Bad Assed Trader: I've been reading Brett N Steenbarger's The Psychology of Trading this past week and so much of what he says really hits the mark for me. But it's one thing to recognise the problem, quite another to devise an effective cure...
He talks about cultivating the Internal Observer within you, that wise person who can be relied upon to be objective rather than rash and who it is possible to engage when you are actually feeling rash. Research has shown that we have two hemispheres to our brain and that we are often primarily functioning in one or the other. When trading we are often planning our trade from one hemisphere but then executing it from another, which is why when we look back at some of our trades we say "How could I have done that? What was I thinking? I was not in my right mind!" and we are speaking the truth, we really were not operating from our right mind.
Getting in touch with our Internal Observer helps to bring us back into our right mind - the objective and rational one that can see all the information, build a good evidence base for a trade (or against one) without bringing fear or greed into the act. Engaging our Internal Observer can also help us to stick with a trade when the evidence is still with us, or cut a losing trade when the evidence is against.
I've heard many traders, including my magnificent coach Emmanuel, say that trading well is like being a robot - and I think this is another way of saying that the Internal Observer has taken control and booted the emotional aspect into touch. This is not to say that emotions are of no use. As I have said in previous blogs, emotions generate warning signs which are helpful to notice and scrutinise, but they should not guide our actions. When we get an emotional signal that is the time to engage the Internal Observer and say "What would the wise woman within me think of this situation? What would she do?".
This helps get the rational brain back into play, looking for objective technical reasons to act.
Here's a lovely story from Brett's book which really demonstrates so well what I have found myself doing a few times and which I am gradually managing to overcome:
"Kurt was overtrading, trying to make opportunities when none were present. He would experience "seller's remorse" - he castigated himself for a poor trade. This then emotionally coloured his subsequent trading decisions....Kurt was trading simply to keep his seller's remorse at bay. By holding onto losing positions or by quickly entering new ones, he didn't have to think about what was going wrong. This temporarily made him feel better, but it wreaked havoc with his bottom line."
Isn't that so true? Getting into trades as a way of getting over trades?
I can remember two occasions when I did that repeatedly to the point where it felt like addiction. What was I addicted to? I think probably denial!
So what does Dr Steenbarger recommend? He explains that Kurt was also a successful golfer and "When he made a bad shot - which happens to all golfers - Kurt would focus on the next shot, rather than immerse himself in what had gone wrong with the past shot. By invoking his golf-challenge state of mind during trading, Kurt was able to treat drawdowns and losing trades the way he handled errant shots on the golf course."
He says: "It is helpful to meditate on past success to cultivate a winning mind-set...people consist of many little I's, many traders running around with different needs and impulses...by focusing on past successes and by placing yourself in the mind-set of another domain in which you are successful you can select the I's that will dictate today's trading."
I have started to invoke my Internal Observer who, I must confess, often chooses to turn to an imaginary Emmanuel sitting on my shoulder to ask for his advice. I will take the example of a recent winning trade I have on the yen (USD JPY).
I placed the trade at 11.30am on February 7th and it kicked in shortly afterwards (entry marked with yellow arrow). I set an initial target at about 1% which was near the top of the range in which the currency pair had been bouncing for months. I took half of one percent off at that point and have been trailing my stop loss behind the daily pivot point and 50 Moving Average on hourly chart ever since (currently at the pink arrow). I've locked in over 1% profit.
There have been a few moments where I've been tempted to take the profits and run on this trade because on the daily chart there have been some rather over extended bars followed by small reversal bars that can indicate a turn back down. But on each occasion I've felt tempted to do this I've brought my Internal Observer in by asking "What is the evidence to support such action?" and Emmanuel has appeared (in a virtual sense) and told me to just trail the stop loss to technically safe levels. He's reminded me "You don't know where price is going to get to." and "You don't take the trade off, you set the stop loss where if you're stopped out it proves you wrong."
This has made it so much less stressful, just following that advice. And price has gone up far further than I would have imagined - and of course imagining is not good when you're in a trade because imagining invokes emotions and we don't want to be led by those.
Having said that, I did in my last-but-one-blog talk about emotionally charging my rules to help me to stick to them better and this is generally helping me as it's adding weight to them and I feel that if I'm starting to ignore or downplay one of my rules then I'm ignoring a family member and this makes me feel bad.
The Gorgeous Girl trader I referred to in my last blog is also trying out this technique and is emotionally charging her stop loss by making it Tilly, her beautiful cat, because she feels so protective towards her pet.
And looking at Tilly (right)...well who wouldn't want to make sure she never comes to any harm?
And whoever said traders weren't imaginative?
He talks about cultivating the Internal Observer within you, that wise person who can be relied upon to be objective rather than rash and who it is possible to engage when you are actually feeling rash. Research has shown that we have two hemispheres to our brain and that we are often primarily functioning in one or the other. When trading we are often planning our trade from one hemisphere but then executing it from another, which is why when we look back at some of our trades we say "How could I have done that? What was I thinking? I was not in my right mind!" and we are speaking the truth, we really were not operating from our right mind.
Getting in touch with our Internal Observer helps to bring us back into our right mind - the objective and rational one that can see all the information, build a good evidence base for a trade (or against one) without bringing fear or greed into the act. Engaging our Internal Observer can also help us to stick with a trade when the evidence is still with us, or cut a losing trade when the evidence is against.
I've heard many traders, including my magnificent coach Emmanuel, say that trading well is like being a robot - and I think this is another way of saying that the Internal Observer has taken control and booted the emotional aspect into touch. This is not to say that emotions are of no use. As I have said in previous blogs, emotions generate warning signs which are helpful to notice and scrutinise, but they should not guide our actions. When we get an emotional signal that is the time to engage the Internal Observer and say "What would the wise woman within me think of this situation? What would she do?".
This helps get the rational brain back into play, looking for objective technical reasons to act.
Here's a lovely story from Brett's book which really demonstrates so well what I have found myself doing a few times and which I am gradually managing to overcome:
"Kurt was overtrading, trying to make opportunities when none were present. He would experience "seller's remorse" - he castigated himself for a poor trade. This then emotionally coloured his subsequent trading decisions....Kurt was trading simply to keep his seller's remorse at bay. By holding onto losing positions or by quickly entering new ones, he didn't have to think about what was going wrong. This temporarily made him feel better, but it wreaked havoc with his bottom line."
Isn't that so true? Getting into trades as a way of getting over trades?
I can remember two occasions when I did that repeatedly to the point where it felt like addiction. What was I addicted to? I think probably denial!
So what does Dr Steenbarger recommend? He explains that Kurt was also a successful golfer and "When he made a bad shot - which happens to all golfers - Kurt would focus on the next shot, rather than immerse himself in what had gone wrong with the past shot. By invoking his golf-challenge state of mind during trading, Kurt was able to treat drawdowns and losing trades the way he handled errant shots on the golf course."
He says: "It is helpful to meditate on past success to cultivate a winning mind-set...people consist of many little I's, many traders running around with different needs and impulses...by focusing on past successes and by placing yourself in the mind-set of another domain in which you are successful you can select the I's that will dictate today's trading."
I have started to invoke my Internal Observer who, I must confess, often chooses to turn to an imaginary Emmanuel sitting on my shoulder to ask for his advice. I will take the example of a recent winning trade I have on the yen (USD JPY).
 |
| Current long trade on USD JPY from Feb 7 2012 (4 hr chart) |
There have been a few moments where I've been tempted to take the profits and run on this trade because on the daily chart there have been some rather over extended bars followed by small reversal bars that can indicate a turn back down. But on each occasion I've felt tempted to do this I've brought my Internal Observer in by asking "What is the evidence to support such action?" and Emmanuel has appeared (in a virtual sense) and told me to just trail the stop loss to technically safe levels. He's reminded me "You don't know where price is going to get to." and "You don't take the trade off, you set the stop loss where if you're stopped out it proves you wrong."
This has made it so much less stressful, just following that advice. And price has gone up far further than I would have imagined - and of course imagining is not good when you're in a trade because imagining invokes emotions and we don't want to be led by those.
 |
| Tilly: Now working as an emotionally charged Stop Loss |
The Gorgeous Girl trader I referred to in my last blog is also trying out this technique and is emotionally charging her stop loss by making it Tilly, her beautiful cat, because she feels so protective towards her pet.
And looking at Tilly (right)...well who wouldn't want to make sure she never comes to any harm?
And whoever said traders weren't imaginative?
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