How to Become One With Your Trading System

We’ve all heard the sad excuses after a bad run. The lame rationalizations.

“I know it was through my stop, but I thought that it would come back”.

“Yes, I saw the signal, but I just didn’t believe it”

“I don’t know, I just froze”

When someone is struggling, one way to lessen the pain is to rationalize it away. That’s understandable. After all, no one wants to wallow in pain and suffering anymore than necessary. But these sure are annoying to listen to.

If a friend or colleague is struggling and in a bad place, then the last thing anyone wants to hear from them is some BS. What’s even worse is when we catch ourselves making these excuses. We all have our ups and downs but we still have to take full responsibility. So just man up, be mindful of what you’re saying and you’ll be fine, right?

Unfortunately, it’s a bit more complicated than that. If someone just blew up, then a large part of the reason probably *is* because he “froze” and didn’t stick to his plan. While one part of him “knows” what to do, he can’t get on board fully with doing it. Theoretically, he has a plan—but when push comes to shove, he doesn’t follow it. There is a great example on the SMB site entitled “Trading Is All Psychology”.

What’s the solution? It all comes back to my favorite question, “How?”. This is both a technical question about your strategy and a psychological question about your mind. First, you need a trading system that works. Then, you need to believe in it to the point that you become one with it.

Put another way, you have a strategy that you want to follow. You’ve probably researched it and tested it and everything seemed fine. Deep down inside, though, you don’t believe in it so you don’t follow it all the time. Why don’t you believe in it? What would it take to convince you on every level?

As Brett Steenbarger so eloquently describes in his book, Enhancing Trader Performance, most trading problems that people ascribe to “poor psychology” are *not* psychological problems. They are actually trading problems. For instance, imagine that you put on a position that’s sized five times as big as it should be, then get freaked out and close it an inopportune time. Of course you got scared and panicked—you were taking too much risk! Thus, the first step if you’re running bad is to make sure that you have a strategy.

Next up, you want to make sure that you have thoroughly researched your strategy and tested it in the markets that you’re trading. You should have an idea of how it will perform in all market conditions and environments. Go back as far as the data will permit and really dig through every single setup and trade that you would have put on. Is the strategy working in your target market? Does it adhere to all of the basics of good trading—having a discernible process, cutting losses, letting winners ride? A good trading system has to be grounded in solid trading fundamentals and in the specifics of the market(s) you’re working with.

How much will you make in an average year? What’s your maximum drawdown? Tinker with it until you are confident that it works all the time and that it suits your own personality. If you are an economist by trading and try to day-trade, the backtest may show phenomenal results—but it’s not suited to your personality so it will be difficult for you to stick to it. Ultimately, you need something that works and works for you. Otherwise, you won’t believe in it.

Furthermore, do these fit with your goals? For instance, if your goals are to generate wealth long-term by compounding at 10% per year with very small drawdowns, then a system that makes 12% per year but could have a 30% drawdown will not work for you. Ultimately, you won’t trust it and you won’t follow it. Your results will end up being all over the place. Get really clear about your goals and whether or not your strategy fits in with them. If your strategy doesn’t fit with your goals, then change your strategy until it does.

Next, you will want to document your system somehow. First off, you will want some kind of philosophical statement, like a set of rules that govern your actions. As an example, it could be your philosophy on markets or your P&L and risk/return goals. A good example is Dennis Gartman’s Rules of Trading, which cogently present how he thinks about the world of markets and explains in broad brush strokes how he tries to do things. You will want some documentation of how you intend to put on and take off positions day-to-day. It should cover the basic steps of managing a book:

Evaluating the markets
Finding potential setups or entry points
Getting into positions, including sizing
Managing positions, including sizing and risk management
Getting out of positions, including stops and take profits
Overall risk management, such as when to take overall risk up or down

The purpose of this is two-fold. One is to have a crystal clear idea in your mind about what you’re doing. After all, if you can’t write it down, then you probably aren’t clear! Second is to keep you honest with yourself. When you are putting on a trade, or when you are reviewing your recent performance, you want to make sure that your trade rationales actually followed your process. If it’s what you say you do, and what you’ve tested that works, then you should want to stick to it. The written trading plan functions as a sort of checklist—if you’ve tick the boxes on a certain trade then you’re probably on the right track.

You may consider this approach a bit boring or clinical. You’re probably right. Where is does help you is to detach from the emotions that can spring up in trading, which is a good thing. By focusing on sticking to the plan and executing your checklist, you are reframing the game. Now, instead of having to worry so much about your positions, your P&L and your emotional state without a clear idea of what to do in any given moment, now you have shifted your focus more to making better decisions—the heart of good trading. By being a bit more emotionally detached and trying to stick to your system, you are reinforcing the odds that you stick to it and you are subtly reaffirming trust in it—which raises the odds that you will stick to it.

Having a plan, we have done a lot to convince ourselves of its validity and to reinforce its decision-making. We have addressed the trading considerations that come up. Now, we are going to tackle the psychological issues.

Visualization Exercise

When we have a system, our task becomes getting our psychological makeup to believe it fully. What we’re going to do is to imagine the ideal trader, one who always has a plan and sticks to it; one who stays calm and resourceful, even when under pressure; one who is successful and happy about that success.

The first part of this is identifying exactly when we were in our most resourceful state ever when it comes to trading. The famous psychologist Mihaly Csikszentmihalyi called this “flow”, when you are completely absorbed in an activity and distractions just seem to drop away. Athletes call it being “in the zone”. Recall a time when you were clear-headed, relaxed, completely absorbed and feeling totally ready for the markets.

Maybe you haven’t experienced this kind of state in relation to your trading. Maybe you’ve only encountered “flow” in the context of athletics, where you became totally absorbed in the activity. Nonetheless, this is a good analogue for what you want to achieve in trading: immersion, brisk decision-making, an absence of internal “chatter” interfering with your performance. It could even be from school, where you prepared well for an exam and you just sailed through it effortlessly. The key is to find a period of peak performance and effortless, spot-on decision-making that you would want to replicate at any given time.

Next, you want to imagine an Ideal Trader version of yourself. This will be a combination of the calm, confident, “in-the-zone” you that we just recalled and also of an imagined you—one who is and always has been completely process-driven, trusting his strategy and detaching from harmful emotions; one who always knows the right action to perform; one who methodically executes his strategy, in good times or bad; one who has the confidence that comes from decades of experience, success and huge profits.

Get in to this representation and really feel it. This Ideal Trader is who you would want to be if you had could design the perfect trader from scratch; it’s exactly who you would want to be after 30 years of trading experience. Think about how you would look; how you would act; how you would feel. What you would do every day in the markets? What would success look like? Importantly, if there are any objections that you envision, just let them drift away slowly. Let them pass.

Now that you have identified your Ideal Trader self, then you want the necessary tools to draw on that state whenever you need it—which would be pretty much any time you’re trading! That way, you will have the tools to reverse any unresourceful emotional states and any doubts. That is exactly what we are going to practice now.

The series of steps:

Get nice and relaxed, preferably in a sofa or a good chair. Do not do this in bed—you don’t want to fall asleep!
Breathe in and out deeply and get into a slow, deep, comfortable rhythm
Reconnect with your experience of being in the zone. Go back and remember what you felt like, what you seeing and hearing. It could be that you were hearing nothing – that’s ok as well. Get to know in detail all of the various feelings of that experience. If you think that something could still be better, then tweak that experience by varying the representation of some parts of the representation to alter their emotional impact
Now, take the representation of the Ideal Trader and combine it with the “in the zone” feelings. This is basically the best version of you connecting with the Ideal Trader. Blend those two together, so that you can really fell what it would be like to be the Ideal Trader at the top of his game, in the midst of peak performance.
While experiencing that state—we will call it “Ideal Trader You”—imagine yourself but with a big circle underneath. See yourself standing above that circle, experiencing the feelings and experience of peak performance. Make that circle big, brightly-colored, pulsing with some kind of light – like in Star Trek—just so that it’s clearly delineated and stands out in your mind.
Now see your body stepping out of that circle, but leave all of the feelings and experiences within the circle. That way, the feelings and experience have become separate from “Ideal Trader You”. From now on, this state will be accessed just by stepping into the circle.
Imagine yourself in a trading situation where you want the characteristics of Ideal Trader You. For instance, starting your day out the right way or trying to keep your cool after a couple losing trades. Imagine you, with all of your trading knowledge, desire to succeed and experience. We will call this “Trading You”.
Imagine Trading You stepping into the Ideal Trader You circle. Connect with those feelings and experiences of peak performance, and how they would boost your trading. Imagine Trading You as an elite performer, executing his strategy flawlessly and successfully, absorbed in the flow of trading, feeling good about it.
The next step is to set this up for use any time that you want. Step out of the Ideal Trader circle, and return to being just Trading You. Choose a trigger for the experience of Peak Performance—it could be a phrase that you say to yourself, like “Get in the zone”, or a simple gesture, like tapping yourself on the back of the hand twice. Use your trigger and step into the Ideal Trader You circle. Now step out, returning to Trading You, and fire the trigger and step into the Ideal Trader You circle again.

10. Repeat a few times—you should be able to access the Ideal Trader You state whenever you desire.

The idea is that if you do this frequently enough, then your brain will start to reinforce subconsciously all of the characteristics of the Ideal Trader—the very things that you want to encourage. By merging your daily behavior with that of the Ideal Trader, your brain is getting signals to take on those desired characteristics and traits and to overcome any objections that you might have had. This is the way to get your mind fully on board and to become one with your trading system.

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading