Mastery of Trading Psychology

Table of Contents

• Mastery of Trading Psychology
  • Focus on Process
  • Peak Performance Mindset
• Consistent Application / Review and Improvement

Mastery of Trading Psychology

A negative mindset, and poor trading psychology, does not directly lead to failure. There are a couple of steps in-between. A negative mindset, and its associated focus on fear, will result in poor decision making in an attempt to protect us from that fear.

This poor and inconsistent decision making leads to inconsistent application of our plan. And it is the inconsistent application of our trading plan that leads to trading failure. The process of changing our mindset from one of fear to one of confidence and self-belief will take time.

While this is occurring we therefore need a plan to manage our decision making process, to ensure that any negative thoughts or emotions have minimal impact on our trading decisions. Providing us with the maximum opportunity for consistent application of our trading plan despite our fears.

• Our solution involves 2 main components:
  1. Focus on Process
  2. Peak Performance Mindset

Focus on Process

In this component we aim to maintain our focus on the process of consistent trading, rather than on the fear or greed associated with the possible outcome of each trade.

• We aim to achieve this focus through the following tools and techniques:
  1. Documented procedures (pdf available on website below this article)
  2. Daily process goals
  3. Consistent Application
  4. Review and Improvement

Documented Procedures

Our procedures manual provides standardization and consistency in our daily
routines, in order to minimize impulsive or unplanned behavior.

Daily Process Goals

• There are many widely recognized benefits of goal setting, if used correctly:
  • It provides clear direction, both long-term and short-term;
  • It provides motivation in the short-term; and
  • It provides a benchmark against which you can measure your performance, allowing you to identify and celebrate your successes, and to identify and correct areas of poor performance.

The purpose of this article is not to explain in detail the theory of goal setting. If you wish to do more study in this area then do some research on goal setting as it relates to sports psychology.

The end result of this study though is the discovery that process goals are vastly superior to outcome goals.

• The difference?
  • “I want to earn $500 today”
  • “My BANKNIFTY option target today is 100 points profit or GBP/USD target today is 50 pips profit”
• Are all outcome goals.

They document a specific outcome or level of performance. The problem with outcome goals is that achievement of these goals is largely out of your hands. The market that day may not offer the opportunity for $500 profit, 100 points or 50 pips.

Process goals specify the process (or procedure, action, step, task) which must be carried out in
order to achieve our desired outcome.

• Process goal examples would include:
  • “All entries must have an attached stop and target order.”
  • “For trading today, I will only take entries in the direction of the 5 min trend.”
  • “Today I will not scratch my part one positions while the NYSE Tick is still moving in my trade direction.”

Essentially they involve an action, or a process. An action or process which, if carried out correctly, gives us the maximum chance of achieving a positive outcome. But the outcome is not important. Success in achieving our goals is related to success in following our process, not in achieving any outcome.

During our post-session routine we identify an area for improvement, which we will specifically target in the next session. We assign ourselves a process goal (or goals).

The goal is recorded in our trading log, and reviewed as part of the next pre-session routine.

While we may have longer term outcome goals (our reasons why), during the trading session our focus needs to be solely on our process (procedures) and our process goals.

Consistent Application

Of key importance is consistent application.

Your focus will drift away from process, as a result of all manner of internal and external distracters. You need some means of identifying this drift, and returning focus to its rightful place.

Most people find it difficult to maintain focus (including myself). So don’t be hard on yourself when you discover your loss of focus. Note it. Correct it. And aim for gradual improvement. Do NOT judge.

I use a simple tool to achieve consistent application. I set a timer to beep on the close of every trading timeframe candle, in order to attract my attention. If my focus has been diverted, this allows me to return it to the process of trading, conducting ongoing analysis based on this new candle information.

Review and Improvement

While trading, pause regularly to check your performance, in terms of both your ability to focus on process and your mindset. Use your trading log during the session to record any observations.

Review these notes during your post-session review, and consider the need for a process goal in the next session, to correct or improve any deficiencies in performance.

Use longer period (monthly) reviews to search through your notes for longer-term patterns of poor focus, and consider procedural change to manage this deficiency.

Peak Performance Mindset

I often get comments from people stating that positive thinking is not the answer to trading – it’s about effective strategy.

These people are missing the point.

It’s not just about effective strategy, but about effective application of that strategy. And when discussing application, positive thinking is far more effective than negative thinking.

• Let’s look at some of the tools and techniques that I use for maintaining a peak performance mindset during my trading session.
  1. Relaxation / Breathing Session
  2. Visualization
  3. Motivation Journal
  4. Action Affirmation Statements
  5. Recovery Procedure

Relaxation / Breathing Session

I conduct a relaxation / breathing session during all three phases of my trading day (pre, during and post-session). It’s an incredibly powerful means of ensuring a clear mind and relaxed body.

Mind, body and soul in alignment, ready to face the challenges ahead!

You may replace this with any relaxation or breathing process. However if you don’t have one, I recommend the following simple procedure:

• Sit on your trading chair, with your feet flat on the floor, arms relaxed by your side, hands resting on your lap, your shoulders comfortably back, and your back erect (do not slump)
  • This should be a relaxed position, not forced.
• Touch your tongue to the roof of your mouth, close your mouth, smile, close your eyes and breathe softly through your nose.
  • Keep your breath natural. Don’t force it. Don’t try to hold it longer than what is comfortable.
  • Breathe into the lower belly rather than the chest.
  • Make it one fluid motion – inwards and outwards, ensuring no pause between breaths.
• Relax your body.
  • As you breathe, focus on your body. Identify any sources of tension. Use the outbreath to consciously relax those muscles. Repeat until you’re completely relaxed.
• Relax your mind.
  • Focus on your breath. Feel the breath entering your body as you inhale. Feel the breath leaving your body as you exhale. If you discover your mind wandering elsewhere, do not judge; simply return your focus to your breath.
  • Some people may prefer to consciously occupy their mind. Count each breath (inhale and exhale combined) from one to ten. Once again, if you find your mind wandering, simply return your focus to your counting.
• Continue for as long or as short a session as you like.

For a more in-depth study of breathing, I recommend the Taoist Longevity Breathing program currently available through https://www.energyarts.com.

Visualization

During my pre-session routine, I review my trading log to identify my daily process goal. This also includes a brief visualization of the process goal being carried out successfully.

So for example, let’s assume our daily process goal was, “Today I will not scratch my part one positions while the SBIN Tick is still moving in my trade direction.”

• Visualize a trade entry and stall. Feel the unease and the desire to scratch the position. Visualize myself looking towards the SBIN Tick on my chart and observing it still supporting my trade. Visualize myself holding… and the trade moving on to T1. Feel the satisfaction that comes from having successfully achieved my daily process goal.
• Visualize a trade entry and stall. Feel the unease and the desire to scratch the position. Visualize myself looking towards the SBIN Tick on my chart and observing it still supporting my trade. Visualize myself holding. Visualize the stall continuing and the SBIN Tick turning, leading me to scratch the trade. Feel the satisfaction that comes from having successfully achieved my daily process goal – holding the trade to give it chance to move to T1 rather than getting scared out at the first sign of stall.

Note that in both visualizations – winning and losing trade – I successfully followed and achieved my process goal. This is a successful trade, in both cases.

Motivational Journal

A primary pre-session tool used in maintenance of my peak performance mindset is my motivation journal.

The motivation journal is simply a folder containing various pieces of text or image material which I find sufficiently motivating; the aim being to ensure I face each trading session with focus and commitment and, most importantly, confidence.

I’ll share my contents list below; however feel free to create your own however you see fit. Make it a work in progress, always updating as you find new motivational material.

My motivation journal is a ring binder, allowing insertion of relevant material in the following five sections:

1. Reasons Why
   • a) My four motivation statements – Disgust, Decision, Desire, Resolve.
     • You may prefer to use the pain and pleasure statements.
   • b) Any additional thoughts as to what trading success means to me.
   • c) An image of my family.
2. Current Reminders
   • a) Any current areas of focus, which need regular reinforcement and reminders
     • For example, if you’re hesitating at entry and having difficulty pulling the trigger, you might write a few sentences as follows:
       • Always remember, each trade is just one of many being traded that month. And each month is just one of hundreds that I’ll have over the course of my trading career. So, I will take my entries knowing that it doesn’t matter if I win or lose on this trade.
       • My quality, reality-based setups, with reward : risk ratio of at least 1:1 to the first target, combined with my strict application of risk and money management, mean that I have a positive expectance and I will profit over a series of trades.
       • Nothing annoys me more than an entry not taken due to fear or hesitation. I’d rather take the small 1R loss than miss the opportunity for >1R profit.
3. Goals
   • a) My target goals – 70/90/100, as discussed in Article 73.
   • b) A reminder of the probabilistic nature of trading
     • i) Here I insert the 70% winning days diagram from figure 9.1, along with some written notes reminding me that individual trade results are irrelevant.
4. Proof of Success
   • a) A small sample of printouts of trades in which you performed in a professional manner (winning and losing), annotated with notes.
5. Motivational Material
   • a) Any statements, quotes, excerpts from books or poetry or songs, or any images which you find motivate you to excel in both trading and in life.
   • b) Examples:
     • i) Ziad’s motivational passage, from the comments section of the following blog post: http://www.eminiplayer.com/2009/06/learning-to-become-successful-trader.html (an absolutely brilliant passage – I highly recommend this one).
     • ii) The Warrior Trader principles and Action plan, from “The Way of the Warrior Trader” by Richard McCall.
     • iii) Optimists Creed – do a Google Search.

Affirmation Action Statements (AA Statements)

Affirmations are short, positive statements that you repeat to yourself; typically in an effort to replace any negative self-talk with positive self-talk.

For example, “I am a successful and consistently profitable trader.”

While I love this sort of affirmation, and use them myself, they do have some limitations. Especially when the goal of the statement has not yet been achieved! It’s hard to believe a statement that you’re a consistently profitable trader when you haven’t got there yet.

This type of affirmation also offers little benefit during the trading process.

However there is another feature of affirmations which is very useful during the trading process – their ability to focus our mind.

Successful trading is largely a result of taking correct decisions and actions, ensuring we apply our trading plan as accurately as possible. To assist with this, and ensure I focus on the process of trading, I make use of what I call affirmation action statements.

These are short statements which provide either a reminder of appropriate behavior, or of an action which should be carried out.

Affirmation action statements are used for all primary areas of the analysis and trade process. They also used when my post-session review has identified an area which requires improved action or behavior in future. The affirmation action statements ensure my mind is appropriately focused, and reinforce correct behavior, as required to improve the application of my trading plan.

I currently have five primary affirmation action statements – Focus; Analysis; Trading; Management; Regroup. Others come and go as required.

You may wish to start with these and then adapt as required. And add any additional ones for areas causing significant difficulty.

Focus

• Breathing (slow and deep)
• Mind clear, body relaxed
• Trust (myself and my strategy)
• Focus

Analysis

• What is the trend?
• Where is the strength?
• Where is the weakness?
• Where is the next opportunity?
• Patience

Entry

• Confirm the weakness (against S/R or on PB)
• Who’s trapped?
• Where will they exit?
• Trust (myself and my strategy)
• Fade the weakness! Spring the trap!
• Strike!

Management

• Patience
• Trust (myself and my strategy)
• Where’s the strength?
• Where’s the weakness?
• Hold while the premise remains valid

Regroup

• Confirm flat
• Clear my mind
• Review the trade
• Review any error
• Accept it
• Forget it
• Focus

Any bracketed text is not verbalized, but is documented in the statement as a reminder of the context.

Repeating these statements to myself ensures my mind is focused on what’s important during each critical stage of the analysis and trading process. My actions will therefore be less influenced by doubt, second-guessing or any other negative distracters.

My affirmation action statements are documented as part of my procedures manual, as well as displayed on my trading wall.

Typically I’ll repeat them whenever my trading process advances to the next stage – analysis, entry, management etc. The focus AA statement is repeated any time my timer interrupts my diverted attention and allows focus to be returned to the process of trading.

In a way, they’re like procedures in themselves, although in summary form. Repeated like affirmations though, they focus the mind on the process of trading, rather than allowing it to be distracted by fear.

You’ll note also that they’re a form of process goals – typically an action, or a reminder of process.

Personally, the Entry AA statement has been particularly effective for me. I’ve associated the word strike with the requirement to place an order. If my analysis has identified weakness and someone trapped in the market, and I’ve identified a suitable entry zone, then I want to get in. I can’t afford to doubt myself and miss the entry.

It’s time to trust myself and strike!

Recovery Procedure

This is a clearing process, used whenever encountering a significant loss or some evidence of (worse than usual) negative emotions.

It may or may not lead to resumption of trading. That will be a judgment call based upon the circumstances.

Once again I’ll provide guidelines based around my procedure, but feel free to use it, adapt it, or create your own from scratch. It needs to be something you own, and you feel comfortable with.

The process involves three stages – relaxation, review and release. The whole process should take only 10-15 minutes.

Relaxation – Body & Mind

• Conduct a standard relaxation / breathing session.
• Conduct a short Chi Gung session.
  • This is a moving meditation session. If you’re not trained in or interested in Chi Gung, this step could be replaced with any other soft-form martial arts such as Tai Chi, or a simple guided meditation. The aim is a still and calm mind.

Review

• Consider the nature of the occurrence from the perspective of feelings
  • What feelings led to the decisions that were made, or actions that were taken?
  • How does this make you feel after the event?
    • The key here is to explore your feelings in a non-judgmental manner.
      Accept them.
• What does this mean? Where is the lesson?
• How will you behave in future when encountering the same circumstances?
• Visually replay the situation with the new improved behavior. Confirm improved feelings.

Release

• Conduct a standard relaxation / breathing session.
• Forgive yourself.
• Completely let go of whatever happened.
• Review your motivation journal.

Consistent Application / Review and Improvement

As with our focus on process, my trading timeframe timer will allow an interruption of thought, hopefully trapping any negativity and allowing a return to a positive peak-performance mindset through my Focus AA Statement.

Make use of the trading log for recording any mindset observations or challenges.

And review these notes to identify patterns of behavior which may be impacting results. If you can identify it, you can correct it.