PSYCHOLOGICAL
PREPARATION PLAN
What does it mean to be psychologically ready? It means you
have to get your head in the game before you put your money on the line.
Here are a few steps to help any trader - veteran or novice - become
psychologically prepared for the trading day. Even after 20 years as
a trader - much of it spent in the S&P pit - I still go through
these steps.
Step 1 -
Prepare
your indicators. Whatever you use as a guide, you must study before
you begin trading. This will not only refresh your memory as to where
the market has been - where there are key support and resistance levels,
for example - it will also put your mind in the market.
Step 2 -
Clear your mind of distractions. You can't trade if your mind is elsewhere.
If your money is in the market, your brain had better be there, too.
Step 3 -
Have realistic expectations about your own physical and mental limitations.
You cannot expect to sit in front of the screen from 8 a.m CST until
4 p.m., five days a week, without taking a break. Work smart. Concentrate
your trading time during the first 90 to 120 minutes of trading and
then take a break. Regroup your thoughts. Do some research, and then
prepare anew for the final 90 to 120 minutes of trading.
When I started out in the futures market some 20 years ago, I was both
filling orders for customers and trading for my own account, as was
allowed in those days at the Chicago Mercantile Exchange. I had to be
in the pit, bell to bell, to fill customer orders. But when it came
to my own trading, I saw that the best opportunities for me were usually
from the open until 10 a.m. CST and then again around 1:30 p.m. until
the close. The rest of the time, I usually got chopped up.
So, much of trading is really trial and error. Your mistakes will be
your best teachers, which is why I always tell new traders, "You
have to love your losers like you love your winners."
Step 4 -
Avoid trading during times of personal problems or disruptions. If something
is weighing heavily on your mind, it will distract you from trading.
Even positive events - such as the birth of a child or buying a new
house - can affect your trading. For example, when we moved offices
in February 2000, we were out of sorts for a week. Our data lines were
not in; our phone lines were not completely up and running. In plain
words, it was not an ideal environment for trading "upstairs"
at the screen. Because of this, we had to limit our market activity.
When you're in personal turmoil or in the midst of big life changes
- both positive and negative - be careful of your trading activity.
Step 5 -
Know that you will have bad days. You must be able to bounce back psychologically
the next day (or the day after that) and look at the market and your
trading with a fresh perspective. You can't come in the next day, psychologically
carrying your losses from the day before. Here's what I mean: You can
say, "Yesterday I lost a lot. If I don't make that money back today,
I'm in trouble…:" OR you can say, "I made some mistakes yesterday
that cost me, but I've learned a few things. I had better start out
slow today, make some profits, and then move on." Believe me, the
latter is a far better mental attitude for success. Granted, when you're
going through the loss, it's very painful. But exiting a losing trading
provides a tremendous amount of clarity and even relief in some instances.
It's not the end of the world if you lose money. It's only a problem
if you let those losses eat at you and cloud your judgment.
Step 6 -
When you have a loss, take it. The most common mistake among our junior
traders is trying to "get even" or "scratch" a trade.
A scratch is not necessary. If you have a losing trade, get out. Accept
the fact that you made a bad decision. End it, and move on. When you
can accept the fact that you will have losses, it's a big psychological
shift that can greatly improve your performance.
Just one thing about "scratches" though: If you put on a position
and the market doesn't do much of anything and you exit with a scratch,
congratulate yourself for having the discipline to exit a trade before
it turned into a loser. A scratch is a "winner."
MENTAL DISCIPLINE
Mental discipline is as necessary for me as a veteran trader as it is
for a novice. In fact, experienced professional traders face a special
breed of mental demons, borne of their own successes. And to be truthful,
these are demons I've wrestled with myself on several occasions, situations
such as:
- Focusing on a monetary goal instead of the market.
- Forcing a trade. Making a trade when market conditions don't warrant
it.
The two go hand-in-hand. The situation usually happens like this. You
go into the market saying to yourself, "I'm going to make a lot
of money today." Or maybe you say to yourself, "I NEED to
make a lot of money today. I want to have a big day. I need to have
a big day today." Your motivation may be anything from previous
losses to the need to make a down payment on a house.
Complicating matters is the fact that you've had big days before when
the market presented opportunities for large profits. That makes it
all the more tempting to believe that you can pull it off again. But
if the market conditions don't present themselves, you're forcing trades
that won't materialize. You will trade too big, risk too much. Instead
of the big profits, you may end up with big losses.
School Of Hard Knocks
I can tell you from my own school of hard knocks that there have been
times when I've been up $17,000 and I'd like to make $3,000 more - just
to have that nice round profit number of $20,000. So I stick around
for the extra $3,000, even though the market may have quieted down and
there aren't that many opportunities to trade. And you know what happens
next? I end up losing all of the $17,000.
Or I'll be down, say, $15,000 and I'll stay in the pit to make it back,
even though the market conditions aren't there. What happens? I lose
even more. Or take a day like I had recently when I made $42,000 in
a morning. Then the next day, it's dead quiet in the pit. I know better
than to stay there. But I do … and I lose $80,000.
Your best days happen when you're prepared and the market presents the
opportunities. The more volatility, the more opportunities you'll have
to make money. Daytraders and short-term traders thrive on volatility.
But when ranges are tight, volume is light and the market is slow, don't
trade. You can't make the opportunities happen. Just keep working on
your mental game. Study the market. On days like that, keep your mind
in the market, but your money out.
This underscores a trading maxim that is as important for novices as
it for experienced traders: Trade the market, not the money. Think about
making good trades, not about making money. Focus on the trading process.
If that process is sound, the outcome will be a profit.
NO EXPECTATIONS
As part of your mental preparation, you must not have any expectations
about your performance. Your emphasis must be on the opportunities presented
by the market that day, not on having a "big day." As we discussed
in Point #5 of the Psychological Preparation Plan, if you've suffered
previous losses, you can't think about "making it all back."
Rather, it's time to slow down and take extra care to prepare for that
day's trade. You should cut down your trade size and make a few small
profits to gain your confidence. Get back in sync with the market.
Your concentration must be on making good trades, not on making money.
As soon as monetary objectives enter the picture, you will be distracted.
Emotions begin to rule your trading, and you'll be distracted. To trade
successfully, you must be emotionally quiet and focused on the market.
As a trader, you must be methodical about the trades that you make.
You put a trade on because you believe the market is going from "here"
to "there." If not, you know where you'll exit with a pre-set
loss level. If you have anxiety about making a trade, then emotions
have entered your mental landscape, and your decision process will be
negatively affected.
When emotions infect your trading process, you'll soon find yourself
in the "wishing, hoping, praying" mode. Instead of making
a decision based on your technical research, you'll be "hoping"
that the market turns your way to wipe out a loss instead of exiting
an unprofitable trade and beginning anew. And believe me, "hope"
is not a trading method.
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