Surviving The Chop & Techniques for Transformation

Trading The Chop

Bad Assed Trader: One of the thrills of trading for me is the journey of discovery and personal growth involved.  It seems that apart from a few rare exceptions most traders do need to go through extensive transformation, particularly in understanding themselves, in order to succeed.  This seems to take at least a year.

My main concern is that I do not occupy myself with this learning as an academic exercise but have the courage to apply it to myself and make the changes necessary.  As Jeanne, one of my very best friends says: “IQ is nothing without I do” and it is vital I apply the theoretical understanding to myself, however torturous that may be.   I am lucky to have been allocated Emmanuel as my coach as his approach to trading and life in general is even more enthusiastic for enlightenment and self-knowledge than mine and he is without fail supportive, non-judgemental and inspirational.

Ed Seykota, one of the most successful traders ever clearly shares this view.  Given the theme of one of my recent blogs – the similarities and differences between learning to drive and learning to trade – I was delighted to read Ed’s words: “Psychology motivates the quality of analysis and puts it to use.  Psychology is the driver and analysis is the road map.”

The interesting thing about trading psychology is its subtlety and how prone we are to deny it.  The most accomplished traders have watched themselves and noted how they behave and the effect it has on their performance.  This is what I am seeking to learn and currently at the very beginning of what I know will be a painful but I hope transformative journey.

I am now working up a routine for doing a daily visualisation of different scenarios and how I will react in each one so that my subconscious is better aligned with my conscious in each eventuality.  For example, there will be days when I switch on the computer and my set-up is nearly there but not quite.  I know the sort of things that will tempt me to jump in prematurely, such as price action not sufficiently decisive (“fuffling”) and without sufficiently “sharp shoulders” to demonstrate a rejection of a low or high price.  So I visualise myself in this situation, being aware of the dangers and staying out until exactly the right conditions come into being.  Then and only then do I take the trade.  I set the stop loss and target and walk away.

Apparently the more detail and the more senses we use to reinforce the correct way to play the scenario the stronger and more reliably we train our brains.  I understand that the sense of smell is the most powerful at drawing up long term memories – we’ve all smelt something that evokes our childhood and been transported back to it in a way that looking at photographs cannot quite do.  So I’m training my brain to associate a particular smell (got to be a nice one!) with following my rules so that I only need to smell the smell to get into Rule Following Mind Set.  I’m using Polo mints for my associative smell as they are easily transportable and always available.

I am strengthening the visualisation and smell association with taste and as I have Polo mints at hand this seemed the best option.  I toyed with the idea of my favourite chocolate but, given I will be working on this visualisation a few times a day if I use chocolate for my taste association I’ll be the size of a house by the end of the week.  Low sugar Polo mints it is then.

I started this process last week and managed to follow my rules for all my trades and found it easier.  I’m starting to really feel more confident about my strategy.  The bizarre thing is that I didn’t win any of these trades and yet my confidence is even stronger.  I’ll explain why.

My strategy risks 20 pips to gain, usually, 40-100 pips.  I developed this strategy on a trending market and should have realised that it actually doesn’t work well when the market is chopping as it frequently does in between trends. 

The Euro and Pound, paired with the dollar, are the only currencies I trade at present and both have recently dropped down and beyond their 50 Moving Averages from uptrends.  Once price is below the 50MA on the daily chart I can’t take long trades anymore and so have been looking for short (sell) opportunities.  But the market’s been very indecisive about whether price should go back up over the 50MA or stay below, for both currency pairs.  It has bounced around, hanging onto the 50MA line and not really gone anywhere much – basically just chopped.  For over a week.

When I had a coaching session last week Emmanuel intelligently suggested that during the chopping I should take half my profit at 1%.  I thought he was right but there’s always a time lag for me between hearing and thinking something is right and actually behaving differently.  It seems I have to actually see the evidence before I make a change.  

Well, the market gave me the evidence to show that Emmanuel was right.  Almost all the trades I placed hit 1% - sometimes quite a bit more – but none of them went as far as my usual target.

So now I have sharpened up my rules.  Not changed them but tightened them.  Now I’ll apply a 1% take half profit target unless the charts are showing a well-established trend with clear cyclicity.

I’ve learnt an important lesson about the overall context that needs to be present for my strategy to work its best and this has given me even more confidence.

Plus I really need to act immediately on Emmanuel's wise words.

                                       Now where did I put those Polos.......