my plan, myself, and my approach to the markets. But I know today that I can trade and that I have an edge. I trust myself to do what is necessary to do, even when I screw up. I know I will stand up again and make it back.”

Mastering great challenges yields great confidence.

Luck

“There is no room for luck in trading? Don’t believe that for one second,” Chris asserts. “How many trades did you do and looking back you know you were just lucky to get out breakeven or make a huge windfall profit? I always think I’m entitled to two or three lucky trades per month. But make sure you know you got away lucky. Don’t bask in the glory of that wonderful trade, when all you did was violate your rules, add to that lousy entry, and then have the luck to ride a spike against the prevailing trend right to the tip.”

Keep a Detailed Trade Journal and Write a Blog

“You need to be totally honest with yourself,” Chris advises. “There is no rock to hide under if you screw up. It shows in your account and you need to document it. Otherwise you will do the same mistakes over and over. Believe me, you will still do the same mistakes over and over again, even when you write a journal, but at least now you know you made the same mistake again. A trading journal can provide you with the statistics necessary to develop trust in yourself. It will tell you if you have an edge. It can tell you which approach to the markets works and which was a big failure. The trading journal I use today goes back more than four years now, and I made about 5,500 trades in that time. It is an invaluable source of information about myself and the ways I handle certain types of markets. If I encounter a rough patch in the markets I can look back and see if I had a similar experience in the past. I can see how I handled the situation then, whether my solution was successful, or whether I should better try a different approach today. Usually before I screw up big time, I have a few days with smaller and smaller profits. Looking back I see that I felt insecure in the markets: something was changing and I was not changing with the market. So I struggled to keep the green until something snapped and suddenly I was totally and absolutely wrong. The next day or two, I often make it back before I have a second deep red down day. After that I usually get back on track with smaller profits. The account starts to consolidate before I manage the next trend move.

“Writing the Globetrader blog I maintain to this day has made me accountable. I started the blog because I hoped that by sharing my approach to the markets, older, wiser traders would read it and question me or point me in a different direction by commenting on my ideas. Fortunately for me some of the comments I received proved invaluable and are now an integral part of my trading system. You don’t need to write a public blog, but writing about your thoughts in a trade, how you see the markets, or what constitutes a trade setup structures your approach to the markets. Right now I’m at a point in my development as a trader where I try to dissect that gut feeling I wrote about earlier, so I can consciously see why my subconscious mind just gave me a clear Go ahead and take that trade signal. Or why it just questioned an otherwise wonderful looking signal and is proven right a minute later. By writing about these trade setups, I can relive the feelings I had when the trade opportunity presented itself in real time. Eventually I can see why the trade setup actually was not an opportunity. The blog is also the place to deal with all the demons and obstructions you will encounter in your trading. Writing about the problems is the first step to solving them. As long as you have no mechanical automated trade system, you have to accept that you are human and will make mistakes. You need to deal with them and you will have to find ways to avoid or integrate them or you will not make it in trading. But the first step is always to bring them in the open, so they can no longer hide.”

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

Don’t Panic

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

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

COACHING CUE

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

LESSON 83: CULTIVATE SELF-AWARENESS

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

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

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

Environment

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

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

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

Self-Awareness

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

Discipline

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

First and foremost, good traders are good risk managers.

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

Keeping a Journal

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

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

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

Becoming an Amateur Trading Psychologist

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

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

Listening to Trading Affirmations

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

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

COACHING CUE

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

LESSON 84: MENTOR YOURSELF FOR SUCCESS

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

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

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

Tuning Out Opinions

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

Review

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

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

Mental Checklist

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

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

Find a Trading Partner/Group

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

Form a team to make trading personally rewarding and stimulate ongoing learning.

Think in Terms of Concepts

“I think the largest shift in my performance came when I began to view markets and price behavior conceptually, rather than being driven by indicators or news reports,” Corey explains. “This was a process that took time and was difficult for me. Previously, I viewed multiple indicators and believed those were the secret to trading success. However, too much conflicting information was not only frustrating, but unprofitable. Even when I decreased the number of indicators, I still struggled to find profitability. My results were often no better than random entries, which was endlessly disappointing. The shift came when I was able to view markets and price behavior conceptually . . .The shift happened slowly and was attributable in part to studying Market Profile information, such as the concepts of trend day, bracketing markets, auction dynamics, timeframe participation, etc. Other concepts were based in the teachings of the early founders of technical analysis, including momentum, price range (expansion /contraction), broader trend structure, dynamics of price behavior, and price patterns (with their underlying reasons: accumulation or distribution, reversal or continuation). Essentially the shift was one towards greater understanding of price behavior and participation by all sorts of market participants . . . To further the conceptualization switch, I also began researching the broader concepts of intermarket analysis, which compares markets to each other, and sector rotation, which details performance of equity sectors and expectations . . . I began to see markets as a grand chess game, which opened up a new method of perception. Markets clearly do not trade in isolation.”

When you think in concepts, you understand why markets move, and that helps you formulate promising trade ideas.

Keeping an Idealized Trade Notebook

Corey explains, “In addition to keeping a simple spreadsheet that tracks trading performance (which is essential in knowing when you’re making mistakes and correcting them), I use a different kind of trading journal that I call my idealized trade notebook. In this notebook, I print off the intraday chart (I use the five-minute chart most frequently) of the stock or index I traded for the day. Also, if there are particular charts I find interesting, I annotate by hand what I deem to be ideal (or best) trades based on my understanding of price behavior and opportunity. Through looking at the charts at the end of the day without the pressure of real-time trading, I am able to see new patterns that I had missed . . . I then overlay my fills to see how close I came to achieving the total potential move . . .This serves a dual purpose of deeper visualization of my performance, but more importantly, helps clarify the distinct patterns and trade setups I use for trade entry, management, and exit.”

By tracking ideal trades, we internalize best practices.

Following Brian and Corey, your task for this lesson is to structure your process of review. One task should include a review of the market day, comparing your trades to the actual moves in the market, so that you are learning both about you and about the patterns you want to be trading. Mentoring yourself is not an occasional activity to be performed during losing periods. Rather, among the best traders, it is a regular process embedded into each trading day. Compare what you did with what you could have done as a great way to track your progress and bring yourself closer to your ideals.

COACHING CUE

When you coordinate your learning with a trading partner, compare your ideas of the best setups for the markets you are trading. If you see markets through the eyes of others, you can enrich your own pattern recognition.

LESSON 85: KEEP DETAILED RECORDS

Two of the respondents to my question—two whose work I’ve followed for years now—independently arrived at similar answers. This is not because they trade similarly. Instead, it’s a reflection of the wisdom they’ve accumulated over years of tackling markets and honing their own performance.

Charles Kirk is a trader, portfolio manager, and author of The Kirk Report blog site (www.thekirkreport.com). He also maintains a portion of his site for members, who are treated to his stock picking tools and selections. Much writing focuses on when to trade; Charles’s forte is selecting what to trade. His blog is among the few on the Web that comprehensively links to articles on key themes that deal with markets and the economy. This is a particularly valuable resource for those who want to stay on top of the market’s larger picture. If you want to see how institutional money might move markets, it makes sense to focus on the themes tracked by institutional money managers. Charles seems to have a knack for identifying those themes.

Jason Goepfert is the editor of the Sentimentrader site (www.sentimentrader.com), which—as its name suggests—focuses on measures of market sentiment. Jason freely offers his perspectives on markets and also shares the results of his tests of historical market patterns. He collects a large amount of data on markets and assembles the data in unique ways to uncover possible edges. These data provide information to guide traders’ thinking, as well as food for specific trade ideas. A particularly interesting facet of his service is the tracking of relative smart and dumb money, including unique ways of reading options sentiment.

In response to my question of what has most helped his self-mentoring, Charles Kirk provided a single, detailed response: his BOO book. BOO stands for Book of Observations, and it is a collection of his trading experience. “In this book,” he explains, “I keep a detailed track record for every trade I’ve made, along with observations about the market and things I’ve learned from others and from monitoring my own success and failures ... My BOO book contains specific and detailed information on every strategy and screen(s) I use, along with detailed performance information over different periods of time. In essence, everything I’ve learned up until now can be found in this book.” Significantly, the contents of the book are organized in a database called do-Organizer (www.gemx.com), which enables him to readily access any idea that he’s written about.

A database turns a trading journal into an active research tool.

Charles indicates that the database keeps his thoughts organized, as a scientist might systematically record data and observations from laboratory investigations. “Treating the market, and a strategy, from a scientific, evidence-based approach in this manner was helpful to me to keep me focused, disciplined, and on the right track,” he explains. “This also helped me to test new strategies and to recognize early when certain strategies stopped working in specific market conditions, so I could adjust and transition my trading as needed.” He also uses the BOO book to track new strategy ideas that he wants to integrate into his own trading. “I consider myself a perpetual student of the market and maintaining and using my BOO book has been incredibly helpful in this regard,” he notes.

Indeed, Charles explains, “Looking back, the biggest mistake of my trading career was not starting my BOO book sooner. It took me several years to understand the importance of keeping notes in an organized manner while using a scientific, evidence-based approach to test and improve my skills and strategies.”

The BOO book is a great example of the creative strategies that successful traders utilize to identify and hone their strengths. I believe Charles’s key insight is that the ideas in his book must be organized to be maximally useful. By placing his journal in a database format, he is able, with a few keystrokes, to access relevant experience from a broad time period. Journals can become unwieldy over time, and it is difficult to pull material from past entries. Increasing his access to his experience has enabled Charles to keep the past relevant to the present as a source of learning.

When I asked Jason Goepfert to share his three greatest sources of self-coaching, he started with an idea similar to Charles Kirk’s.

Write Down Every Idea

“I’ve written close to 5,000 comments publicly over the past six years,” Jason explains, “and also keep a personal journal that tracks more soft subjects such as how I’m feeling, anecdotal evidence, clips of headlines on news sites, etc. I review all of these periodically and find that they are exceptional tools in several respects. They keep me honest (not getting too ahead of myself when trading well and not too down when not), and they also serve as a check for when I’m anxious about a trade. I’ve looked at how I felt right before putting on past winning trades and saw that I was anxious then, too, so what I’m feeling now isn’t necessarily some sixth sense subconsciously hinting that I not put on a trade.”

Talking to More Accomplished and Experienced Traders

Jason notes that he meets many successful traders through his market service. “I am always struck that most of them suffer through the same travails as the rest of us,” he points out. “They all get emotional at times, but they never let that seep into their risk control discipline. And that discipline is constant—there is no deviation from the strict principle that no one trade will sink them or their career. That is something I have written down in front of me. Risk control is paramount, and it is something I use as a mantra.

It’s okay to be emotional; it’s not okay to let emotions change your management of risk.

Always Learning New Things

“It’s a cliche’,” Jason acknowledges, “but I’ve found that the more I learn, the more I discover how little I know. That helps tremendously in trading, as it has helped me to find new ways to approach old problems. Market dynamics are always changing, so we need to find ways to adjust as conditions change. Learning new trading strategies or new ways to test old ones can be very fruitful. It’s a lot of work, but anyone afraid of hard work shouldn’t be risking his or her capital. It isn’t just trading-related stuff, either. I try to push myself into uncomfortable situations and experience new places, new people. That helps broaden my perspectives so I don’t get closed-minded to new approaches.”

What most struck me about Jason’s insights was that writing thoughts down led to self-discovery. When he tracked his trades and emotions, he found that he was often nervous prior to winning trades. This tracking helped him not succumb to nerves when putting on a trade. It is this constant desire to learn new things—about self and market—that keeps trading challenging and interesting as a career. Tracking also helps the trader adapt to shifting market conditions. Jason Goepfert and Charles Kirk are not afraid of the hard work: they spend a great deal of time developing, reviewing, and testing their strategies. There is nothing get rich quick about their approaches to markets. Their record keeping is their way of sustaining a learning curve.

Your assignment for this lesson is to create an indexing system for your own trading journal, so that you can track themes associated with what you’re doing and how well you’re doing it. Tracking means categorizing your trades by strategy/setup, by markets, by results, and by your specific market and personal observations. Keep a journal in electronic form, such as through the StockTickr service (www.stocktickr.com), as one way of indexing your ideas. Another method is to turn your journal into a trading blog, with tags for various topics. Still another approach is to maintain your journal in a formal database, like Charles Kirk. Your records need to be living, breathing entities that you can frequently review for insight and perspective. Imagine your trades organized by market, market condition, trade setup, time of day, and size, so that you can pull up your results for any given market situation. Organized in this manner, your experience may just become your greatest trading coach—as it has been for Charles and Jason.

COACHING CUE

Consider a portion of your journal devoted solely to research: developing and tracking new trade ideas. Charles and Jason continuously search and research for trade ideas as market conditions change. What is working in the current market environment? Which stocks are moving? Which patterns are showing up? Journal about the markets as well as about your trading to help you anticipate opportunity.

LESSON 86: LEARN TO BE FALLIBLE

Dave Mabe is a trader, system developer, and founder of the StockTickr service and site (www.stocktickr.com). StockTickr is a unique resource because it enables traders to track their ideas and performance in an online format that can be shared with selected groups of traders. This Web 2.0 approach to developing ideas and tracking progress enables traders to build their own community of like-minded peers. The StockTickr site also includes an informative blog featuring interviews with traders who share their work online. I particularly like how StockTickr has created a true online trading journal, making journaling a social activity. It gives traders control over what they share and with whom. Indeed, there is huge potential simply in the idea of sharing a real-time journal with a trading coach.

Chris Perruna is a full-time trader and blogger whose work can be found on the site that bears his name (www.chrisperruna.com). His site is devoted to “successful investing through education” and covers topics ranging from screening for fundamentals among stocks to position sizing and charting. He shares his stock screens with readers, along with specific trade ideas. I like how the site enables traders to learn from his example.

Let’s take a look at how these two pros responded to my question about what has been most helpful to their self-coaching, starting with Dave.

Trading Journal

Dave asserts, “A trading journal is by far more powerful than any indicator or platform. It provides the foundation for everything I do as a trader. Your mind can play tricks on you, but your execution data don’t lie. Being able to reflect upon my trading results allows me to step back and view results in aggregate to see how I’m measuring up to my goals.” I’ve seen this with many successful traders: the journal offers a layer of accountability and focus that would otherwise be missing. Dave also stresses the importance of flexibility in goal setting via journals. “Instead of setting a single goal (for example, a certain dollar amount over a time period), I find it much better to set a range of goals from conservative to radical. A lot of traders will set high goals, which set them up for devastation when they aren’t achieved.”

We often focus on what we want to see. Statistics on our trading patterns don’t lie; they focus us on what we need to see.

Learning to Be Wrong

“Most beginning traders have a tremendous need to be right and are resistant to admitting they might be wrong,” Dave observes. “I learned quickly that being right (that is, having a high win rate) doesn’t correlate well with making money. Win rate is overrated—in fact, one of the most profitable strategies I’ve traded had a winning percentage below 30 percent.” Dave is right: most good traders I’ve worked with are not far from a win rate of 50 percent. Their success comes from knowing when they’re right—and taking full advantage—and knowing when they’re wrong—and minimizing losses. Overcoming the psychological need to be right is essential to success; without that, it’s too easy to take profits early and remain stubborn in losing trades.

Automate

Dave recounts, “I’ve spent my trading career trying to remove as much of my discretion as possible from my trading. Many aspects of manual trading systems can be automated. The benefits of automation are numerous: more consistency, less time spent doing trading grunt work, and fewer mistakes. I’ve found that the more automation I have in my systems, the better my results. This includes my manual trading systems all the way to 100 percent completely automated trading systems that I trade.” His point is well taken: even with discretionary trading, execution can be automated so that decisions can remain strictly rule-governed. The simple step of trading with limit orders rather than at the market can make a meaningful difference in performance over time, as traders enter and exit trades at favorable levels, rather than chase markets and get themselves in and out at the worst possible times.

Chris Perruna’s responses will ring true to traders who have traversed their initial learning curves; he focuses on some of the universals of successful trading:

Understand Me

“The most powerful tool I have found in life and in this specific case, the market,” Chris explains, “is what I, as a person, am capable of doing. I finally understand that personal characteristics that are ingrained in my DNA will only allow me to trade successfully under specific circumstances. For example, I am much more consistent and profitable as a medium-term and longer-term trend trader than as a day trader (even more so on the long side). I don’t need to be everything all the time as long as I continue to focus on the areas that bring me the greatest success. Understanding me has been my holy grail of understanding how to trade the market with consistency and profitability.” Chris’s insight is critically important: you don’t make yourself fit a market or trading style; you find the markets and styles that best fit you. Successful traders trade within themselves: they stick to what they do best and ignore the rest.

Find what you do best and fashion trading strategies around that.

Learning to Cut Losses

“It’s almost cliche’,” Chris points out, “but not many people can do it in any aspect of life. I have learned to cut losses in my trading, my career, my hobby of competitive poker, and everywhere else in life where the rule applies. Without this rule, there wouldn’t be a third rule.” Chris makes a valuable point: you can’t live one way and trade another. It’s hard to imagine being totally disciplined in trading and lax in other areas of life. Good trading practice is a philosophy of living: pursuing opportunity, managing risk, limiting losses, and diversifying positions. Chris trades the way he lives.

Study and Work Hard

It is difficult to find a successful trader who does not place hard work at the center of what she does. “It is extremely important to my success for me to continuously study the markets on a fundamental and technical level and learn from my successes and mistakes,” Chris points out. “Applying the knowledge gained from past experience allows me to properly analyze similar situations in the future with slightly greater odds of success. Never stop learning is a phrase I will never stop saying, as it proves to be truer as I get older.”

Notice how both Dave and Chris emphasize the importance of knowing when they’re wrong. This is an important difference between beginning traders and experienced ones. The beginners focus on being right, as Chris pointed out. Beginners try to avoid being wrong. The experienced traders know they’ll be wrong on a significant proportion of their trades and fully accept that. Their self-coaching is designed to help them anticipate and manage losses, not avoid them. They have a plan for each trade to deal with loss, and they have an overall trading plan to deal with periods of drawdown. Your assignment for this lesson is to use your trading journal to flag your fallibility, identifying the five largest losing days in the past year. What did you do wrong on those days; what could you have done differently? What were the problems that occurred on more than one of these losing occasions? The idea is to embrace your fallibility by turning it into an engine of learning. If you clearly identify the mistakes from your worst trading days, you’ll be better prepared to avoid them in the future. Your worst trades can be your best tool for self-understanding—and your best guide for self-coaching.

COACHING CUE

As you review your trading, make a special study of how you exit trades. Do you tend to exit too early, so that you leave potential profits on the table? Do you tend to overstay your welcome, so that potential profits are retraced? Take it a step further: what could you have looked at to stay in the trade longer or to exit sooner? How can you best adjust your exits to the market’s level of volatility? If you refine your exits, you can break your trading down into components and turn observations into goals for improvement.

LESSON 87: THE POWER OF RESEARCH

Rob Hanna is a trader and the writer of the Quantifiable Edges blog (www.quantifiableedges.blogspot.com), a unique site that tracks historical patterns in the stock market. His electronic newsletter goes out daily, detailing the trades he places from his research. For traders, the blog and newsletter are unique tools that can extend their market edge. I particularly find historical patterns relevant to discretionary trading, as we’ll see in Chapter 10. With a sound understanding of historical performance, we are in a great position to identify markets that are following their usual patterns and those that are not. Both scenarios can generate excellent trade ideas.

Jeff Miller is a money manager in Naperville, Illinois, who also shares his ideas about markets and trading through his blog, A Dash of Insight (http://oldprof.typepad.com). He frequently challenges accepted trading wisdom and offers perspectives on markets that reflect his disciplined analysis and understanding of economics. He has researched trading systems and uses those systems in his portfolio management. Like Rob, Jeff’s edge is that he tests ideas before he trades them, giving him confidence in risking his capital.

Rob’s answer to my question of what he’s found most helpful to his self-mentoring as a trader was quite simple: “Research, research, and research.” He explains, “I know that sounds like one answer repeated three times, but it’s not. It’s the top three answers . . .I’ve been through several stages in my career and traded using different methodologies. The one constant I’ve found with any method of trading I’ve employed is that it takes a substantial amount of research outside of market hours to successfully implement them.”

Rob Hanna started his career day trading, focusing on short-term setups, such as those described in Jeff Cooper’s Hit and Run books. What Rob found most useful was not the setup patterns, but the screening for volatile, trending stocks to implement the strategies. He began creating his own scans based on trading patterns, focusing on trades with the best risk/reward. “I wrote down each potential trade in a notebook along with the trigger price for the next trading day,” Rob described. “When the trade was done, I would log the results in my accounting software. I kept a field in the accounting database called reason. It was there I entered the name of the setup I used to initiate the trade.” This is a theme we see time and again with successful traders: they track their results meticulously to aid their learning curves.

Keeping records of trades that work cements success patterns in your mind.

Rob Hanna points out that keeping his trades in a database accomplished two goals: it forced him to have a reason for every trade, and it enabled him to track his results as a function of the trade setups employed. “It made it extremely easy for me to determine which setups worked best and which ones struggled,” he explains. “By doing this, I knew which setups I should continue to focus on and which ones I should scrap altogether.” When Rob didn’t have a solid reason for a trade, he simply entered the word Hunch as the reason for the trade. “It didn’t take long for me to figure out how much the Hunch trades were costing,” he recounts. He quickly scrapped trading from hunch alone.

The second phase of Rob’s research occurred when he switched to longer-term trading that utilized patterns inspired by William O’Neil’s CANSLIM approach. Rob began to utilize technical screens with the TC2000 software from Worden Bros., with his final lists filtered through fundamental criteria. “With TC2000,” he describes, “I am able to easily place notes on the chart. This is incredibly useful. If a stock pops up with an interesting pattern, I may have already researched that stock in recent weeks. With the note feature, I can see if I already checked the fundamentals and rejected it for some reason. No need to waste time looking up the same symbol over and over.” As with the day-trading patterns, the setups were less important than the work that went into implementing them. “Once again,” he notes, “I found it was the research and not the trading that made me the money.”

In Rob’s third phase of research, he has formally back-tested his trading ideas, using Excel and TradeStation as primary tools. This back-testing has enabled him to generate actionable trade ideas. As he puts it, “I love taking these trades because I have a good idea of my success rate and profitability expectation going in.” Reviewing a variety of price, breadth, volume, sentiment, and other indicator data helps him develop a view on markets, but it also “helps me to unveil what is truth and what is lore with regards to conventional market wisdom. There is so much information out there. It’s difficult to know what’s valuable and what information is simply hype . . .There is great value in being able to test ideas and understand what indicators and setups actually provide a quantifiable edge, and what ones don’t.”

Much conventional trading wisdom does not stand the scrutiny of objective analysis.

For Rob, research has been his source of edge. “Whether my focus has been day trading, intermediate-term momentum trading, or quantitative swing trading,” he explains, “I have consistently found that it’s been the nightly research that has facilitated my growth as a trader more than anything . . .The ideas are all constructed at night. Market hours are simply used for executing those ideas. Research (stock screening and charting), research (quantitative analysis), and research (results analysis) are the three things I’ve found most helpful in coaching myself as a trader.”

What I most like about Rob’s perspective is that it highlights the relevance of research for every kind of trader, not just those that trade mechanical systems. Rob has tested and traded setups, but he also has treated himself—and his trading—as a subject for study. When Rob identified the ideas that work best for him, he has been able to maximize opportunity and eliminate the hunches and market lore that cost him money.

Jeff Miller approaches markets differently from Rob, but his perspectives on self-mentoring are surprisingly similar. “The most important thing—by far—in my trading is having a system and/or method,” he stresses. “Without a system in which you have confidence, you are adrift. You second-guess yourself on every occasion. This leads to selling winners too soon, holding on to losers too long, and many other errors. You need to know that your basic method works. If you really understand and believe this, you can focus on making the correct decisions, which may not always be the winning decisions.”

The key word Jeff uses is know. Many traders don’t know their edge; they don’t know how well their methods work in different market conditions. They have beliefs, but not deeply held convictions about the ways in which they make decisions. As a result, traders lose discipline. This loss is not because they cannot follow rules. It’s because they don’t deeply believe in the rules to begin with.

Many times, poor discipline is the result of shallow conviction. If we don’t truly know our edge, how can we believe in it?

A second important element for Jeff Miller’s self-coaching is analysis and review. “Having a system means testing it properly,” he explains. “This is not back-fitting for a short time period. It is developing the method in one era and testing over out-of-sample data covering different markets. Only then can you be confident. Even with this method, you must do regular performance reviews to make sure that something in the world has not changed. There may be a tough decision about whether you are in a predictable slack period or circumstances that are really different.” In other words, trading is fraught with uncertainty; even the best ideas have a limited shelf life. The purpose of analysis and review is to generate an edge, but also to monitor changes in that edge over time. It’s not as simple as finding systems that make money for all time and all markets.

Jeff’s third area of self-coaching is learning to recognize exceptions. “Understanding your method means knowing when something truly exceptional is happening,” he points out. “We all know the danger in saying that, ‘This time is different.’ Keeping this in mind, there are exceptional trading opportunities lasting a day or a week, even for those of us with longer time horizons.” This thought gets us back to the excellent point raised by Henry Carstens: knowing when to turn your trading off. When markets are behaving in historically abnormal ways, the usual methods may not produce their usual results. Exceptional markets yield exceptional risks as well as rewards.

The takeaway from Rob and Jeff is the value of self-knowledge. The more you know about your trading methods, the more you can play to their strengths and avoid their weaknesses. Note that for both Rob and Jeff, this has meant considerable time and effort outside of trading hours to hone their edges and stay on top of how they change. I consistently find that a major predictor of trading success is the amount of time devoted to markets outside of trading hours proper. The time spent in defining and refining trading methods is a major part of this commitment. When you are your own trading coach, you are no different from a basketball or football coach: much of your success will come from the hours you put into recruiting new talent, practicing, and planning.

Your assignment for this lesson is to treat yourself as a trading system, so that you can research, research, research your performance over various markets and market conditions. For this assignment, pay particular attention to the kinds of trades that make you most of your money. Do they occur at particular times of day, or in particular market conditions? Do they occur primarily in a few markets or stock names? Are they primarily short-term trades or longer-term ones? Are they mostly reversal trade, or are they trend following? Your goal is to clearly identify your bread and butter as a trader, so that you can allocate most of your risk to what you do best and reduce the risk associated with trades that are outside your wheelhouse. Understand what you do—especially what you do best—as it is the most effective means for developing and sustaining confidence in your work. Weekly and monthly reviews of each of your trades by categories are a great start in this direction.

COACHING CUE

Track the number of trades you place that break even or that make or lose only a small amount of money. Many times, this is a sign of good discipline in cutting losers (although it can also reveal problems with exiting winning trades far too early). Recognize quickly when a trade is wrong to help keep the average size of losing trades below that of winners, an essential ingredient of trading success.

LESSON 88: ATTITUDES AND GOALS, THE BUILDING BLOCKS OF SUCCESS

Ray Barros wears many hats as a money manager, trader, blog writer, book author, and trading coach. He is one of the very few coaches that I know who incorporates a keen awareness of psychology with a sound understanding of markets. His Trading Success blog (www.tradingsuccess.com/blog) is notable for trading and psychological insights, and his book The Nature of Trends is an excellent tool for mentorship. It explains his ways of analyzing markets, his risk/money management ideas, and his trading psychology tools.

John Forman similarly combines a wealth of roles. An athletic coach, he also mentors traders and offers his insights in The Essentials of Trading blog (www.theessentialsoftrading.com/Blog). His book by that same name is an excellent introduction and orientation to markets, with valuable views on analyzing markets, executing trades, and developing trading systems. He is keenly aware of the importance of skill development and psychology to the evolution of traders.

When I asked Ray for the three things that have most contributed to his self-coaching, his number one factor was attitudes. Among the attitudes he views as essential to trading success are:

Honesty

 

Ray defines this as “the value of never consciously faking reality. If there is one trait that has proven critical to my success and to the success of my students, it has been this one. Successful students are brutally honest with themselves. Failed students tend to provide excuses and rationalizations for their failures.”

 

Responsibility

“I learned to take full responsibility for my successes and failures,” Ray explains. “With successes, my question is: How can I repeat this? With failures, my question is: What can I learn from this?”

 

Tenacity

“I’ll do whatever is necessary to achieve my goals,” Ray emphasizes. “This includes constant learning by first learning the material, then adapting it to suit my needs. I notice that failed students tend to resist the material whenever that leads outside their comfort zones.”

Learning requires a willingness to venture outside one’s comfort zone to see and do things in new ways.

Discipline

Ray stresses, “I am disciplined enough to write out my trading rules and execute the rules consistently. I am disciplined enough to keep my psychological and equity journals so that I can learn from my trades. And I am disciplined enough to celebrate my successes and take time from the markets to recharge.”

Citing Linda Bradford Raschke, who has mentored many traders over the years through her online trading room, seminars, and books, Ray Barros stresses that coaching is only valuable if its insights are implemented by traders in their 3-Rs: routines, research, and reviews.

Among the routines that Ray finds essential to his lifestyle as a trader are:

• Updating data and journals.

• Reviewing trades.

• Preparing for the coming day, “including visualization of entries and exits.”

• Balancing other duties and responsibilities with trading regimes.

• Staying on top of personal and business finances.

• Completing commitments, including writing articles, preparing for talks, and so on.

He notes that his self-mentoring blends review and research. “I may notice a pattern in my journals that needs attention,” he explains. “It may be that I am suffering losses or experiencing profits beyond the norm. In the former case, I would need to research the context that is leading to the loss. I’d need to determine whether it is incompatibility between my plan and current market conditions, or whether I am breaching discipline. In either case, I have to decide what to do. If current market conditions do not suit my plan, I’ll cut down size or take a break. If I am breaching discipline, I identify the context/contexts within which the breach/breaches occur and take remedial actions. I then review the actions to see if they have had the desired results. If not, I change the actions.”

Ray also carefully reviews and researches periods of unusually positive trading performance. “If I am making above normal profits, I determine if current market conditions happen to suit my plan or if there has been a fundamental shift that is leading to greater profitability. In the former case, I increase my size and ensure that I maintain my discipline before I take a trade. I have learned that, in my case, I need to be more vigilant when I am having a great run than when I am suffering a drawdown. If there has been a fundamental shift, I seek to identify what I have done to cause the shift, and I seek consciously to continue the new behavior.”

Vigilance during a run of profitability is an effective way to prevent overconfidence and lapses of discipline.

“I also constantly research new ideas,” Ray Barros notes. He is an avid reader and seeks insights that will impact his life and trading. When he encounters a new trading idea, he outsources the testing of the idea to determine whether or not it truly possesses an edge. “My review provides a solid foundation for my activities,” he explains. “I set goals, take action, and then see if the action is leading toward or away from the desired outcome.”

One of Ray’s best practices is the separation of his daily journals into trading and personal components. In his trading journal, he grades his entry and exit discipline, giving himself three points if he entered and exited according to plan; one point if either the entry or exit broke discipline; and zero points if he broke discipline on both. “I look to maintain a 90 percent threshold,” he explains. “I must garner 90 percent of the total possible points. If I drop below 90 percent but above 85 percent, I start looking for causes, and I start remedial actions. If I drop below 85 percent, I take time off from trading.” In the trading journal, he also tracks the excursion of each of his trades, expressing how much he took out of the trade as a proportion of what he possibly could have made. “I seek to capture around 65 percent of a possible move,” he elaborates. “If I find that I am consistently capturing significantly less than 65 percent, I take this as a warning I am entering an ebb state.”

Like successful manufacturing businesses, traders can engage in continuous quality improvement by evaluating their processes and correcting shortcomings.

In the personal portion of the journal, Ray notes event, feelings, and behaviors that accompany each of his trades. “The aim here,” he points out, “is to have enough details so that I can spot the patterns that warn of fundamental shifts, breaches of discipline, and ebb-and-flow conditions.” In other words, he is tracking his performance much as he tracks a market, looking for signs of trends emerging from the data. When he is flowing, he wants to be more aggressive in his trading; when his execution is ebbing, he wants to cut his risk. Toward this end, he also tracks his trading metrics, including his average win and loss sizes; his win and loss rate; the standard deviations of profits and losses; consecutive wins and losses; average holding periods for winners and losers; his expectancy ratio; his drawdowns; and his recovery periods from drawdowns. The key to Ray’s self-coaching is to study himself as intensively as he studies markets.

John Forman echoes Ray’s point about making sure that one’s trading life fits into her personal life. “The first thing a trader needs to do,” he emphasizes, “is step back and take a big picture view of things. This is extremely important for new traders, as they need to figure out how trading is going to fit into their lives. Even folks who have been doing it for a while need to do this from time to time as well. Trading is part of one’s life, not separate from it. What part it plays must necessarily define how it is approached, and that can change over time. Periodically taking the 30,000-foot view allows one to maintain perspective.” I wholeheartedly agree with John’s insight. Even successful professional traders can become overloaded by work responsibilities, tracking markets and themes day and night. If traders allow trading to consume them, they lose concentration and efficiency—and eventually that takes a toll on performance. Successful trading means knowing when to not trade and when to conserve and renew personal energy. Often, the best trading decision is the decision to take risk off and go on a holiday from markets. This reprieve can spark good thinking about markets and performance from the 30,000-foot view, aiding performance once trading commences.

“A second important thing,” John Forman notes of his self-coaching, “is the commitment to performance improvement. That may seem to be an obvious thing, but it’s something easy to stray from at times. It’s often hard to not become complacent with one’s trading, especially when a level of success has been achieved. In order for the self-coaching to have any value, though, the realization that one can keep getting better, and the desire to do so, must be at the fore all the time.” I have noticed this time and again among the firms where I work. The best traders and portfolio managers seek out coaching when they’re doing well, not just when they’re losing. They have a continual drive for self-improvement; not just a temporary desire to remedy deficiencies.

The measure of a trader is how hard he works on trading during winning periods.

“Finally,” John concludes, “setting good goals and assessing how one is progressing toward them is critical. These are things coaches in other activities like athletics do as external observers. The advantage there, however, is that they don’t have the direct link to the individual’s psyche, which complicates self-assessment. The most challenging aspect of this process for the individual is not allowing it to adversely impact one’s confidence level. That means the process needs to be as objective as possible, and the trader needs to be able to disconnect their ego from it.” Forman raises an excellent point here: goal setting and review must be pursued in a manner that does not damage confidence or motivation. Vague or distant goals offer insufficient feedback and learning; difficult goals can yield frustration. Tracking goals with a negative mindset—emphasizing shortfalls—makes self-coaching a punitive activity. The good self-coach, like the good athletic coach, uses goals to facilitate learning and build confidence. No one will sustain a process if, over time, it leads them to feel worse about themselves.

Your assignment for this lesson is to conduct a self-assessment from 30,000 feet. We’ve talked about tracking your trading, but now the goal is to track your self-coaching. Is trading fitting into your life, or do you find yourself fitting your life into the markets? Is most your time consumed with trading, or are you spending at least equal time in performance improvement—the reviews and research of markets and trades—and the routines that help you develop new ideas and hone skills? How much of your efforts are goal-focused, and how much are you drifting from day to day? Do you get down to the hard business of grading your performance and tracking your ebbs and flows, and do you use this information to guide your risk-taking? In short, if you’re going to be a good self-coach, you have to be as aware of your own coaching performance as your trading results. The value of such meta-coaching—training yourself to be a better mentor of yourself—is a key lesson we can take away from Ray and John.

COACHING CUE

Just as you can develop a report card on your trading to track your progress, you can grade your self-coaching efforts by assessing how much time you spend in self-coaching mode; how clearly you set goals for yourself; and how well you sustain work toward those goals. You can’t develop as a trader without working on trading skills, and you can’t develop as your own coach without working on your coaching skills.

LESSON 89: A VIEW FROM THE TRADING FIRMS

Mike Bellafiore is a partner at SMB Capital, a proprietary trading firm in New York City that specializes in the short-term trading of individual equities. He is also a successful trader and a mentor of traders within the firm. Most recently, SMB has extended its training to the trading public via a blog (www.smbtraining.com/blog) and a formal trading curriculum. I had the pleasure of visiting SMB Capital and was impressed by Mike, Steve Spencer, and the others in the firm. There was a good buzz on the trading floor throughout the day as traders shared ideas and breaking developments.

Larry Fisher is a co-owner of Trading RM, a proprietary trading firm in Chicago that specializes in trading individual stocks and options on those stocks (http://tradingrm.com). Larry and his partner Reid Valfer started the firm with the desire of providing a mentoring and teaching environment for traders. An unusual feature of the firm is that Larry and Reid call out all their trades, illustrating to their traders what they’re doing throughout the day. Teaching and mentorship are thus woven into the fabric of daily trading. In visiting Trading RM, I was impressed by the learning environment. Larry and Reid have developed a web site and blog so that they can share their insights with the trading public ( http://blog.tradingrm.com).

It is typical of Mike that, when I asked him for the three things that most help his self-coaching, he emailed me a 14-page document. He is attuned to the mentoring process and practices it in his own trading. Number one on his list is keeping trading statistics. “Statistics are very important for my trading,” Mike explains. “I must know what trading plays are working best for me, what stocks I am trading profitably, my win rate, my liquidity stats, etc.”

The head trader at SMB, Gilbert Mendez (GMan) created a tool for the desk called the SMB Chop Tracker. It summarizes trading statistics each day for each trader, so that they can see how well they’re doing and where their profits and losses are coming from. “Most often I struggle with my trading because I am in the wrong stocks,” Mike Bellafiore notes. He tells the story of how he traded one particular stock, MBI, quite well in the fall and then consistently lost money in it. “I felt like someone else was inhabiting my trading body,” he jokes. “So I looked at my stats. They were screaming, ‘Hey, Mike, maybe another stock for you?’ I figured out some adjustments I could make, concluded there were better stocks for me to trade, and decided to move on. I went right back to making money.”

Statistics on our trading alerts us to hidden patterns, both problems and solutions.

Mike also tells about a particularly vicious loss he took in trading SNDK. “I will always remember 1½1/05,” he recalls. “What a bloodbath. For weeks I walked around cussing SNDK underneath my breath and swore to never trade it again. But one day I checked my statistics and surprisingly learned that I actually traded SNDK well, save that one day. I was overvaluing that last rip. While trading, you develop a perception of how well you are trading a stock. That perception can be incorrect. When you study your trading statistics, you may discover that the stocks you thought you were killing, you weren’t. And you may discover that the stocks you thought were a disaster weren’t.”

Mike Bellafiore’s second coaching practice is something we all do, but not with intention: breathe. “While trading, it is essential to quiet your mind so that you accurately process the data that the market offers,” he observes. “Some traders think they just need to focus better and shut out unneeded stimuli. These traders believe they can will themselves to focus better. But quieting your mind is an acquired skill. Mariano Rivera [a fast-ball pitcher] can’t just start throwing a changeup because he really wants to. He would have to spend hundreds of hours working on his grip, motion, and control. It takes 15 to 30 minutes of deep breathing a day to develop and maintain this skill. My partner and co-founder of SMB Capital, Steve Spencer, taught me how to properly breathe. Steve teaches this to our new traders on our prop desk. I used to think I accurately processed the data that the market offered. But after I learned how to properly breathe, I recognized that this was not accurate . . .You must develop the skill of quieting your mind so that you accurately process your market data and, as a result, fulfill your trading potential.”

Mike tells the story of a young trader next to him who cheered whenever his stocks moved in his favor. The veteran traders merely smirked; that trader soon blew up. “For old-school traders like us,” he points out, “there is no celebrating intraday. You are now rooting for your stocks and not just interpreting the data that the market is offering.” By controlling his breathing, he is better able to let the market data come to him, improving his decision-making.

If you’re celebrating or bemoaning a trade while you’re in it, you’re not focused on the market itself.

Mike Bellafiore’s third self-coaching best practice is watching his trading tapes. “Watching my trading tapes has improved my trading more than any other self-improvement technique,” he asserts. “Many great athletes such as Alex Rodriguez use video to improve their performance. I record all my trades and watch back the important plays. Doing so has helped me particularly with my two biggest weaknesses: closing out a winning position prematurely, and adding size.” By watching tapes of his trading, Mike developed rules for recognizing when he should hold positions, when he should get back into a position he has exited, and when he should get out of positions. These rules were compiled into lists that became his system. “It gave me the confidence to add size when I see a great risk/reward opportunity that is on my list,” he explains. “I learned from my trading tapes that adding size in certain spots offered favorable risk/reward trading opportunities, and that perhaps it was even irresponsible to not add size with certain trades. So when I spot a trade from my list of When to Add Size, I just execute.”

Once again, self-coaching boils down to directed, hard work. “In my trading space,” Mike insists, “if you are not willing to come into the office on the weekends and/or find some time after the close to watch your trading tapes, then you are not competing as a trader. Trading is a sport. It’s a competition. And the results of your trading are often determined by the effort you put in before the open.”

Larry Fisher’s responses to the question of the three self-coaching practices that have most aided his trading reflect his teaching practices at his firm, which in turn reflect his years of trading experience. Here’s what he has to say:

Writing a Trading Journal

“Over the years, I have used a journal as a medium to make sure that I am in tune with my emotions,” Larry explains. “The journaling process has become a very important part of my trading routine. I have realized that writing in my journal pays huge dividends, especially when I am trading well and I am trading poorly. The process keeps me grounded, while often limiting the duration of trading slumps and extending periods of trading successes.” Notice that Larry employs the journal effectively both when he’s trading well and when he’s not. This keeps him attuned to emotions in a positive way—it grounds him in confident trading when he’s seeing markets well—and it enables him to take corrective action quickly when he’s not in tune with the stocks he’s trading. So often the difference between the successful trader and the unsuccessful one is how they handle being very right and very wrong. The journal, properly constructed, can be a tool for adjusting to these extremes, enabling you to add risk when you’re trading well and pull back when you’re not.

The trading journal is a means for sustaining self-observation.

Communicating with Peers

Larry Fisher notes, “I have a network of friends and colleagues with whom I make an effort to communicate on a regular basis. This allows me to learn from others while sharing real-time market experiences. These conversations aid me in dealing with the ebb and flow associated with being a professional trader.” This theme arises again and again with the best traders: they have a rich network of contacts that help them personally and professionally. Larry’s observation echoes what we heard from Ray Barros: there is always an ebb and flow to trading; profitable times and lean times. Being able to connect with traders who have been through the cycles and know how to move beyond them can be a tremendous support. We also underestimate the power of social interaction as a means of cognition: some of us simply think more effectively when we think aloud. Sounding boards for our ideas helps us hone our market views and make better decisions.

 

Trading in a Good Environment

“In order for me to be able to coach myself,” Larry explains, “I need to trade in an environment that is conducive for success. We built our firm with that in mind. All the traders at my firm are on the same page. Willingness to be a part of a team combined with the desire to learn are characteristics each trader possesses.” I have visited many firms in which traders operate in almost total isolation of one another. One person’s learning experiences become just that: opportunities to learn for that individual alone. When a firm is founded upon a team concept, everyone’s learning becomes learning for the group. This is Larry Fisher’s central insight, and it is the greatest strength of his firm. When everyone calls out her trades, there’s no place to hide. That is tremendously freeing. You can learn from the successes of your peers and also from their mistakes. Their ideas spark yours, and your heads-up on news or breakouts aids everyone else. In an environment in which all traders are their own coaches, all traders inevitably contribute to each other’s coaching.

Learning cannot occur without accountability.

These are the real words of real traders who really trade for a living and really run successful trading firms. Their best practices can become your own, even if you don’t work for SMB Capital or Trading RM. How do your trading practices compare with those at these firms? How does your trading atmosphere compare with theirs? When you’re coaching yourself, you are—in a sense—creating your own trading firm. You are coach, risk manager, researcher, and trader rolled into one. How well you fulfill these roles depends on the time and effort you devote to each. A world-class basketball player works on offense and defense; on passing, dribbling, shooting, rebounding, and physical conditioning. There are many facets to one’s game—in sports and in trading. The successful firms pay attention to all of them.

Mike and his partner Steve are correct to emphasize breathing in their training of traders. This exercise makes a worthwhile assignment for your development. The first step toward controlling emotional and cognitive arousal is controlling the level of arousal in the body. When we are filled with stresses and worries, we bring those to markets. When we sustain a quiet mind, we let markets come to us and free our minds to respond to the patterns we perceive. Write in journals, communicate with peers, and consult your trading statistics. These actions are all ways to make sense of your market experience so that you can then sit in front of the screen with a quiet, confident mind. It does take dedicated time each day to sustain the quiet mind, but it comes more easily with experience. Find a room with no distractions—no noise—and keep yourself totally still as you fix your attention on something in the room: an object on the wall, music in headphones, etc. Then breathe very deeply and slowly, keeping your attention as fixed as possible. You’ll find yourself able to tune out fear and greed, anxiety and overconfidence as you sustain a high level of concentration and fix your attention on an emotionally neutral stimulus. The best trading practices and environments cannot benefit you if you are not in a state to make good use of them. Quite literally, with each breath, you can be coaching yourself.

COACHING CUE

I have found that if I start my day with physical exercise and biofeedback, I can sustain calm concentration as an effective strategy for maximizing my energy and focus. If you start your day run down and distracted, you’re likely to become even more fatigued and scattered during the trading day. Part of preparation is to study the market; part is also to keep yourself in a physical and cognitive mode that maximizes performance.

LESSON 90: USE DATA TO IMPROVE TRADING PERFORMANCE

Rainsford “Rennie” Yang is the author of the Market Tells web site and newsletter (www.markettells.com), which generates trade ideas through historical analyses of stock market behavior. His service is unusually helpful in finding trading edges, particularly with respect to generating trend-catcher alerts during the day. The ideas can either be traded outright or can be used to inform discretionary decisions from favored setups. For traders who don’t have the time, skills, or inclination to conduct their own historical research (see Chapter 10), a service such as Market Tells is invaluable.

David Adler is the Director of Trader DNA (www.traderdna.com), which markets a program for tracking trading performance over time. The software captures information about futures trades and generates a series of metrics that reveal areas of trading strength and weakness. This information is especially helpful for high-frequency traders, who would find it impossible to manually enter trades into a log for analysis. Results are charted as well as summarized in print, providing easy-to-understand reports.

When I asked Rennie to summarize his most useful self-coaching practices, he most generously shared some of the patterns from his historical research. He included daily/weekly analysis and intraday analysis in his response, which I quote extensively in the following pages.

Daily/Weekly Analysis

“When advancers recently outnumbered decliners by more than a 3:1 margin on the NYSE and the market continued to push higher over the next few sessions,” Rennie recounts, “I brought up the Master Spreadsheet where I conduct all of my testing and research. It contains the daily data back to 1980 and weekly data back to 1950 on all of the major averages and all of the market internals (breadth, volume, new highs/lows, etc.) to make testing quick and easy. In this case, I searched for instances when the S&P was higher three days after a 3:1 positive breadth session and examined the market’s performance over the next two weeks. Such lopsided breadth days can mark buying climaxes, in which buying power is exhausted and the market trades lower short-term. But when the market remains on firm ground in the days following such a lopsided positive breadth session, I would expect the S&P to continue moving higher over the next two weeks.”

Rennie Yang explains how to conduct this analysis: “To keep things simple, let’s assume I have a spreadsheet containing daily S&P 500 and NYSE advance/decline data. Column A has the date, while columns B and C contain the daily S&P 500 closing price and NYSE advance/decline ratio, respectively. Starting at the fifth row in column D, enter the following formula:

= if(and(c2 > 3, b5>b2), (b15-b5)/b5,””)

“This states: if the advance/decline ratio from three days ago was over 3.0 and the S&P closed above its three-day ago close, show the percentage gain for the S&P over the next ten trading days. Fill this column down to the point where the data ends and quickly scan the results. You can immediately see that the hypothesis seems correct. Over the last 30 examples, the S&P has been higher 10 trading days later in 25 out of 30 cases, or 83 percent of the time.”

To get a sense for whether an edge is present, it is important to compare a historical pattern over X days with the market’s general tendency over X days.

“That may look like a bullish edge,” Rennie points out, “but first you need to check the S&Ps at-any-time odds of posting a higher close 10 trading days later. Here’s a quick and easy method. Go back to the fifth row in Column D of the sample spreadsheet above and change the formula to read “=if(b15>b5,1,””).” This means that if the S&Ps close two weeks later is greater than today’s closing S&P, print a one, otherwise print nothing . Then fill this column down to the point where the data ends. In most spreadsheet applications, such as Excel, you’ll see in the lower right corner the summation of all those 1s. Dividing that result by the number of days in the sample reveals the at-any-time odds—57 percent. In other words, on any given day, the chances that the S&P will be higher two weeks later have been 57 percent. That is far less than the 83 percent odds when the S&P is higher three days after a 3:1 breadth session. This confirms the original hypothesis that the chances for a market rally over the intermediate-term are far better than average, meaning there’s a clearly bullish edge.

“Instead of relying on traditional indicators, most of which merely manipulate and regurgitate price action, look beneath the surface of the major averages at the market internals such as breadth, up/down volume, new highs/lows, NYSE TICK action, etc,” Rennie advises. “This is the area in which I’ve found the majority of trading setups that stand up to historical testing. Does a surge in new 52-week lows portend an intermediate-term bottom? Is a 90 percent up volume day bullish? How about a cluster of 80 percent up volume days in a short time frame? Just about any concept you can imagine can be quickly researched and tested with the proper preparation. By maintaining your own version of a master spreadsheet and conducting your own testing and research, you’ll know when a concept truly provides a bullish or bearish edge. Consistently exploit that edge, and you’ll have a leg up on the competition.”

It is powerful when you find a pattern with an edge, but even more powerful when your edge is the ability to find and trade many such patterns.

Intraday Analysis

“The NYSE TICK is probably the single most helpful intraday indicator,” Rennie Yang asserts. “It tells you, at a glance, how many issues last traded on an uptick versus a downtick. A reading of +500, for instance, means that, at that moment, 500 more issues last traded on an uptick. When you first view a chart of the NYSE TICK, it will look as if it’s too noisy to be of any use . . .But change your viewpoint and you’ll see an entirely different picture . . .You can actually hide the NYSE TICK itself and just plot the 20-period moving average of the TICK to gain considerable insight into the supply/demand equation. Is the average holding above zero, meaning generally more buying power, or is the average holding below zero, reflecting better selling pressure? That’s something every day trader should know.

“Here’s another technique for utilizing intraday TICK readings,” Rennie offers. “Many data feeds such as e-Signal allow you to export data in real time to a spreadsheet. Through a technology known as DDE (dynamic data exchange), it’s a relatively simple process to have one-minute NYSE TICK data updating constantly in your spreadsheet. Once this has been accomplished, you can easily create your own cumulative TICK. Here’s how: Set up a spreadsheet with columns A, B, and C containing the date, time, and close of the NYSE TICK ($TICK in e-Signal). It should start at row 2 and contain the last 390 one-minute bars, the equivalent of one full trading day. In the first row of column D, enter a zero. In the first row of column E, enter a space, followed by today’s date (the space is due to a quirk on e-Signal’s part). Then jump down to the second row of column D and enter the following formula: “and fill it down through all 390 rows. This states that, if the date matches today, then take the most recent closing one-minute TICK and add it to the running total for the session. As the data comes in, this will automatically build a cumulative TICK in column D, which can then be charted to provide a real-time intraday chart of the cumulative TICK. Draw a line at the zero mark and watch the cumulative TICK reveal the underlying buying and selling pressure that is hidden in the noise of the NYSE TICK.”

= if(a2 = $E$1,c2+d1,d1)

The cumulative TICK reveals the trend of daily sentiment.

David Adler approaches the use of data for self-coaching in a different manner, focusing on the assessment of trading performance itself. “The philosophy behind TraderDNA, which I firmly believe,” he explains, “is the idea of being cognizant of what happened (in terms of your performance) within a given session, week, month, etc. of your trading, so that, going forward, the negative aspects can be minimized and the positive can be maximized. The fundamental idea is that, if the trader is able to look back on a certain time period of his trading and understand more about the overall result, then he can be proactive . . . in preventing the same mistakes going forward. Likewise, he can identify strengths and focus on situations that are likely to result in a profit based upon what his past trading has shown.

“Our users extract their order data from their front-end software,” David Adler notes, “and import the data into TraderDNA. This affords them the opportunity to thoroughly analyze their data in order to understand more about the strengths and weaknesses of their trading: specifically, their performance trends, where their losses came from, characteristics of their trades, the differences in their winners and losers, amongst other things.” Here are some of the analytics provided by the software, along with David’s commentary:

1. Hour of day analysis. “Because markets trade differently throughout the day,” David explains, “many of our users measure their performance (in terms of average P/L, risk taken, profit opportunity, number of winners/losers, size of winners/losers) by the time of day the trade occurred. This helps them to use their past performance to determine the most ideal times for them to trade a given market.”

2. Winning trades versus losing trades. “In looking for differences in winning and losing trades, it’s helpful—and necessary—to group all winners together and group all losers together and then apply metrics to each category,” David points out. “The value in doing so is the opportunity for you to discover the differences in your winning trades and your losing trades.” Among the metrics applied to both the winning and losing trades are the number of winners and losers; the average win and average loss size; the number of times a trader added to winning and losing positions; the average amount of heat taken in a trade before it was covered for a profit or loss; and the average time it has taken to hit the point of maximum heat. The latter is an especially interesting metric in that, by comparing winning and losing trades, it can help guide traders to formulate rules for the proper amount of time to be holding positions.

If you know how much heat you take on winners versus losers and how long it takes you to reach that point of maximum heat, you can set guidelines for when and where it might be prudent to cut your losers.

3. Comparing results among market/product traded. “Traders that trade more than one market/product sometimes have difficulty interpreting how their performance compares in their trading of each market,” David Adler observes. “Oftentimes the trader will be very profitable in one market but have consistently less profit or even losses in other markets. If you trade more than one market, it’s important to split up any analysis or performance reporting that you do by the markets you trade.” Among the metrics he applies to different markets are: the total amount earned/lost per market; the average win and average loss for each market; the number of consecutive winning and losing trades for each market; the average risk incurred among trades for each market; the average lost profit opportunity for each market; the number of times you added to losing and winning positions per market; the average amount of time spent in losing trades per market; the maximum losing and winning trades per market; and breakdowns by hour of the day for each market. My experience with metrics is that these breakdowns by market will often shift over time, as certain markets yield greater opportunities and others go dry. Tracking results over time can be a great way of seeing, in real time, when and how markets are changing.

“I’ve seen numerous traders increase their P/L by minimizing trading losses and increasing the frequency and/or size of their winners after applying one or more of the techniques above,” David concludes. “From what I’ve seen, it’s most effective to conduct your analysis or review of your trading no more than once a week, and ideally once every two weeks or even once a month.”

Intuition—the result of implicit learning that occurs after long periods of observing market patterns—may play an important role in getting traders into and out of positions. Even the most intuitive and discretionary trading, however, can benefit from analytics: knowing which markets and time frames offer opportunity and measuring how well you’re taking advantage of that opportunity. Ultimately, you are your own trading system . Your task, as your own performance coach, is to know how your system operates, avoid its shortcomings, and maximize its strengths. The insights and tools provided by Rennie and Dave are excellent guides in the quest to become more scientific in the management of our trading business.

COACHING CUE

The contributors to this chapter have provided a wealth of insights, derived from firsthand experience, as to the principles and practices that can improve your trading. A worthwhile exercise is to review each of the contributor’s ideas and identify the overlap: the points emphasized by more than one contributor. These points of overlap represent important best practices that can guide your efforts going forward.

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 9: http://becomeyourowntradingcoach.blogspot.com/2008/08/daily-trading-coach-chapter-nine-links.html

The contributors to this chapter maintain their own web sites, which offer a wealth of resources to developing traders. Here are links to the contributors to this chapter and their web sites: http://becomeyourowntradingcoach.blogspot.com/2008/08/contributors-to-daily-trading-coach.html

For background on technical analysis, Brian Shannon’s book is a useful resource for mentorship: www.technicalanalysisbook.com/

Ray Barros’s book The Nature of Trends details his approach to trading and trading psychology; see also the seminars he offers on these topics: www.tradingsuccess.com/

John Forman’s book The Essentials of Trading is an excellent introduction to the practice and business of trading: www.theessentialsoftrading.com/Blog/index.php/the-essentials-of-trading/

The NewsFlashr site is a great way of staying on top of many popular trading-related blogs, as well as news: www.newsflashr.com/feeds/business_blogs.html