Steps toward Self Improvement
Success does not consist in never making mistakes but in never making the same one a second time.
George Bernard Shaw
What are the core processes of self-coaching? What concrete steps can we take to make changes in our trading to improve performance? These are some of the topics well tackle in this chapter.
Much of this chapter comes from research over the past several decades that has illuminated common effective ingredients across all counseling and therapy approaches. An interesting finding from that research is that all of the major approaches to counseling appear to be more effective than no counseling at all, but no single approach consistently shows better results across a range of people and problems. Not only do the major modes of helping seem to work equivalently, they also seem to work for many of the same reasons. Those reasons capture the essence of what creates changeand what can fuel our efforts to become our own trading coaches.
SELF -MONITOR BY KEEPING A TRADING JOURNAL
Self-monitoring refers to methods that you use to track your own patterns of thought, feeling, and behavior over time. Self-monitoring is the foundation for many of the other self-coaching techniques described in this chapter, because it tells us what we need to change. We cant alter a pattern if were not aware of its existence. Very often in brief therapy, the first homework exercises involve self-monitoring. Just as observing market patterns precede our ability to trade them, becoming aware of our own patterns is the first step in changing them.
One of the most common ways to monitor oneself is through the use of trading journals. Active intraday traders might make entries during a midday break and at the end of the trading day; others might simply write in the journal at the end of each day in which they are making trading decisions. The key is to catch your patterns as soon after they occur as possible, rather than rely upon fallible memory.
Note that self-monitoring is not a change technique in itself, but it often leads to changes. Once you see your patterns with crystal clarity including their costly consequencesit becomes much easier to interrupt them and prevent their future occurrence. At other times, selfmonitoring may alert you to patterns that you didnt know were present. This is exceedingly valuable, as it lays the groundwork for change that otherwise would have been impossible.
Any time you systematically review your performance over timeand the factors associated with successful and unsuccessful performance youre engaging in self-monitoring. For example, I reviewed my recent trading results trade by trade and found that I was taking larger point losers on small trades than on my larger ones. This review led to the realization that, when trades were quite small, I was not as vigilant in setting and sticking to stop-loss levels. Although the total dollar loss for each small trade was not huge, over time the small losses added up. This led me to establish a new routine for setting and sticking to stop-losses with small trades by explicitly writing out my risk/reward ratio for each trade before I placed the order. The self-monitoring made me more conscious of what I was doing, which in turn kept me trading well.
Self-monitoring is the foundation on which all coaching efforts are built.
My experience is that the best predictor of failure in the trading profession is the inability to sustain self-monitoring. This inability leaves traders unable to clearly identify their problem patterns, and it prevents them from reflecting and learning from their efforts at change. Goals without selfmonitoring are but mere good intentions; they never translate into concrete actions to initiate and sustain change.
Why would a trader, seemingly desirous of success, not sustain efforts to monitor her own thoughts, emotions, and/or trading performance?
I believe its because many traders are motivated by trading and making money, not by a desire to understand themselves and markets. This is an important distinction. To paraphrase coach Bob Knight, they are motivated to win, but not motivated to do the work it takes to become a winner. In the best traders, self-mastery is a core motivation. Its why they continue trading long after they could have comfortably retired.
The most common format for beginning a regimen of self-monitoring is keeping a journal. The basic components of a self-monitoring journal might look as follows:
Divide your journal page into three columns. The first column describes the trade that was placed, including the trade size and the time of day. If you scale into a single position, you would treat that as a single entry in the journal. Similarly, if you enter several positions to capitalize on a single trade idea (e.g., you want to be long precious metals, so you buy three different mining stocks), those would also be incorporated within a single journal entry. The first column might thus summarize what you did for each trade idea, how much you risked on the idea, when you placed the trades, the prices that you paid, and how you placed the trades (e.g., all at once or by scaling in; executed at the market or with limit orders). If you are a high-frequency trader, consider the possibility of automating your trade monitoring with tools such as StockTickr or Trader DNA.
The second column would summarize the outcomes of the trades, including the prices and times of your exits, your P/L for that trade (or trade idea), and how you exited the trades (e.g., all at once or scaling out, at the market or by working orders).
The third column would include all of your behavioral observations for that particular trade or trade idea: what you were thinking, how you were feeling, your preparation for that trade, your degree of confidence in the trade, etc. In other words, the third column takes a look at you and your state of mind, thought patterns, and physical state during the trades. The third column could also include observations about how well you entered, managed, and exited the trades. Whatever stands out for yougood or badabout the trade would be included in that third column.
Keep your trading journal doable; many efforts at self-monitoring fail because they become onerous.
For a trader such as myself who only place, at most, a few trades per day, such a journal is relatively easy to keep. Prop traders who make dozens of trades per day or more, however, are likely to find such a journal to be onerous. One of the best ways to sabotage self-monitoring efforts is to make them so burdensome that you wont sustain the effort. If youre an active trader and cannot automate your monitoring of trades, you can streamline the journal in one of several ways:
You can create a single entry for the morning trading and a second entry for the afternoons trading, with the columns simply summarizing your positions, your P/L for the A .M . or P .M ., and your associated observations of your trading at those times.
You can create entries for selected positions only that stand out in your mind either because they were quite successful or quite unsuccessful. If you sample from your trades in this manner, make sure that you include best and worst trades, so that you can observe positive and negative patterns. These are the trades from which we learn the most.
If your trading is complex, with many positions, hedges, and a flowing in and out of risk exposure over time (like a market maker or a very active portfolio manager), you can simply summarize your day with a single journal entry. The first column would review your major trading ideas, the second column would note P/L, and the third column would include your self-observations.
There is no single self-monitoring format perfect for all traders; the key is to adapt the format to your needs and trading style. The real work comes when youve accumulated enough entries to notice patterns in your trading: the factors that distinguish your best trades and days and those that accompany your worst trading. How to analyze your self-monitoring journal will be the focus of the next lesson. For now, however, your task is simply to sustain self-awareness: to be an active observer of your own trading process.
When you are your own trading coach, there is always a part of you that stands apart from your decision-making and execution, observing yourself and exercising control over what you do and how you do it. The real value of the trading journal is that it structures the process of self-awareness and helps make it more regular and automatic. If you were walking on a familiar street, you would hardly think about how you walk, everything would be on autopilot. If, however, you were taking the same walk in a minefield, you would be exquisitely self-aware, conscious of every step that you took. Trading is neither a walk in the park nor a minefield . . . perhaps its more like a walk in a beautiful, but somewhat dangerous park. You want to be absorbed in the walk, but alert and aware at the same time. That is the function of the trading journal: it enables you to monitor yourself, even as you are immersed in what youre doing.
A great insight into journal keeping is offered by Charles Kirk, who enters his observations into a database program so that he can readily retrieve journal entries on various topics. This is an effective way of monitoring specific trading challenges over time.