Getting Out of Your Own Way When Trading

02/12/2010 12:01 am EST


I want to direct your attention to the most powerful technology for producing positive changes in your trading. What’s that? No, this is not a ”whiz-bang” indicator or new method. Each of us has this, but few invest the time or manage this properly. What is it?

It is our minds!

That six-inch space that rests between our ears that leads and directs our every action. Everything you do in your trading every day starts as a thought! And I’m here to tell you after working with traders for over 14 years, it is simply a game changer when managed properly. Let’s look first at how we can optimize our minds through trading state management.

What Is Trading State Management?

State management is essential to successful trading. What do I mean by “state management?” Quite simply, state management is handling the recent trading events that can affect your trading state of mind. State management focuses on the notion that how you feel affects how you perform. Losses can make it harder to execute entries because you break exit rules and stop placement rules. Winners can take you on a euphoric ride of “I am supertrader, hear me roar!” and lead you right into an impulse trade—death trap. This death trap can spiral faster than a politician retracting a provocative statement!

Your “state” refers to the psychological-emotional frame of mind and even your physiological condition. After a losing trade, do you find that you are slumped down in your chair? Is your breathing shallow? What about your internal dialogue? Is the dialogue defeating and negative instead of positive and supporting?

Think right now for a second about your internal dialogue. That dialogue is the little voice that reprimands you after losses and tells you after the trade what you should have done differently! We can question our actions on every trade when it’s over, however, these questions are not very constructive.

When was the last time you followed the rules of your trading system every single day for a solid week? What’s that? You don’t have a system? No trading plan? You need a structured series of “If this, then that” statements, which help bring quantifiable organization to what you do in the markets before risking your hard-earned capital.

When I bought my first system, I was thrilled after seeing the back-tested performance. I calmly ran test numbers in my spreadsheet showing that I had easily increased contracts. By the end of the year, I was visualizing paying cash for that Benz I’d been slobbering over. Yet, I was crushed when after just one week, my real numbers didn’t look anything like my tested numbers!

Of course it was the system, the markets, the Fed, my broker, oh, and also my dog that caused all of this and not me! I quickly found those were all wrong answers and I didn’t follow the simple rules. I started asking why I jump out early, trail stops too tight, and skip trades completely, which keep changing the course of my research. Here is what I found:

The combination of the internal dialogue and your outward physiology all absolutely affect your decisions regarding the next trade setup, and thus, your ability to execute your trading plan. Knowing this information places you far ahead of the game. When you are aware of something in your internal dialogue and physiology, you are able to address it, making the appropriate and necessary changes to affect positive outcomes.

“We are the living embodiment of our consistent thoughts.”

NEXT: Control Your Emotions for More Consistency and Success


Why Is Trading State Management (TSM) Important?

In the most obvious terms, managing your trading state will dictate the consistency in your trading. Whether it is consistency of execution, pattern recognition, equity growth, or positive mental health, TSM will put you in control over your emotions. These emotions have the largest impact on trading consistency. Remember, the most powerful trading system out there is useless in the hands of a trader who chooses not to follow the rules!

The Most Important Element Is You

Your ability to recognize this as fact and then actively work to manage your trading state will be directly correlated to your long-term success in any market and in much of day-to-day life.  Working with traders for the last 14 years—from the newbie to the three- to five-year veteran, proprietary trading firms, and hedge fund traders—I have seen convincing and unmistakable evidence that those who accept these concepts have a significantly higher probability of long-term trading success when compared to those who continue the search for whiz-bang trading system #18.

Facts to Ponder

Jack Schwager, after writing two books (Market Wizards and New Market Wizards) in which he interviewed some of the world’s top traders, (36 of the interviews made up the two books) made the following statement at the end of book two: “Time and time again, those whom I interviewed for this book and its predecessor stressed the absolutely critical role of psychological elements in trading success!”

When asked to explain what was important to success, Jack says, “The market wizards never talked about indicators or techniques, but rather about such things as discipline, emotional control, patience, and mental attitude toward losing.

The message is clear:  The key to winning in the market is internal, not external.”

Need more proof?

Ed Seykota, an industry-recognized trader and lecturer, once taught a college course in trading that lasted ten weeks. He spent the first week of the class teaching basic information about trading. He spent another week teaching the class Donchian’s 10-20 moving average crossover system.

However, he needed the remaining eight weeks of the class to convince the students to use the system that he had taught to get them to work on themselves enough to accept the losses that it (or any other good trading system) would generate. So, we have concrete evidence from over 40 traders who cumulatively have earned billions of dollars in this business that we pursue every day telling us clearly that long-term success in the markets is internal.

Yet, we as traders continue to invest our time and energy looking for the holy grail of trading, going from live trading room to live trading room and searching continuously. What if we just stopped the insanity and listened to the obvious message from those who have done what we seek to do? They didn’t have a little success, but rather huge and sustained successes!

That speaks volumes and puts me on a different path, which changed the way I view the markets and trading.

By Todd Brown, trader and systems developer, Triple Threat FX

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