The Trading Psychology Plan
Did you ever see the movie The Italian Job, and if so do you
remember when John Bridger asked: "you see those pillars over
there, that's where they used to string up thieves who felt
fine." Make the transition from paper trading to real money
trading and you will feel FINE too - Freaked-out Insecure
Neurotic and Emotional. And what a great analogy 'string up' is,
because after all those months of paper trading winners are
replaced with real money losses, that is exactly what you will
feel like doing to yourself.
The Trading Psychology Viewpoint
No discussion about trading, or the consideration to begin
trading, can be done without a harsh realization - the vast
majority of all traders lose.
It is said that the reason that most traders lose is because
they are not psychologically prepared to trade, that is they are
not prepared to accept financial risk for something of which
they have no control over the outcome. Trading is much more of a
psychological problem then a methodological one, only the
traders who have first accepted this have a chance of being
consistently successful traders. Without an understanding of
trading psychology and the various issues that circumvent
method, there will be virtually no chance to overcome the fear,
confusion, and despair that can be inherent in trading.
Ultimately, after a series of consecutive losses, method becomes
replaced with a feeling that it is impossible to do anything
right; if for no other reason than this situation, trading
psychology is more critical than trading method.
New Trader Scenario
Consider a scenario where a trader develops a method for day
trading an index future. The method gives 15 trades per day, and
the trader has gotten to the point where they are able to paper
trade with the following results: 9 wining trades averaging $85
each, and 6 losing trades averaging -$65 each - thus giving $375
average daily gains. The trader has achieved these results for
three consecutive months; their paper trading goals have been
met and it is time to start trading real money. Real money
trading begins, but things quickly change. Instead of trading
their method like they did when paper trading, the trader starts
'skipping' trades trying to pick the winners instead of
accepting the 40% losers; of course, they invariably pick more
losers than winners. Trying to then correct this problem, the
trader decides that maybe they are entering their trades too
late. So now instead of letting the setup complete and then
doing the trade, the trigger is anticipated so the trade can be
entered earlier - the losses get worse.
With the continued losses the emotions take over: "What is
wrong, why am I such a pathetic loser? Maybe it's not my fault,
maybe the method just doesn't really work."
The problems get worse with each trade, more emotions and more
loses - the trader quits trading. The trader now decides that
their paper trading results weren't really adequate to begin
real money trading. They will go back to paper trading and
studying again.
Thoughts that are going through the trader's mind now: "Maybe I
should try different trading methods until I can eliminate those
losing trades - then I will be ready to trade real money again.
Really, maybe I should just quit trading altogether - maybe I am
just a loser, and that's why I can't trade."
The Trading Psychology Plan
What should be very apparent from this scenario is that the
trader never traded their paper trading method plan after
transitioning to real money trading. Unfortunately, the trader
is unable to realize what they have done, instead their emotions
first place blame on the method thinking that it really doesn't
work, and then on themselves for being "such a pathetic loser".
The final result being that the trader quits trading, and if the
real underlying reasons for what has happened aren't accepted
and changed, this trader will never be able to trade real money
even if their paper trading results become 100% winners, which
of course is not going to happen.
The trader had a trading method plan, but they did not have a
trading psychology plan. They did not have a way to make the
transition from fear and emotion directed trading to actually
trading the method as designed. They did not have a plan to
objectively access and understand their given non-method
actions, and then define a 'setup' for replacing them.
The trading psychology plan must begin with an honest assessment
and acceptance for what really happened: the trader never traded
their method plan; there is no other blame to be placed, or
excuses to be made. There is nothing wrong with the trading
plan, and regardless, the trader has not traded it in order to
be able to make that evaluation. As well, traders cannot
internalize trade loses where they lead to their viewpoint of
themselves - you are not a loser because your trade is a loser.
Trading Psychology Plan Components
* Accept that losing will be a normal part of trading. Not only
is it impossible to be perfect, it is not an objective or
necessary to be a profitable trader. * Replace the focus of
winning and losing with the objective of following your plan.
This was not done while paper trading, as the trader had a
specific profitability goal that they used to tell them when
they were prepared to trade real money. They did not understand
that the reason they achieved this goal was because of how they
followed their plan.
* Remain neutral and non-judgmental towards yourself. If
profitable trading is ever going to be possible, this is
mandatory. There is no way that you are going to be able to
trust yourself to manage risk while you are also telling
yourself that you are 'stupid' or a 'pathetic loser' each time
you lose or feel that you have done something wrong.
* Eliminating your emotions is not the objective; I actually do
not think this is possible. Emotions are always going to enter
into trading - learn to control the emotions, instead of having
them control you.
* Accept that emotions are a part of life; they aren't by
definition good or bad, and actually if you can shift the focus
of what the emotion represents, they can be very beneficial for
the trader. For instance, if I am feeling confused and that
causes an emotional response or hesitation, I want to feel that
emotion. This emotion becomes a warning to me that I should wait
and try to find more chart-market clarity before taking a trade,
something that can be very typical when markets are in
congestion.
* Start slowly - this may be the most important component of
your plan. For instance, begin trading real money for an hour at
a time, and then assess what you have done, always asking
yourself the question: did I follow my plan, or did I take
non-method trades.
Granted, you will not be able to approximate your paper trading
results as the expectancy of that plan was achieved by averaging
15 trades per day. However, not only will this help further to
shift the focus from how much money did I make to did I follow
my plan, it will also allow you to acclimate to the logistics of
real time-real money execution, and the related initial
emotions, where all of a sudden the market feels like it is
moving considerably faster. By doing this you will 'build-up' to
trading your full plan at a pace that won't cause you to become
so overwhelmed by the process, and immediately cause you to
avoid what you had intended to do as fear and emotion becomes
too strong.
You have a great trading method and trading plan. You have
profitably paper traded, and you ARE now ready to start trading
real money - just be sure that you have a trading psychology
plan that is as good as your trading method plan, and that you
realize that neither will be of any use to you without the
other.