I remember going to a student’s office where he was an active day trader. At one point, the trader was short a large number of futures contracts and as it approached his stop he started tapping the screen as if to loosen the friction that would allow gravity to take the price of the futures contract lower.
He really cared if that trade made or lost money. Of all the trading psychology issues I work with, this is one of the biggest problems many traders face.
In over 1000 surveys and assessments of both professional and independent traders, only about 25% are able to frame trading losses in a way that allows them to maximize the statistical edge of their trading strategies.
The rest of the traders, to varying degrees, care about the outcome of each and every trade. This is often because the outcome of the current trade reflects on their dreams, their hopes and their worthiness as an individual.
It is my contention that how much we care about each and every trade outcome is a great barometer for traders to learn about themselves. How much do you care about the outcome of every trade?
I have a game that I play with groups of traders in which I give them a statistical edge of 3 to 2 on a fair flip of a coin. It is just a random flip of a coin and I have created a table that allows them to not only record their wins and losses but the emotional intensity behind the results of their call. By looking at the table, the entered results form a picture that allow you to see clearly how much the traders care about whether they called the heads or tails correctly.
Trading, as we all agree when we are sober, is a statistical game. There are moments when markets will give us a statistical edge. If we have developed a strategy that can locate those moments and execute a trade that is designed to take advantage of those moments, then we not only have a statistical edge, but we see the results in our trading accounts.
So here is an exercise that every trader can do:
- Are you watching every tick and being excited when it goes your way and disappointed when it goes against you?
- Are you swearing at the screen or the markets when the trade approaches your stop?
- Are you thinking about the bastards who are about to take out your stop?
- If this trade goes your way do you notice feelings of grandeur, excitement and vindication?
Pay attention to these factors right after you put on the trade, roughly in the middle of the trade, as well as after you close the trade. Score yourself at each point on a scale of 0 to 10. Zero equals a totally dispassionate point of view of whether this specific trade makes or loses money. A 10 indicates either extreme excitement or extreme despair.
Do this for every trade you take for five days. If your scores are seven and higher this means that it will be almost impossible to execute a strategy properly and complete its mission. If your score is under three this means that you are taking a statistical approach to your trades and you fully appreciate that the outcome of any given individual trade just simply doesn’t matter. If you are scoring somewhere in the middle this means that the more you care the worse you will fare.
The more you care the worse you will fare.
To better understand our trading psychology, the next question is, how do we not care?
The answer lies in our internal resilience. If we need external references to fulfill our dreams and make us whole, then a trade that goes against us will strike at the core of our being. If, on the other hand, we are amused by the markets, have confidence in ourselves and love trading as a statistical game, then we are internally referenced and the losses do not strike at our vulnerabilities.
Thus the first step is to be aware of how externally or internally we are referenced. The next step, is to make the shift from being externally referenced to internally referenced with training or private coaching, so we can start feeling comfortable as successful traders.