Sports-Inspired Tips Any Trader Can Use

05/04/2012 2:00 pm EST

Focus: TRADING

Gary Dayton

Founder, TradingPsychologyEdge.com

Pro athletes achieve peak performance using a three-part approach that stresses preparation, execution, and review, says Dr. Gary Dayton, and traders can benefit from a similar formula.

There can be a lot of correlations made between athletes and traders and how athletes use routine to increase their performance. Our guest today is Dr. Gary Dayton, and he’s going to talk about how traders can do the same thing. So Dr. Dayton, talk about how a trader can be like an athlete in this respect.

Certainly there are differences between sport and trading, but top athletes use a routine that I think traders can benefit enormously from.

The routine is a simple one. It’s three parts: preparation, execution, and review. You can think about it like before, during, and after.

Before a competition, athletes prepare well. No top athlete would ever think about setting foot on the playing field without a lot of preparation beforehand.

They are studying their plays and practicing them; they’re studying their playbook; they’re even looking at their opponents and understanding their opponents’ strengths and weaknesses and what their tendencies are in certain game situations.

Well, traders can take a cue and prepare as well. Study the charts, know where your support and resistance lies ahead of time; know if there’s news coming out that might move the market that day; have a game plan for the trading day.

That’s a critical thing, to have a game plan, but then go even beyond that. If the market is trending—and right now, we happen to be in an uptrend, so look at other previous uptrends. If we have a low-volatility situation, look at those low-volatility situations and get a sense of how the markets traded in the past.

Also, when they start to depart from that norm, knowing that and being able to see that in real time offers great opportunities for a trader. So that’s preparation.

When athletes are in competition, they’re executing their playbook, they’re monitoring their opponent, and they are making their plays and adjusting if necessary. Traders do the same thing. When we’re in the middle of trading, that is not the time to be figuring out where weekly support is or whether news is coming; that’s our preparation. Our job is to monitor the market and execute that game plan.

Keep in mind that the game plan is a guideline. If the market is trading according to that game plan, you’re going to be able to pull the trigger at the right spot with confidence. But if it’s not trading in accordance with your game plan, you’re going to know that, too, and it’s going to keep you from holding onto a market bias when you shouldn’t be.

Then, after competition, athletes review. They’re looking at what they did well, where they came up short, and what they need to do to improve themselves. It’s not a time to get down on yourself or to beat yourself up. For athletes, the review is a good time to learn where they have fallen short so that they can improve their skills.

The same with traders. After the trading day, let’s review our trades. Also, review the market; how did it trade, what can we learn from that, and review our performance. Where did we perform well?

That’s something valuable and we can count on that in the future. Where did we fall short? That’s valuable, too. We may want to sweep that under the carpet, but I encourage you to take that out and look at it carefully.

If we’ve fallen short, that is the time to lay out some steps that we can take to improve ourselves. That then becomes part of preparation, and we go through the cycle all over again.

This is the way we become not just competent, but perhaps even great traders.

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