I've written several articles over the last year about the importance of keeping a trading journal. Besides helping you analyze your trading business, its successes and losses, certain patterns will also manifest themselves as you review your journal. Most traders do not have 10 different patterns that are problematic. Rather, he/she may have one, two, or perhaps three problems that come forth in 10 different ways. For example, a trader may struggle with missing good trade entries, ignoring stop-loss or max loss exit levels, inappropriate position sizing, etc. These examples may seem like unique problems, but in reality they may discover that it is a single problem pattern – anxiety over trading.
In order to disrupt these old patterns in trading, it's important to not only recognize these patterns, but patterns among them. This means that if you are able to accurately identify the core problematic pattern, many other related difficulties can fall into place. Using the above example, once the trader learns to master anxiety over trading, he/she will miss far less opportunities, become more consistent in adhering to stop-loss levels, size positions appropriately, and let trades progress towards their target as per the trader's plan.
Sometimes a trader will be aware of what he/she may be doing wrong, but doesn't know the right course of action. This can occur if a trader does not focus enough on the solution. For example, they are aware that they should not double-dip to recover on a losing position to attempt to make the money back. They do not know how to re-enter a trade, and take advantage of the new entry after taking a loss. If this situation occurs, there are two courses of action:
- The problematic patterns must be curtailed before it gets out of hand, and
- Guidelines and procedures for a potential solution to the pattern should be developed and followed.
Disrupting problem patterns
Mark Douglas, in The Psychology of Trading, states “the key to disrupting problem patterns is to alter the state that you're in when those problems first appear.”
What does this mean?
Basically, it means that it is important to be aware of problematic patterns as they emerge, and recognize when/how they appear. For example, some traders are at their worst when they focus too intently on the P/L of a position early on in the cycle. Putting too much attention on the P/L as the trade is developing may take away from the proper trade management. This could result in premature adjustments, early exits, etc. If this happens, it's important for the trader to refocus his/her attention on the ultimate goal of the trade.
How can this be done?
Many times, a quick way to shift your state of mind is just to walk away from the computer for a few minutes, and engage yourself in an activity other than trading. Such activities might include a few stretching exercises, taking the dog outside for a brief walk, or getting a bite to eat. Quite often doing something different will enable you to approach the situation differently; you have shifted your frame of thinking and focus.
Yet another way to shift your mind is to actually talk aloud a particular situation, perhaps with your spouse or a fellow trader. When you talk out loud about your feelings and thoughts, you are able to remove yourself from them, and listen to them as an observer.
There have been numerous articles and books published on the psychology of trading and how to avoid potential pitfalls that lure traders into a negative state of mind. These are just a few observations I have learned and observed through my years of trading, and I hope they are helpful to you.
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