So last week we looked at the 7 ‘meta-habits’ I believe are essential for effective trading.
1) Respecting that the market is never wrong
2) Trading for consistency instead of accuracy
3) Keeping your expectations realistic
4) Sticking at it!
5) Knowing when not to trade
6) Always position-sizing your trades
7) Taking the path of least resistance
Now much of that stuff is about what’s going on in your head. And I needed to cover those habits right up front because your first job, as a trader, is to introduce better habits for managing your ego-driven thought processes.
Or at least make a start on consciously managing them! I know it often easier said than done when you’re in the middle of a frantic trading session.
But this is something that tends to surprise newbie traders. They tend to look more towards the technical side of things in order to gain a competitive edge – finding the best trade entry patterns, or buying the most ‘cutting edge’ trading software, or whatever.
But trading really is a massive mind game.
If you think about it the technical side of trading boils down pretty simply… you find a pattern on a computer screen [identify a trading opportunity], you press some buttons on your keyboard [place and manage your order/s], you rinse and repeat over time, and as long as your strategy has a profitable edge you make money!
That’s all there is to it really. You could teach a 10 year old to do the technical stuff.
But, of course, once you introduce money, and all the emotions that bubble to the surface when money is gained or lost, it’s a completely different landscape.
Here’s one of the most accurate descriptions of trading I’ve heard…
Trading: a [mentally] tough way to make an easy living!
But if it wasn’t a little bit challenging everyone would be at it, right?
So if things don’t immediately feel ‘easy’ don’t be put off. Remember our rule 4 above: stick at it!
And make a start on getting the other meta-habits in place too. It’s the stuff that’ll contribute the most to your long-term success, I promise.
Start with those seven foundational habits.
And then follow up with two vital habits I have for you today.
The first is a daily ‘action habit’ I think you need to drop into place immediately. There’s a good chance you’re already doing it, but if not, you need to start keeping accurate records of all your operations in the markets.
And start doing it today!
The Record Keeping Habit: Improving and growing as a trader
You’ve probably heard the old saying “What gets measured gets improved,” and it is true you know.
When you keep accurate records of your activities in the markets it can really help you spot patterns in your performance. Your records will show you any areas of weakness. And they’ll also show you areas where you are naturally strong.
PROVIDING you keep accurate records. No conveniently leaving out any trades taken in error or other blots on your performance!
And guess what… once you can clearly see areas that need improving you can introduce small micro-habits that help you do it (more about them in a minute), or you can adapt your trading strategy in such a way that it completely steers around any areas of natural weakness.
And when it comes to your areas of natural strength, those are the areas to capitalise on. That’s where you can expand your strategies to make the most of your natural talents.
Why you need hard data
So say, for example, you’re looking through your records one day and you notice that the trades lasting many hours were the ones that challenged your discipline. You tended to get restless and fiddle around with your stop loss too early on these trades. You rarely captured the lion’s share of profits that were available and even took early losses on some of these trades just because they were dragging on too long.
The short term trades on the other hand, the ones that lasted an hour or less, were handled with perfection. You had no problem sticking to the strategy and actually performed better when things were moving fast and held your focused attention.
Well, instead of fighting the tide (remember rule 7: taking the path of least resistance) you might tweak your trading campaigns to focus on your true strengths: the short term fast trades.
You might adapt your strategy in some way so that it actively seeks the shorter term opportunities and culls the slow boiling trades, one way you could do this might be to introduce a ‘time stop loss’: you exit all open trades at the 60 minute mark or something like that.
Anyway, tweaking and streamlining strategies is a job for another day, but the point I’m making here is that you’ll only see the areas to work on if you have the hard data – your records – to hand.
What records to keep? Here’s what I suggest…
You keep two main documents: a Trading Journal, and a Record of Results.
The Trading Journal: this is a creative and organic record of the actions you take during the trading day. It’s also space to record your observations and feelings experienced during the day. Probably best to do this with pen and paper. Have a nice notebook open on the desk next to you so you can quickly jot things down.
The Record of Results: this is a clinical and scientific record of all your trading activities. Probably best kept as a computer spreadsheet: entry price of the trade, exit price, reason for exit, record of profit or loss etc. You can lift the information from your trading journal to fill in your record of results at the end of each trading session. This data set will become VERY useful to you over time.
I think record keeping and using the data to improve your trading probably deserves a full session in its own right so I will cover this in more detail in a future eletter.
But for today, start keeping a good record of the things you do. Once you have this information captured it can’t go anywhere and we can get to work on analysing it soon.
Micro Habits: the day to day tasks of trading
Ok, a quick status check…
You’ve got the 7 meta habits to work with, and you’ve now also got the record keeping habit to put into place (if you weren’t already doing it).
The next thing we need to do is look at making habits of any individual tasks you need to complete as part of your trading processes.
Here’s how I do it…
- Have a clearly stated goal for the behavior you’re trying to make a habit of.It might be something like “Every weekday, after the NY close, I will scan the daily charts of all commodity markets looking for potential reversal patterns. I will clearly write instructions to myself for any entry orders I need to place at the next day’s open and execute those orders without hesitation”
- Plan any “one-off” steps you might need to take in order to get your habit in place and then take appropriate action. This might include things like:
a) Subscribe to new data feeds so I get real-time quotes on the grain markets
b) Set up a new page on my chart software so I can click through a list of relevant markets quickly and easily
c) Create and keep a document next to my computer that lists the criteria of the valid reversal pattern I’ll look for
d) Create a new spreadsheet to record my entry instructions e) Create a new spreadsheet to record my trade records
- Plan your lead-in actions steps. This could be something like “At 22:00 every evening I’ll load up my charts, lay out a notepad and pens on the desk and put some relaxing music on. I’ll then sit down ready to work on my analysis uninterrupted for the next thirty minutes”.
- Plan the habit itself. This obviously depends on the particular method or strategy you’re using. For the example we’re using here (daily reversal patterns in commodities) it might be something like:
a) Load up a full-screen chart of the first market on the list
b) Look for proximity of price to existing support and resistance levels
c) If S&R is touched, check for presence of a valid reversal pattern
d) If S&R was touched, make sure potential risk to reward is at least 1:3
e) If criteria b, c and d were present, make a note of the intended entry price, target price and stop-loss price ready for trading tomorrow
f) Update any new support and resistance levels
g) Move onto next chart and repeat until all markets have been analysed. Aim for completion within 30 minutes.
- Plan your post-habit action steps. This is the winding-down, tidying up period. It might go something like:
- a) At 22:30 take a ten-minute break to clear my thoughts
b) At 22:40, re-evaluate the intended trades I have made notes on. Do they all still look like valid opportunities?
c) Type all vetted entry orders into my spreadsheet ready for trading at tomorrow’s NY open.
d) Save all spreadsheets and charts
e) File my paper notes in ring binder
f) Switch off computer
Phew, that’s quite a lot of stuff to think about, but don’t dismiss how important your trading habits are. After all, you become what you repeatedly do.
So make a start on your new trading habits today and I’ll catch up with you next week.