Wednesday, November 17, 2021

Why working on yourself is so important

We know we cannot change the past - what's done is done.

We also know that we don't know what will happen in the future - it doesn't exist, and anything (or anyone) can do something which may influence what will occur in the future.

So, what are we left with? We can only react and respond to the moment of now.

As traders, the danger is that our brains get scrambled by our thoughts and emotions or feelings, in response to things we cannot change (the past) or things we cannot control (the future).

Thoughts are simply how you internally react or respond to an action generated by yourself, or something in the markets which has occurred, is in the process of occurring, or you believe may occur in the future.

From thoughts we get the feelings, being the emotional responses (such as anger, frustration, or overconfidence). If we are not careful, these can influence the future actions we take, which can be detrimental to our results.

Some examples of this:

  • being overly aggressive with regards to position size and risk;
  • taking entries or exits when there are no such signals;
  • revenge trading in an attempt to recoup losses.
In other words, what happens on the inside (your thoughts and emotions) will determine what happens on the outside (your actions and performance).

In this regard, when I am referring to performance, I am talking about how you perform in terms of following your rules, rather than the monetary profits or losses generated. 

We all know people who have overridden their rules and made a killing on a trade - but that then leads them onto slippery slope of the trader thinking he is smart and knows better than the rules he created when he was in a calm and rational state. 

In the same way that a trader and their method tries to minimise the effect of being whipsawed by price noise, you also want to eradicate the noise generated by your thoughts and emotions.

The good news in all this is that a thought is just that - a thought. It is nothing tangible. Your thoughts and responses are fully within your control. And how you think and respond can be changed - for the better.

Change your thoughts so that you are more accepting of what occurs in the market and what your method generates in terms of results, and you will change your emotional reactions and subsequent actions in a positive manner. 

Understanding this 'chain reaction' process is imperative if you want long-term success in the markets.

Unfortunately, most traders who struggle concentrate solely on the external elements (such as looking for a holy grail method which doesn't exist), without looking at their thought patterns and emotional responses, and from there the decisions and actions taken. 

Action is tangible. Action means interacting with the markets in some way (buying or selling), or doing something positive in the process of getting ready to interact (calculating your position size, your entry and exit levels etc.)

Someone who has a clearly defined process and set of trading rules, will be able to interact with little or no thought. This will be the same whether entering or exiting a position (be it with either a profit or a loss). They will just react to what is happening, with no second-guessing.

That said, even if you do have a well developed trading plan, it does take a lot of work to get into the correct mindset where you can react without thought or emotion detrimental to the decisions and actions you take, and develop the underlying confidence in what you are doing.

And that comes from simply doing the reps.

As an example, in my case as a trend follower, what I do can almost be viewed as a set of simple if... then commands - if price does 'X', I do 'Y'. I have a clear plan every day for potential entries for stocks or instruments on my watchlist, with entry levels, position sizes and initial stops already calculated. The same with stop placements on any existing positions. 

As a result, when it comes to needing to act, no thought or interpretation is required. Everything is second nature.

I have also become accepting of the fact that I cannot control what happens in the markets. I am in control of what I do until the point I enter a trade. Once that happens, I am at the market's mercy in terms of what happens to price of the stock or instrument I am trading. 

At that stage, all I can do is update my stops in accordance with my rules. I have to let those rules take the strain in terms of telling me when to get in or out of a market.

It simply falls to the idiot in front of the PC (me) to deal with the execution side, by putting the orders in the system or updating my stops in accordance with my rules.

Some people try to get around these emotional or execution elements by fully automating their trading processes. However, traders can still override their systems! So they are not completely immune.

Over the years, I spent far more time working on myself and my mindset, controlling my thoughts and feelings, rather than my method of interacting with the market. And for me, that has proven far more beneficial and profitable than tweaking parameters or adding layers of complexity to my method trying to find a holy grail.

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