How to Hold Yourself Accountable in Your Trading (Part 1)

05/11/2009 10:53 am EST


Timothy Morge


Some profits you cannot spend. They accumulate deep inside you and feed you when you are in need. They grow brighter and brighter and keep you heading down the good path in life. You cannot spend them; they are as necessary as sunshine and cool water and a caress from a loved one.

I spent a good period of my life concentrating solely on my career as a trader. I made money for myself and for the institutions I have traded for over the past 38 years, which include some of the largest funds in the world. For many years, I generated a tremendous amount in profits and those profits could be spent. I could spend them on clothes, on cars, on a new home, on traveling to new places, and doing anything I wanted to do. I could spend these profits, but they never seemed to matter much.

I recently wrote an article about a trader who e-mailed me regularly, and who lost all his capital because he refused to follow any coherent trading rules. He was a gambler, not a trader. But it saddened me that I could not help him. Four or five people who e-mail me regularly sent me messages asking if I was describing them, so I guess the lesson in that article touched quite a few people who have trouble mastering themselves. The more I think about it, the more I know deep inside that some lessons apply to all of us.

I have informally taught traders for about 25 years now. As a manager in a trading room or one of the largest traders in a multi-manager hedge fund, I often found myself helping traders younger or less experienced than myself. I never tried to make them into me, but instead, I watched them trade and looked for ways they could improve their own trading styles. And I always watched for traders who were having problems mastering themselves.

As my experience as a trader grew, I developed cues that I used to help myself when trading, little quirky affectations to help me when I was at my weakest. For example, to catch myself from reaching for a position that had a poor stop, I started writing out invisible checks in the air. The act of writing them out, though funny for others to watch, forced me to face the size of the potential stop loss before I entered the trade. I made it a part of my trading routine to always leave the trading room after I had closed a trade—winner or loser—to force myself to clear my mind of the emotions from the just-closed trade, and more importantly, to recover the focus I had just spent on that trade. Most traders who I worked with over the years just shook their heads when I wrote out checks in the air or when I got up and took a walk after each trade. But to me, they helped define my trading and kept me on track. And I passed these and other cues on to other traders around me who were learning or struggling.

About five years ago, a few friends at the Chicago Mercantile Exchange approached me and asked me if I would be willing to help some of the pit traders who were struggling making the transition from being floor traders to sitting in front of a screen, making trades based on charts and indicators. I spent a few months putting together a three-hour seminar, one that I felt would give these struggling traders some foundation materials and tools to help them find their way in the “off floor” world and also some strict money management and risk/reward guidelines, because “off floor” trading can be dangerous if you don't have strict rules in place (of course, you must follow your rules once you have them!)

These seminars were the original “Market Maps” seminars and they were an instant hit. In two years, more than 300 professional traders took the seminars and I unofficially mentored many of them for a good portion of that time, monitoring their trades and helping them with tips and cues when they ran into difficulties. The experiences with this first group of traders were priceless. These first two years of officially teaching others how to become better traders helped me crystallize what I knew, and as time went on, I began to learn more about what made me a consistently successful trader. And I learned how best to pass the teachable parts of what I do on to other traders trying to improve their trading.

One of the cues I build into the routines of all the traders I mentor is a simple corporate monthly meeting. The idea behind it is simple: Trading is a business, it's your business, treat it like a business. At the end of each month, the “shareholders” of your trading business (you!) must sit down and evaluate your results for the month:

  • Did you make money for the month?
  • How many trades did you actually enter this month?
  • How many trades did you try to enter but ended up not being filled on your entry order?
  • How much money, on average, did you risk each time you contemplated a trade, and what result did you expect in profits, on average, from these anticipated trades?
  • Of the trades that you actually entered, how did the average risk compare with the average profit?
  • What was your largest per contract loss?
  • What was your average per contract win?
  • What was your largest drawdown?
  • What was your win/loss percentage?
  • What was your net profits divided by your net losses?
  • What was the percentage change in the value of your trading account?

Once each trader has compiled these statistics at the end of each month, they can look for anything that looks odd in the statistics.

More tomorrow in Part 2. Part 2 | Part 3

Timothy Morge
"Master your tools, Master Yourself."®

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