Learning from Your Mistakes

Guest contribution by Steve Ward who gives his insight into trading psychology; in particular how to avoid repeating behaviours that are not useful in trading such as chasing losses, impatience, and taking profits too early.

Scrooge-like weather forecaster who spends the night in Punxsutawney, Pennsylvania, where he is to do a broadcast the next day about the annual ritual of the coming out of the groundhog. He wakes up the next morning, does his story and is annoyed to discover that he is trapped in Punxsutawney for a second night because of a snowstorm that comes in after the groundhog ceremony. He wakes up only to discover that it is the morning of the day before, and throughout the film he is forced to live the same day over and over, before finally realising that only by changing his ways can he break out of the repetitive cycle.

In trading it is not uncommon, in fact it is often all too common to have ‘Groundhog Experiences’ – to repeat behaviours that are not useful such as chasing losses again, not being patient enough again, running a loss too far again, taking that profit too early again, and so on. These episodes are frustrating and highlight one of the big challenges in trading successfully which is moving from ‘knowing what to do’ to ‘doing what you know’.

So how do we get out of Groundhog Day?
How do we do what we know we should?

There are three steps to making an improvement in your trading performance:

Step 1: Awareness

The first stage is to get an awareness of ‘what is happening?’ – noticing your behaviours and the results that they get for you.

One of the most powerful and important tools for helping you to develop this awareness is to record your trades and keep a trading log/journal. When you write things down it activates thinking at a different level and is a much more focussed process than purely thinking about something in your head alongside the other 50,000-60,000 thoughts you had that day. A trade log also enables you to engage effectively in the second part of the process – reflection.

Step 2: Reflection

Step 2 is all about trying to understand and makes sense of what you are doing.

Reflection is a process of evaluation and of assessing your trading decisions. I would encourage you to think about your trading performance in three dimensions – thinking, feeling and doing. We all too often focus on what happened but the really important information is in being aware of and reflecting on what you were thinking and what you were feeling at the time as these are often the drivers of our behaviours. It is important also to begin to consider the motivations behind your behaviours – why are you doing what you are doing?

One bank trader I coached last year saw a huge impact on his trading performance through spending some time each day reflecting on his trading decisions, the states he was experiencing, and what the market had been doing. It helped him to develop a greater understanding of his trading and to importantly to develop confidence in his approach.

Key questions to ask yourself are:

  • What is happening?
  • When is it happening specifically?
  • What am I feeling before and during it happening?
  • What am I thinking before and during it happening?

Step 3: Control/Change

This is all about doing things differently. Performance improvement in trading is largely down to doing some differently, to making a change in some area, maybe in your thinking or how you feel, or the tasks and activities that you perform.

Some key questions to ask yourself are:

What would I rather be doing instead?

This creates a positive focus on what you want instead of your old behaviour – so for example if you were overtrading, you would now be ‘being patient and selective’. Note the focus on the positive and not on ‘not overtrading’. Negatives are not processed by the unconscious mind and consciously acting to avoid something can create unwanted stress and anxiety. It is also impossible to not think of something you have been told not to think of… DONT think of a pink elephant.

What are the benefits of doing things in my new way?

This question is designed to elicit some of the reasons, the motivations for change and focussing on the benefits creates a positive direction to head in. Change without sufficient motivation will not happen.

What action will I take?

What will you do, think and feel to create the result you want. Often people focus on just trying to do the action, without understanding the importance of also ‘talking the talk’ and also getting the feel. Remember performance is three-dimensional. If you want to stop running losses then you need to activate the appropriate thoughts and feelings to be able to trigger the required behaviour. If your thoughts and feelings don’t change then the behaviours won’t.

If you want to move forward with your trading and maximise your profitability then awareness, reflection and change are going key part of that process.

Keep a log of your trades, review your regularly and reflect on what is happening why, and then take action on it. Repeat.

Happy and profitable trading.

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