Trader Self-Development

from Dr. Brett-
Successful self-coaching requires an ongoing commitment to tracking and improving performance. Here are some posts that will help guide your self-development as a trader:

* How Can I Learn Trading?

* Coaching Yourself for Profitable Performance

* Self-Efficacy and Attaining Goals

* What Contributes to Success

* Turning Goals Into Habit Patterns

* Setting Effective Goals

* A Secret to Life Success

* Finding the Heroic Within Us

Learning Trading Discipline

from Dr. Brett-

A big part of coaching yourself as a trader is staying in control when you are risking your capital. Here are some posts relevant to maintaining trading discipline:

Training Yourself for Discipline

Staying Cool in the Heat of Battle

Understanding Lapses in Trading Discipline

Top Reasons Traders Lose Discipline

Changing Your Self-Talk

Trading Stress and Emotion

Avoiding Overtrading

Self-Coaching Techniques - Part 1, Part 2, Part 3

After a Devastating Trading Loss

from Dr. Brett-
The year was 1982. I had been short most the year and was doing quite nicely in this, my fourth year as a trader of U.S. stocks. For the first time I allowed myself to think about trading as more than an avocation: as a potential source of ongoing income that could help free me to do the writing that I loved best.

Then we hit mid-August. A ferocious rally drove prices sharply higher and left me in the red. I decided to hold and wait for a pullback, but the pullback was mild. We moved sharply higher again in the fall and I was forced to take losses that consumed not only most my profits, but all my dreams of supplemental income.

I'd have to say it was the most depressing period of my life overall. I was questioning the work I was doing in community mental health--a great learning experience, but not a viable career path--and I was not happy in my personal relationships. The trading losses were the icing on a not so delectable cake. The bottom came in a bar in Homer, NY after too much to drink and a smoke that I discovered too late to be adulterated. It was not a happy time.

I'm convinced that the most successful people are not those who avoid those ruts in life, but the ones who use those to turn themselves around. I discontinued trading and embarked on research regarding market timing that, I vowed, would enable me to never make the same mistake. Out of that research came the work on new highs and lows and sector lead/lag relationships that I draw upon to this day.

I also turned it around socially. After consuming a full bottle of scotch at a New Year's party at the end of 1983, I found myself too inebriated to ask the pertinent questions of the woman I had met. Had I asked the questions, I would have found out that she was not yet divorced, had three children, and was nine years my senior--not at all what I was looking for. Today, after 24 years, she remains my wife and the best decision I ever made.

With the marriage in 1984, I inherited shared responsibility for three children. The steps I didn't take for myself I had to take for the new family. Gone were the drinking and partying. I parlayed my community mental health experience into a student counseling position at Cornell University, taking a 33% pay cut in the process. One year later, impressed by the Cornell experience, Upstate Medical University in Syracuse hired me and I joined a medical school faculty.

At Upstate, I realized that my counseling skills were not ideally suited for the medical school environment. I undertook a lengthy review of the research and practice literatures and taught myself the fundamentals of an emerging approach to helping called "brief therapy". Shortly thereafter, I began teaching brief therapy in the psychology and psychiatry programs. In 1990, I published my first review paper in the field, then another in 1992. I had found my niche: one that would lead to over 50 published papers and book chapters, two books in psychology and psychiatry, and two books combining my trading and psychology loves--and, of course, this daily blog.

I look back on that trading loss in 1982 and now see it as the beginning of a turnaround, not as the ending of a dream. But it took an unflinching and unforgiving look in the mirror to make that turnaround. It also took relationships with people I loved enough to want to make more of myself.

I've received several emails and blog comments from traders who have been through devastating trading losses. This post is for you. What doesn't kill you *can* make you stronger, if only you can sustain that hard look in the mirror.

RELEVANT POSTS:

Resilience and the Courage of Your Convictions

Blueprint for an Uncompromised Life

Top Ten Reasons Traders Lose Their Discipline

from Dr. Brett-
Losing discipline is not a trading problem; it is the common result of a number of trading-related problems. Here are the most common sources of loss of discipline, culled from my work with traders:

10) Environmental distractions and boredom cause a lack of focus;

9) Fatigue and mental overload create a loss of concentration;

8) Overconfidence follows a string of successes;

7) Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;

6) Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested;

5) Personality traits that lead to impulsivity and low frustration tolerance in stressful situations;

4) Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);

3) Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;

2) Not having a clearly defined trading plan/strategy in the first place;

1) Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.

Understanding Lapses in Trading Discipline

These are the three legs of the performance stool: (1) your talents and interests, (2) your trading style, and (3) markets and their personalities. The meshing of your qualities with your trading style will help determine your ability to trade that style with consistency and discipline. The meshing of your trading style and the features of markets will determine the degree to which you have a performance edge in the marketplace. The ever-shifting features of markets ensure that traders who are adaptable will be most likely to sustain expert performance over the course of a trading career.

Enhancing Trader Performance

I recently received several emails from readers asking questions about that perennial problem: maintaining proper trading discipline. Sometimes the problem is holding losing trades too long or violating stop loss levels. Other times, it's breaking rules regarding position sizing or when to trade (and not trade). On yet other occasions, the problem is failing to take trades that set up or jumping into trades before they fully set up. Always, however, the problem is a failure to fully follow plans and intentions.

As the quote above suggests, my new book--due out at the end of the month--tackles the discipline issue from a different angle. Discipline problems, I maintain, are not the cause of trading woes. They are symptoms of other difficulties. Just as a problem maintaining the "discipline" of monogamy in a marriage is frequently the result of underlying relationship difficulties, failing to be faithful to one's trading plans is often a sign of conflict between the trader and those trading plans.

In the book, I review research that identifies several key personality traits that affect our decision making under conditions of risk and uncertainty. These include:

1) Neuroticism - Our tendency to experience negative emotion. When people show a tendency toward anxiety, depression, and anger, the volatility of the market--and the volatility of trading results--frequently sets off emotional volatility, interfering with sound decision-making.

2) Extroversion - Our tendency to be outgoing and oriented toward the outer, rather than inner, world. When people have many extroverted features, they tend to be risk takers; when extroversion is low, they tend to be more risk-averse.

3) Openness to Experience - Our desire for novelty and stimulation. When traders have a high degree of openness, they lean toward more discretionary, unstructured trading methods; when the openness is low, they prefer highly structured, rule-governed methods.

What happens when the plans we select for our trading don't truly mesh with our basic personalities? The result is that we continually find ourselves veering away from those plans.

A trader high in neuroticism will have difficulty following a trading system that puts a large percentage of capital at risk, that trades volatile markets, or that requires large drawdowns.

A trader high in both extraversion and openness will have difficulty following a patient trend-following system.

Frequency of trading? Placement of stops? Times of day to trade? Number of instruments to follow and trade simultaneously? All are impacted by our personality traits.

When traders who are normally disciplined find themselves breaking their trading rules, the lapses of discipline are a symptom of a lack of fit between who the traders are and what their rules demand. A fine system on paper is unprofitable if it cannot be followed by a trader. A trading method not only needs to be good; it needs to be good for the trader.

The answer is not to blame yourself for lapses of discipline or exhort yourself with motivational nonsense. Rather, keep a journal and truly investigate each of your lapses. Then view those lapses as information, not as problems. What do they say about you? Which rules do you find yourself breaking, and what inside you might conflict with those rules?

Now look at your trading successes. What came naturally to you? What rules and plans can be derived from those winning trades? Don't force yourself into a pre-made set of trading plans: identify what you do when you win and see how you can make *that* into your system.

Maybe, just maybe, breaking your rules is the first step in figuring out who you really are. A variety of trading psychology articles on my personal site might further that process.

Trading Discipline: Cause of Problems or Effect?

from Dr. Brett-
Among the dozens of submissions for the Trading Coach Project, the issue of discipline--sticking to plans/stops--was far and away the most common problem reported by traders. My general experience is that lapses of discipline are usually the result of a problem, not a cause. A key challenge, then, for work on oneself is identifying the cause of the departures from prudent trading.

There are three frequent causes worth investigating:

1) Personality Traits - Some people score low on a trait called Conscientiousness. They do not plan and follow through well, and they can be impulsive. This, of course, can manifest itself as a problem with discipline in trading. The key to identifying whether or not personality is a cause of discipline problems is determining whether a similar loss of discipline occurs in other facets of life (outside trading). If a person is disorganized and lacking in conscientiousness in their work, social relations, personal finances, etc., then it makes sense that this trait would carry over to their trading. Such individuals frequently need external brakes on their trading, such as risk managers at a firm who will enforce a "drop dead" level (and prevent further trading) once a loss limit is hit. Individual traders with impulsivity and low conscientiousness benefit from very explicit, structured rules that they follow without variation and reinforce with mental rehearsals. If the lack of discipline is so great that even such rules and rehearsals can't work, I personally do not believe such individuals should be trading. This includes traders with clearly addictive patterns of behavior, both in their trading and in other facets of their lives.

2) Market Volatility - Many, many times traders are quite conscientious and self-controlled in most areas of their lives, but experience lapses of discipline specific to trading. When this happens, it's often the case that the trading itself--*how* they're trading--is artificially creating the failure to follow trading rules. A key culprit in all this is market volatility. Volatility changes from day to day and week to week. It also varies as a function of time of day. Frequently, traders trade a fixed size and set fixed targets and stops, heedless of the underlying market volatility. In a low volatility environment, they fail to hit their targets and get stopped out, criticizing themselves for leaving money on the table. In an environment of enhanced volatility, the market will blow through their stops or exceed their targets, leaving them feeling that they did not trade well. This is especially true when traders find themselves unable to take what is normal heat in an environment of raised volatility. In such cases, it really isn't a lapse of discipline causing the problem. Rather, the trader is not adapting to market conditions. Adhering to fixed rules in a variable environment is not necessarily a virtue. Changing markets can prevent us from enacting those fixed rules.

3) Position Sizing - It is very common that smaller traders or aggressive traders will see a good trade and place too large a bet (i.e., a bet that is large relative to their account size). This makes it difficult to ride out normal movements against the position and leads to frustration and emotional arousal that result in loss of discipline. A good way of determining whether or not this is the case is to compare your largest trades with your smaller ones. If discipline problems tend to occur on the largest positions, you know that the increased perceptions of risk are interfering with consistency. The answer to this problem is to size all positions in such a way that individual losses in a trade cannot prevent you from making money on the day; losses during a day won't prevent you from being green on the week. Large trades relative to position size run the risk of ruin: a series of losing trades can dig a monstrous hole for the trader and cause significant emotional damage. In a sense, trades should be boring--not so large as to create undue fear *or* excitement. It is easiest being consistent and maintaining discipline when those emotional factors don't kick in.

It is common for trading psychologists to emphasize that our psyches affect our trading. Equally true, however, our trading affects our emotions. Trading inflexible strategies with inflexible targets and stops; trading size that is too large for our personal risk tolerance and account sizes: both of these can create "discipline" problems even for conscientious traders. Trading well is often the best psychological strategy of all.

RELATED POSTS:

Top Reasons Traders Lose Their Discipline

Understanding Lapses in Trader Discipline

Controlling Emotions is Not the Goal of Trading Psychology