I was recently helping a trader that has been going around in circles for the past 2 years. Essentially the cycle is as follows:
He trades well and, given his technique, is able to generate decent returns given the higher frequency of trades;
Then, he starts to be less cautious and even if his initial idea fails, he throws more money at the market trying to get into the same idea.
Then, he starts to over-trade dramatically and all caution is thrown to the wind. Various accounts have been decimated like this in the past 2 years.
Then, he slows down and “forces himself” to trade less, be cautious and refrain from the bad habits.
However, this “self-control” only lasts for a short spell…and the cycle starts again.
There is only one way to get out of this cycle and it has nothing to do with trading: it is called Self-Awareness.
“Awareness” broadly means the capacity that a person has to perceive reality and one’s own self, and reflect upon it.
Human beings have this special gift that other creatures don’t have. Self-awareness is the only true antidote against automatic responses, automatic behaviors and lack of observation, which is so common nowadays.
During our days we are more often than not on autopilot, adopting automatic responses that come from who knows where. Our society is dedicated to “action” and we’re all more human doings than human beings. So, we are not used to using our self-awareness, paying attention to detail, discerning one situation from another.
Less self-awareness has some less evident effects: it leaves us much more prone to negative emotions and negative stimulus because all around us there is an abundance of negativity, and we need to really look for that silver lining. Also, without having a strong awareness of yourself and your surroundings, you will be prone to seeking satisfaction in the physical realm: buying things, thinking your happiness depends on achieving some kind of object or material possession or career improvement (this is called hedonsitic adaptation).
Self-Mastery is Key for a Trader
There are few careers out there where self-awareness and introspection are more relevant or a greater determinate of long term success than in trading.
The fact is that setups can be learned; risk management can be learned; trading rules can be learned…so the weakest link in the whole chain is really the human component. Just like the trader in question: he knows what he needs to know; he has the technique to do well…but he just can’t act in a mature manner. He attempts to repress the impulses he has, but it doesn’t help. Being self-aware does not mean breaking free of emotion or impulse. Self-awareness means that we become mindful observers to those emotions and impulses: we acknowledge them, but we do not act upon them.
Every experienced trader will tell you the same thing: after mastering a functional day-to-day routine, the intangible aspect of trading comes to the surface: how you go about managing yourself and your contribution to the process.
Failure to become a keen observer of your own thoughts, emotions and actions will simply keep you spinning around in circles.
One Key to Success: Journalling
One of the absolute essentials to achieving self-mastery is journalling. Here is what you will need to journal:
your physical and psychological responses to the markets over time.
Your thoughts, emotions and actions will tell you a great deal about yourself, your fears, your frustrations, your automatic responses…and will allow you to paint a detailed picture of how you react under varying conditions.
When markets are quiet, do you record feelings of frustration, finding yourself sifting through charts looking for action, or looking at new instruments out of boredom, or magnifying moves on the 1 min chart to create the illusion of movement? This is somewhat similar to a person standing in a line that has to constantly check his phone.
When markets are moving fast do you feel a heightened sense of excitement, lack of proper focus or fear of missing moves? Possibly, you’re no longer paying attention to the markets…you only see $-signs moving up & down all over the place and all your pre-trade planning gets thrown to the wind as you chase after money. This is exactly how most retail folk act. No planning, no awareness. Just jumping into the action.