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April 3, 2015

“Plan your trade and trade your plan.” This saying is about as old as the finance industry itself. Yet most traders fail at following their trading plan. Richard Dennis, a legend in the trading arena, once commented that he could publish his strategy in the newspaper and it wouldn’t matter because people would not be able to follow the plan consistently.


I was just asked by a fellow fund manager if we had problems following our guidelines for the fund strategy, which got me thinking about how I personally worked through problems with consistently following my trading guidelines and strategy. The rest is a short synopsis on how I tackled the issue.  


Emotions are some are the most interesting aspects of the human body. They can completely take over any cognitive aspect of the brain and override “rational” thinking. Having traded for a while, I don’t need scientific proof, although there is plenty, to tell me this happens. I can just look back at a few trades that were totally irrational and off the reservation of the trading guidelines.


One thing I do well is document my trades and journal what is going on in my head while I am trading. I started this when I first started trading for the sole fact that I read and talked to the most successful traders and thats what they did. At the time I just documented, not really knowing why I was doing it, but doing it nonetheless. After a few months of doing this, the P&L was not looking to good. I looked back and it was a tough market for the strategy, but when I really dug into the material I documented, I saw that I did not follow my trading plan consistently.


Once I realized how much better the P&L would be if I followed my trading plan I resolved once again to follow it to a tee. I thought I discovered the problem ie: not following my trading plan, so I fixed it by telling myself again to just follow the plan. The problem was at that point I didn’t think to ask “Why” I wasn’t following it.

So I just continued trading the same way making the same mistakes.I finally came to the realization that I needed to know “Why” I wasn’t following the plan when I was stressing about a position going against me while watching the market intra-day. I had gut wrenching emotions telling me to get out. Luckily I got up from my trading screen and left the room in order to think, when it hit me. This was the exact way I felt when I would override my plan before, and it did not pay off. I spent months and years developing the robust strategy and I knew it worked so why couldn’t I follow it. This is when I finally addressed the real issue.


Following Denise Shull and reading Market Mind Games as well as studying as much about emotional awareness as possible, I started to figure out and put into words what was going on. Money is a highly charged instrument for most to all people in my experience. It represents a lot of different things to different people. Managing other peoples money has an even great emotional charge. When I saw my positions were pulling back giving profits back, it was obviously triggering strong emotions which were valid. Who wants to lose money. Losing money means failing or giving up or whatever. Watching the P&L go down and red quotes painted across the screen, it felt as if they were screaming to me to get out. So these emotions were being triggered in me and overpowering my cognitive process and trading plan causing me to take almost irrational action.


It would be interesting because when this would be happening my emotions were rationalizing for me why I needed to take action and go against my plan.Once I had this epiphany of the problem in my trading I started to consciously become hyper aware of what my emotions were doing to my body and causing me to think and do. What I learned was incredible.


The first thing I realized is that my emotions were popping up while watching the market during the day. As Denise Shull writes about, just the flashing colors of red can emote an emotional response. Stepping back and looking at my trading strategy, it was a medium to longer term strategy ie: winning positions held weeks to months to years. So I was subjecting myself to the daily wiggles up and down which were driving emotional responses to positions, but my strategy did not call for this type of oversight.


After rereading for the 100th time Nicolas Darvas’s classic book “How I made $2,000,000 in the Stock Market”, I saw he had the same issue with being “too close” to the market for his strategy. My psychological makeup is not built to stare at the screen during the day, which I have known for a while and why I adopted a medium term strategy, but over time I drifted back to watching the flashing quotes throughout the day.


With my psychological and emotional makeup being congruent with my strategy of medium to longer term, but me watching real time quotes flashing by the minute, it was no wonder it caused me distress and drove me to make poor decisions. Being aware of these emotions can help in reducing errant irrational actions, but I still was putting myself in an emotional position to fail.


Basically me staring at the screen all day was like a recovering alcoholic becoming a bartender. It doesn’t guarantee that he will start drinking but he definitely isn’t setting himself up for success.  So I needed to set myself up for success in trading the plan, technically AND emotionally. The first change is that I tied my definition of trading success not to P&L, but to how well I followed the strategy and executed the plan. I know that if the strategy and plan was executed consistently, then the P&L would take care of itself. In order to do that I took a cue from Darvas.


I started doing all work before and after the market was open. I did research a few hours prior to to the open, put my alerts for trades and exits and then closed down my trading screen. I would open it back up after the market closed and see how it came out. If alerts were hit I would have my plan of action to make a trade or get out of a position and do all my analysis after the close. I was worried at first I would miss the entry point of a big trade or miss the feel of the overall markets moving, but what I realized after about a week or two of doing this is I actually started to get more of a 6th sense of the market.


For me, looking at a stagnant daily or weekly chart lets me be more objective and see strength or weakness, without intra-day P&L or flashing quotes sparking an emotional response. As they say in meditation, it let me be more present with my charts. Even when trades went against me or stopped me out, I didn’t have the same reaction as I did while watching intra-day because I didn’t pour huge amounts of emotional energy into the situation while watching it and “hoping” it doesn’t hit my stop. I just saw it after the fact, accepted it, learned from it, and moved on.


Practicing meditation, I found that when your mind works in the past or future ie: reliving a past event or worrying about a future event, it actually can and will physically wear the body and mind out. This made total sense to me. I would have days watching the market all day and feel totally wiped out even if I didn’t technically do any trading. I would stare at the trading screen and worry about where my positions might go that day or relive a trade that got stopped out. But, I also learned that being present in a situation actually energizes the body. When I study charts and patterns prior to the market open or after it closed I feel excited and energized even reviewing failed trades or losing positions.


So after this new setup do I still have emotional episodes and responses? Absolutely, but the biggest difference is that if I do get emotionally worked up when looking at a loss or gain, I physically cannot do anything about it until the market opens the next day. This gives me time to settle down from a high or low, get back to neutral and put together a game plan if need be for the next day.


Also, when studying outside of market hours I have learned to listen to certain emotions that point to stronger patterns which come from a emotional position of presence and strength vs. reaction and fear. This probably has saved the portfolio from more damage than any technical indicator or trading setup ever could.


Going through this journey through the emotional side of trading showed me that strategy is important, but not the most important part of trading well. There are a hundred successful strategies and plans so why can’t everyone be successful at trading? Because they cannot consistently follow the strategies. Why? To me, this question is the most important for any trader to answer for themselves.



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