@Andrew_Menaker

Although I don’t know this trader, it seems that the underlying question might be, how can I be more comfortable taking appropriate risk? Where the trader is probably hesitating to put on appropriate trades and size and having difficulty holding onto trades and getting out much too early as a trade that’s working is possibly temporarily stalling.

First, let me dispel a major myth in trading. The idea that accruing hours on the screen, the 10,000 hour rule, is not enough. Although more experience is generally a good thing, it’s not simply the quantity of hours, it’s the quality of the time spent in front of the screen. I’ve seen many traders spend lots of time in front of the screen and never improve at all.

The idea of mechanically taking only A+ set ups to build confidence is certainly appealing. But I sense that this trader has difficulty entering into trades in the first place because of their question about being afraid to lose; they sound overly risk-averse.

The first thing that this trader needs to understand is that the nature of true self-confidence for a trader is resilience in the face of disappointment. Not all trades work. I suspect this trader may understand this concept on an intellectual level, but it takes more than an intellectual acceptance of potential loss. One of the reasons I’m pointing this out is that for many traders their confidence is a function of their most recent sequence of trades. If the trades went well their confidence goes up and if the trades did not work they feel less confident. So, how does this trader develop resilience in the face of disappointment?

There are many different approaches within trading psychology. And very often things like mental rehearsal and visualization, journaling and reviewing trades are not enough to change one’s behavior.

And the advice of plan the trade and trade the plan with a focus on A+ set ups may also not be enough.

“Plan the trade, and trade the plan!” is perhaps the most common advice given to traders. As far as advice goes, it’s well meaning, but unfortunately falls well short of addressing the actual problem most traders actually face.

Looking at the advice, it has two parts. The first part says you need a plan. No argument there—only take A+ setups. But the second part, about executing the plan, that’s where the problems appear. Why?

The two parts to the advice “plan the trade” and the “trade the plan” require two very different skill sets. Without understanding the different skills required, it’s highly likely that the trader will continue to regularly veer from the plan.

Here’s the disconnect. Planning the trade depends on your intellect. And most of the time, the development of the plan does not occur in the heat of battle. It’s relatively easily to let your intellect guide you, to be the primary driver when you’re not in the heat of battle. But in the heat of battle when we have to decide right now whether to enter or exit, an entirely different situation occurs.

At the time of execution, no longer are we cool, calm, and collected. Now, a whole slew of things enters the picture—and many of these things are subconscious to a degree. Our feelings about our P&L, our feelings about our performance, or concerns about how we appear in the eyes of others, etc.

And no matter how smart you are, how much you believe you are not an “emotional person”, modern brain science is telling us emotions, including subconscious emotions, are very much a part of our decision making that leads to actions whether we realize it or not. Viewed this way, you can see why the typical advice to “plan the trade and trade the plan” may be well intentioned, but ineffective.

Because of the fact that traders are human and emotions are a part of trading, we can not operate like a robot. Some of the best traders I know, including some of the best traders in the world that I’ve worked with are very emotional. The difference is that they are able to control their actions despite being uncomfortable. How we respond to discomfort—the action we take—will define us as a trader.

If mental rehearsal and other similar techniques don’t result in behavior change, this trader would benefit from actively working towards expanding their ability to tolerate discomfort. And the first step in doing this is to develop a deep level of self-awareness.

Very briefly, what I mean by expanded self-awareness is:

1) The recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying).

2) Much of our motivation—the intertwined thinking/emotion that drives our behavior—is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L (and what our P&L represents to us) is just one example.

3) When we understand the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.

The bonus that comes with this approach to trading psychology is that increased self-awareness leads to increased market awareness. This is one of the building blocks of intuition for a trader.

Andrew Menaker PhD

Related blog posts:
Some Help for the Impatient Trader
Why Do I Trade Worse on Monday?

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