Clawing my way back to profitability

Bad Assed Trader:  OK, so the end result for the month of March was....break even.  Well actually I was 0.1% up but hey, what's a tenner between friends?  This was at least net after my broker pocketed a good amount of rolling fees and spread - a win win for the broker me thinks.  I certainly earned a lot more for my broker than I did for myself.

Am I disheartened?  Not at all.  It was a better outcome than January and February so I'm moving in the right direction.  I've come to terms with the fact that I almost undoubtedly need to return to faceless bureaucracy (unless I can come up with a more fun income generator) at least temporarily to take some of the pressure off my trading and stop the depletion of my bank account whilst there's still enough present to do all the things I have already planned or committed to do. A new car might be required within the next year after all.

So my time is now split between continuing to analyse the charts and trade and cast my critical eyes over the opportunities starting to re-emerge in our good old NHS now that the big bad Health Bill has been passed.

But today I'm in Bad Assed Trader mode and happy to report that after another wonderful session with my most amazing coach Emmanuel I am now adjusting my schedule to relieve myself of some of the time I had set aside for back testing and historical analysis.  Emmanuel tells me that I'm beyond that stage with my strategy and that I'm also sufficiently experienced to be able to add another strategy to my portfolio.  I have decided on an intraday strategy which I used to trade a lot.  But still following Emmanuel's advice to only trade the "stupidly obvious" ones.

EUR JPY Short trade 28 March 2012

So just to share one of my better March trades, here's a short trade I took on EUR JPY following my usual strategy.  Entry shown by top pink arrow, exit by yellow arrow (in charts on left) and stop loss marked by red arrow.
As you can see, I entered when price broke through a support level I identified at 110.30.
On the daily chart (on the right) we had a double top pattern with the second top marked by a high testish doji bar (a bar which looks like a cross with a long stalk at the top) followed by a reversal (red) bar.  This gave me indication price would go further down.  There was also diversion on the MACD indicator on the daily chart.

On the 240 (four hourly) chart (bottom left) price had made a lower high (the second of the double top which showed on the daily chart) with a large high test bar giving indication that price was testing that high and rejecting it quite forcefully) and on the hourly chart (top left) price had peaked with train tracks (green bar and red bar together in parallel at the top) - another sign of a promised move down.

As you can see, I had to sit through a whole day of retracement after my entry, waiting for my analysis to be vindicated, but it was.  I set my target just above the previous two lows on the four hourly chart which occurred on 22 and 23 March and I was right to do so.  Price troughed at 108.74 and my target was at 108.85 - what with the broker's spread I just about got that trade through by a whisker.  Just as well as price shot up the next day.

And now April looms. I have a couple of holidays planned but will be trading my way through the first one and hopefully my performance will continue to improve.

Well it keeps me out of mischief....

Coaching myself better

Bad Assed Trader:  OK, so it's time to own up and confess that January and February have not gone according to plan.  At all.

Just as I felt I had turned that corner I get two months of draw down. My earlier analysis showed it was to a large degree the way I was applying my strategy so I tightened up the way I was trading which has quite dramatically reduced the volume of trading I've done.  But I've repeatedly seen trades that I would have taken if I'd been a bit more flexible (usually in relation to the MACD indicator not yet diverging) then going the way I would have predicted which has caused some frustration.

Now I do know that frustration can be the name of the game in trading if you let it.  I know I have to accept that I won't get all the moves and that if a trade is not my set up it doesn't matter where it goes but I'm not quite there yet psychologically.  I'm still working on my resilience!

So I was, rather inevitably, feeling somewhat despondent.  Not just because performance wasn't going to plan - I understand that it's normal to get variable performance as a trader - but because I can see that the requirement to get a paid job this summer is now more of a reality if I'm to keep enough of my NHS redundancy cheque to keep trading and have the level of buffer zone comfort blanket I need for emergencies.

I'm coming out the other side of the despondency tunnel and have picked myself up, dusted myself off and decided to do some coaching of myself.  After all, what was the point of getting a diploma in executive coaching last December if I can't use the techniques on myself?

As I can't get myself into two different chairs and talking to myself seems rather odd I did my coaching as a written exercise.  Brett N Steenbarger (in "The Daily Trading Coach") always stresses that when you coach yourself you should be the same as if you were coaching someone else. That means being supportive and encouraging, drawing out the positives.  Not bashing yourself over the head and talking yourself down as we often find ourselves automatically doing.

I liked this approach, it felt much more constructive and I had a pleasant and productive session coaching myself through to an action plan and a revised weekly routine.

For anyone who is interested, I've copied the whole session below.  I've included my weekly routine because people have often asked me how I spend my days as a trader and now I can just refer them to my blog.

Self-Coaching

Coach:  So what are you looking for from our session today?

Bad Assed Trader: Well, I’m not achieving the level of success I want and I'd like help to work through that and come out with some clear action to address that

Coach: Tell me more about the specific areas where you want to improve your level of success 

I currently work from home which I love being able to do but am not earning enough money from doing so

How much more are you looking to earn? 

I want to be able to earn at least what I earnt from paid employment year from trading the forex. I have a trading plan with my goals clearly set out.

So what are you currently doing to achieve this?

I analyse the charts at least twice every day, all the main forex pairs.  I note what I see and set out the conditions that would need to be met for me to place a trade.  I have a strategy which I’m still developing and I wait for the rules to be met before I place a trade.  I analyse my previous trades and note whether I exactly met my rules or not.  I get coaching regularly and have two trading buddies for mutual support.  I watch seminars on forex trading regularly.

What do you feel is working well and what needs to change or improve?

I feel I'm spending too much time looking at charts for trades rather than looking back to see what has worked and what hasn't in the past and developing my strategy to reflect that.  I think I may need to clarify having 2 or 3 strategies for different market conditions so I can be more flexible.  I'm also not fully following a schedule I set out for myself at the beginning of January.

How would you like to shift that balance of looking at charts and developing your strategy?

I need to carve out protected time to do the analysis and strategy development, I need to review my schedule to build this in and to adjust it so that I'm more likely to follow it to the letter.

Is there anything else you need to do to help you to shift that balance and develop your strategy?

Yes, I think my motivation to develop my strategy will be increased if I work on my awareness levels and focus through mindfulness techniques

So considering these issues, what more can you do to improve your trading?

Thinking it through in a brainstorming way I suppose these are the things I can do to improve my trading:

1.       Learn to be more attentive to my thoughts and feelings and notice/exorcise negativity/fear and pessimism, also notice when I’m feeling frustrated and why and find ways to let it go – especially during trading

2.       Develop a clear and short mantra I can remember off by heart and replay regularly to myself through the day and before I go to sleep to remind myself that I can achieve this goal

3.       Use biofeedback to monitor my physical state and the optimum state for trading

4.       Model myself more closely on successful traders – think like them, act like them – by regular coaching with Emmanuel, watching seminars and really paying attention. This means making time to do that, making notes of specific points and reminding myself regularly to think and act this way.

5.       Analyse historical trades and reflect on the pattern of what works and what doesn’t and stick to this plan

6.       Find ways to access the resilience and power within me to stay positive and optimistic about improving my techniques and to read trading coaching books

7.       Get a real forensic grip on what works best through back testing and spend more time doing that than looking at charts – get a better balance

8.       Revise the training I’ve already had

9.       Work on improving my focus through mindfulness techniques – setting aside time to do this

10.   Make sure I go to the gym 3 times a week as this helps me maintain a positive outlook

11.   At the end of every week do a rain check on progress

Great - that’s a lot of things! Let’s go through each one in turn and in detail and work out what is involved, how much impact you think it will have on your trading performance and therefore how important it is to do soon. This way we’ll get a prioritised list which can form the action plan to make the performance improvement happen.

OK, I’ll set it out in a table:

	Action	What’s involved	How important /10
1	Learn to be more attentive to my thoughts and feelings and notice/exorcise negativity/fear and pessimism, also notice when I’m feeling frustrated and why and find ways to let it go – especially during trading	Use a technique similar to that promoted by www.marketpsych.com   which means whilst I’m analysing charts live I set an alarm to go off at random points.  When it goes off I have to write down what I am feeling, firstly physically then graduating to emotions and finally thoughts. This shouldn’t take more than about 15 minutes to prepare (get the alarm and a table to record the findings) I just need to integrate it into my daily routine	8
2	Develop a clear and short mantra I can remember off by heart and replay regularly through the day and before I go to sleep to remind myself that I can achieve this goal	Spend about 15-20 minutes composing something and memorising it	6
3	Use biofeedback to monitor my physical state and the optimum state for trading	Research biofeedback tools for traders and buy one then set it up.  I’m not entirely sure it will work but it’s recommended by various successful traders so I should try it.	5
4	Model myself more closely on successful traders – think like them, act like them – by regular coaching with Emmanuel, watching seminars and really paying attention. This means making time to do that, making notes of specific points and reminding myself regularly to think and act this way.	Put into the diary 3 x 1 hour sessions to watch seminars on the internet.  These will be Midweek Market Focus (K2A), Traders Corner Weekend Roundup and whatever I fancy off youtube. Book next session with Emmanuel and stick to regular times.	9
5	Analyse historical trades and reflect on the pattern of what works and what doesn’t and stick to this plan	Put into the diary 1 x 2 hour and 1 x 3 hour slot every week to analyse historical trades and reflect.	9
6	Find ways to access the resilience and power within me to stay positive and optimistic about improving my techniques and to read trading coaching books	Put into diary 4 x 1 hour slots every week to read recommended books on improving resilience and trading coaching.  Start with Tony Robbins and Brett N Steenbarger	7
7	Get a real forensic grip on what works best through back testing and spend more time doing that than looking at charts – get a better balance	Develop a back testing plan setting out which currency pairs I will test in what order and how. Put into the diary 1 x 3 hour slot every week to back test and reward myself for achieving the balance I need – for doing the historic analysis and reflection	9
8	Revise the training I’ve already had	Put into the diary 2 x 1 hour slots every week to revise the training I’ve had	5
9	Work on improving my focus through mindfulness techniques – setting aside time to do this	Put into the diary 1 x 2 hour slots every week to work through the neurosculpting programme and then other techniques to improve mindfulness and focus	5
10	Make sure I go to the gym 3 times a week as this helps me maintain a positive outlook	Put into the diary 3 x 2 hour for gym	8
11	At the end of every week do a rain check on progress	Put into the diary 1 x 1 hour review and reflection	7

  

Well done, we have a plan!  When will you start to put this plan into action?

I’m going to put the regular things (numbers 4-11) into my diary right away today and make them a routine.  I’ll start the first on the list tomorrow and will do the second before the end of today.  I’ll give myself two weeks to get the biofeedback set up.

What might stop you from achieving this plan?

A number of things but mainly family interruptions (including holidays) and procrastination on my part

How will you deal with the family interruptions?

By setting aside an extra 1 x 2 hour slot a week to carry out whatever tasks I haven’t managed to achieve during the routine scheduling and by making a note whenever I am interrupted as to what I need to do in that “contingency” slot

How will you spot and deal with procrastination?

If I find that I’ve failed to stick to my plan on any given day then unless it is due to an unavoidable family interruption that I couldn’t make up time on that day then I will label the cause “procrastination” and have to get up an hour or two earlier the next day (and all further days as necessary) to make up the time.

If I run out of time and find I have procrastinated on the higher priority tasks then I’ll immediately move them to the time set aside for lower priority tasks to ensure I get the important things done.

How will you reward yourself for sticking to this plan?

For every two weeks that I stick to the plan I will reward myself with a spa session including lunch.

So how is the diary shaping up?

Well here it is….

	6.30-9am	9-10am (Breakfast)	10am-12pm	12-2pm (Lunch)	2-4pm	4-6/7pm
Mon	Live trading	Read (trading)	Mindfulness training	And take shopping deliveries	Gym	Online trading learning & chart analysis
Tues	Live trading	Read (coaching)	Back testing	Back testing then lunch 1pm	Emails and blog	Family time
Weds	Live trading	Read (coaching)	Historical analysis	Historical analysis then lunch 1pm	Family time	Chart analysis
Thurs	Live trading	Read (trading)	Historical analysis	And read then gym 1pm	Gym	Contigency slot
Fri	Live trading	Read (magazines)	Contingency slot	Lunch with friends Read (papers)	Family time/emails	Weekly review
Sat	Rest	Read (papers)	Rest/gym	Gym then lunch 1pm	Family time	Online trading learning & revision hour
Sun	Rest	Read (trading)	Online trading learning & emails	Family time	Family time	Chart analysis

Before we conclude, would you like to review that balance of activities to see if it feels right for you?

OK, I’ll start with the time allocations relevant for trading:

Live trading (mainly chart analysis): 12.5 hours

Chart analysis (preparation for trading): 6 hours

Historical analysis: 5 hours

Back testing: 3 hours

Trading reading: 3 hours

Online trading learning: 3 hours

Coaching reading: 2 hours

Mindfulness training: 2 hours

Weekly review: 1 hour

Well what do you know…it adds up to a 37.5 hour working week, albeit worked in a very flexible way across the week.  That was not done deliberately!  I think that with the exercise programme, the regular reading and also family time put in that I’ve got the balance just right for me.  It helped that I was able to use a similar routine I’d put together for the new year as my basis and been able to tweak that according to what worked and didn’t work.  I’ve learnt now which are my most productive times and which time slots seem to melt away into nothing every week!

Do you see any problems with this that might lead you to lose heart?

Well, there will be weeks when I’m on holiday and can’t fulfil the routine but I suppose I just have to treat that as I would have when I’d been in paid employment – as annual leave.  Also, I haven’t factored in things like my coaching sessions with Emmanuel which are on a monthly rather than weekly basis and need travel time.  But I think I have enough flexibility built into the routine with two contingency slots and Friday lunchtime for friends which will allow me to add in those extras.

When will you review your progress?

At the end of April I’ll have a look and see how I’ve gone with this plan.  I’ll be making a record to chart progress so I can monitor my compliance.

Anything else we need to be aware of before we close this coaching session?

I think a little reward for me might be in order right now for getting this far…

Go for it!

Engaging the Internal Observer

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).

Current long trade on USD JPY from Feb 7 2012 (4 hr chart)

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.

Tilly: Now working as an emotionally charged Stop Loss

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?