Saturday, July 12, 2014

A frustrated trader

I had an interesting conversation last night with a trader about his current level of performance. Based on what he told me, he had been diligent in spotting set ups, controlling his losses etc, and felt that, compared to several months ago, he had made a lot of progress, yet he was in a drawdown.

While talking, he said he had identified several issues in terms of both execution of his trades, together with developing a fear of missing out on profitable trades. This had led to an element of overtrading. All told, there were probably four or five areas that he had identified himself, where improvements could be made.

I asked him was his overriding emotion was - anger, frustration, disappointment? "Frustration" he shot back.

This trader had developed a recency bias where his system had identified some potential setups in recent months, which for whatever reason he did not take. some of those trades he did not take developed into big trends, meaning he missed out on some huge winners. Had he taken those signals, then he would have been nicely up for the year.

This bias had led him to taking too many trades, for fear of missing out on another big winner. However, until recently he had failed to marry up the signals being given with the prevailing market conditions, which were less favourable now compared to when those big winners came along.

As part of the discussion, other issues were talked about, which mainly focused on a lack of discipline when carrying out his trading routine, execution issues which meant chasing some trades which didn't work out etc. All of these issues he had full control over, and therefore he knew they could be corrected.

The emotion of frustration was clear because he knew he was the reason for his poor performance.

This is all part of why sitting down and objectively reviewing your performance is a key component of continual self-improvement.

There are three key elements to effecting change:
  • to clearly identify what the issues are;
  • to work out a suitable plan to eliminate these issues;
  • most importantly - to have the ability to act out the new plan.
It's no good working out what you need to do, and then, when a similar situation arises down the line, you revert to old (poor) habits. You need to say to yourself "This is the situation I am in, this is what I am supposed to do based on my improved trading plan, therefore I am going to do this!". I'd go as far as recommending writing whatever your new action will be in BIG capital letters and pinning it up right next to your trading screen.

You need to do whatever it takes to break the old routine - carrying on what you have done before will not lead to a change in performance.

The great thing with this trader is that he has acknowledged and accepted the reasons for his lack of performance - he has taken responsibility. Now he has to act upon his findings and his revised plan of action. I've every confidence he will do it.

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