SHAPE YOUR TRADING BEHAVIORS
Two children, two different homes: both improve their test grades in math; both fail in English. In the first home, the parents praise the improvement in math and encourage similar progress in English. In the second home, the parents call attention to the English grade and demand to know why the child couldnt pick up that grade as well. Which child will be most likely to show further school progress?
Behavioral psychologists who utilize behavior modification as a means for altering action patterns would support the first set of parents. Positive reinforcement, as a whole, works better than punishment. If we reinforce the right behaviors, the child will learn to do the right thing. If we punish the wrong behaviors, the child will learn to fear us. Nothing positive is necessarily learned.
Punishment fails because it does not model and reinforce the right behaviors.
Many traders seek to motivate themselves more through punishment than praise. These traders focus more on their losing trades than on their winners. They spend more time on weak areas of trading than building and extending their strengths. Such traders learn to associate unpleasant things with trading. These traders anticipate criticism and punishment and find it difficult to stay wholeheartedly engaged with the learning process.
We can see such dynamics at work in the journals many traders keep. One page after another details what the trader did wrong and what he needs to do to improve. Self-evaluations emphasize the bad trading, everything that could have been better. Its little wonder that these traders find it difficult to sustain the process of maintaining a journal. After all, who wants to face negativity and psychological punishment every working day?
Many traders fail to sustain work on their trading because they find little positive reinforcement in their work.
Trainers use frequent rewards to teach animals tricks. The trainers dont expect the dog to, say, jump through the hoops all at once. Rather, they will first give a reward each time the dog approaches the hoop. Then the trainer will wait for the dog to go through the hoop before they dole out the reward. Then theyll lift the hoop just a couple of inches and reward the dog when it jumps through the hoop. Then theyll add a second hoop and a third . . . theyll raise the hoops a little at a time . . . all the while requiring new behaviors that are closer to the desired endpoint before giving the reward.
This process is known as shaping. Trainers shape animal behaviors by rewarding successive approximations to desired ends. In a classroom, a teacher might first reward a disruptive student for five minutes of quiet attention. Later, it will take 10 minutes for the student to earn the reward; eventually the reward will require an entire class period of good behavior. Frequent-flyer programs at airlines arent so different. At first, you earn bonuses for simply joining the programs. Only after you ride the airline regularly, however, do you earn later rewards. If you want the greatest perks, you have to shape your riding habits to fit the program.
Shaping is a testament to the power of positive reinforcement. Imagine punishing the dog for not going through the hoops. The chances are good that the dog would simply cower in the presence of the trainer; it certainly wouldnt figure out the right behaviors from the punishment of the wrong. When you are your own trading coach, you are the trainer as well as trainee. You are teaching yourself to jump through the hoops of good trading. For this reason, you need an approach to coaching that is grounded in positive reinforcement. Your coaching must stay relentlessly positive, building desired trading behaviorsnot punishing the wrong ones.
You can keep a positive tone to the learning process by shaping your trading behaviors: rewarding small, incremental progress toward the desired ends.
The first place to implement the shaping approach is in a journal. As an experiment and a worthwhile exercise, try keeping a positive trading journal for a few weeks. Divide your trading into several categories, such as:
Research and preparation.
Quality of trade ideas (ideas that carry conviction).
Number of diversified (uncorrelated) trade ideas.
Quality of entries (favorable risk/reward for trades; low amount of heat taken per trade).
Sizing/management of trades (scaling in/out by planned criteria). Execution of exits (following profit targets/stop losses).
Each journal entry then focuses on what you did right in each of those categories each week. You write down, in specific detail, your best performance in each of these areas and then you review your entries before trading the next week, with the aim of continuing the positives.
As the previous lesson noted, this use of positive reinforcement and shaping is even more powerful if you conduct your assessment in a social framework, where you exchange your weekly positive report cards with one or more valued peers. This framework allows you to support the progress of others, even as they reward yours.
One of the better pieces of self-coaching from early in my trading career occurred when I set a goal of reaching a certain size in my trading account. I normally dont emphasize P/L goals, but in this case I wanted a tangible focus on steady profitability. Once I reached the goal, my commitment was to withdraw a portion of money from the trading account and use it for something enjoyable for the family. This emphasis rewarded my longer-term progress, but also brought my family into the positive reinforcement. When I finish this book, one of my personal goals will be to lose some weightlong hours in airplanes and hotels between working with traders have taken their toll. Ive promised myself a new wardrobe from a Chicago tailor if I reach my weight goals. Each week Ill be weighing myself and tracking my progress. With every opportunity to snack, Ill be thinking about that new wardrobe and how I would feel if I didnt make weight that week. Theres little doubt in my mind that Ill reach my goal.
Tangible rewards for your success are among the strongest positive reinforcers.
The key to making a positive journal work is shaping. At first, you jot down entries for even very small things that you did right. Later, you only make notations of larger examples of virtuous trading. If you conduct the shaping process properly, youll always have good things to write abouteven on losing days. This process ensures that youre always learning, always building on strengths, always keeping your motivation up. The difficult part about self-coaching isnt just making progress, its sustaining the progress. Progress is much easier to accomplish when your focus is building yourself up, not tearing yourself down.
What is meaningful for you as a tangible reward for your self-coaching progress? A vacation with loved ones? A new car? One trader I work with donates a portion of his profits to a charity he deeply believes in; helping them out inspires his own efforts. It helps to reinforce the small steps of progress via shaping, but it also helps to have a larger goal that youre working toward; a goal that is meaningful for you. Remind yourself periodically of the goal; track your progress toward the goal. The psychologist Abraham Maslow recognized clearly: we perform at our best when we are impelled toward positive goals, not driven by deficits and unmet needs.