I was driving in my car the other night with my twin daughters when the conversation somehow turned to what they wanted to do when they grow up.

Naturally, being only nine years old, they had many ideas. There were those that I was very happy with – an astronomer, a veterinarian, a professional soccer player, or a guitarist in a rock band. And there were some suggestions that I just didn’t like at all. Not that it’s my decision! I’ll naturally support them in whichever path they chose for their life, however let’s just say a nine year old should not know what a Forensic Scientist does.

I asked if either were interested in trading, to which Caitlin replied, “But isn’t trading just guessing?”

That was unexpected! I was a little taken aback and frankly quite annoyed that she thought that all I did was ‘guessing’. I replied by explaining that there was a lot more to trading than just guessing which way the market went. But the conversation quickly moved on to other areas, as appears normal when speaking with nine year olds.

That night I put a little more thought to our discussion, not so much out of concern about my daughter’s perception of my career, but rather my emotional reaction to her statement. Why should I allow myself to feel a little insulted by claims that all I do is ‘guess’ market direction?

What do I actually do in the markets?

I assume risk in the markets, with an expectation of profits. But surely it’s not just guessing, or gambling, or taking a punt. I take positions on my terms only. It’s a calculated business decision. Through skillful analysis of past and current price action and an assessment of likely future price action I am able to identify opportunities to profit from market trends. And I combine this with action designed to reduce or eliminate any risk while seeking to maximize that profit. This is no different to any other business.

I’ve been lucky enough to be involved in a number of other ‘cool’ careers, but nothing has satisfied that need within my soul for a meaningful existence like being a trader does.

And I certainly believe that the career of a trader does provide significant benefits for society (a subject for another future article perhaps).

But when you really get down to the nuts and bolts, is what I do any different from guessing?

The definition of guessing according to the American Heritage Dictionary is:

To predict (a result or an event) without sufficient information.
To assume, presume, or assert (a fact) without sufficient information.

The common point here is ‘without sufficient information’, a phrase which certainly applies to the world of market analysis.

A novice trader expects that certainty can be found through better analysis or better indicators or indicator parameters. And so they get stuck for several years on this search for the Holy Grail solution. It’s only when all attempts at this have failed and they’re willing to accept it as a misguided attempt to hide from their fear of uncertainty, and are willing to embrace that uncertainty, can they take the next step on the path towards professional trading.

The fact is that market analysis cannot predict the future. All future events cannot be known. And even if they could be known, then we still don’t know how these events will be perceived by the market participants and will therefore influence price.

A trader operates in an uncertain world. And all trading decisions are made without sufficient information, based on an assessment of the probabilities and a minimization of risk to protect your capital when you get it wrong.

Essentially, my daughter was correct – I ‘guess’ market direction.

The difference is that some traders guess market direction without any real plan or guidelines for formulating that decision, with an inadequate appreciation of both risk and opportunity and with an undisciplined, unprofessional and emotionally influenced execution of their trade. And their losses feed the account of those who guess market direction based on a documented, tested and proven plan which is designed to contain risk when they’re wrong and maximize opportunity when they’re right, combined with consistency in execution of their plan.

I guess market direction, but I do so within a framework provided by my business plan and an understanding of the probabilistic nature of the markets.

I had assumed I was at a stage where I was comfortable with who I was and what I did. It appears now that this assumption was false and I have more work to do on myself. It makes sense – personal growth shouldn’t be expected to ever end.

Why was my ego bruised at claims that I’m just a ‘guesser’? There are many possible reasons that I need to address in more detail:

At a deep level I really want my daughters to be proud of me. Perhaps for a moment I suspected they weren’t?
Maybe my own self-importance was inflating at too rapid a rate (finally reaching an overhead resistance for a great shorting opportunity)
Maybe at some level I still have concerns that being a trader is a Way of life that adds limited value to society?
Maybe I still have some doubts about my long-term survivability in this industry, and so feel that by ‘guessing’ I am gambling my family’s future?

Who knows? I’ve got more work to do in understanding this.

Your beliefs about what trading is and why you do it are fundamental to the success of your trading business. You cannot expect to operate in a consistently profitable manner if you have conflicting beliefs about the value of yourself, of your chosen career or of your ability to succeed at it.

So when your ego takes a little hit from someone’s comments about trading, take the time out to examine your own beliefs. It doesn’t matter what the comment is:

Suggestions that it's impossible to profit from the market.
Claims that you'll never be able to make it.
Cutting comments about how those losses could really have been better used elsewhere.

If it produces an emotional response in you, take some time out to ask why? What does your emotional response mean in terms of your beliefs about yourself and your chosen career as a trader?

That self-examination may reveal the breakthrough you were seeking, to take you to the next stage of your career or personal development.

Happy guessing,

Lance Beggs
‘Chief Guessing Officer’
www.YourTradingCoach.com

I once heard a statement by Rebecca Fine of www.scienceofgettingrich.net that says something along the lines of “If what you’re thinking about isn’t something that you want to have happen in the next three minutes… get rid of the thought and think something else.”

While that’s a great way to live your whole life, and I certainly try to do so, it equally applies to the process of trading, specifically ensuring that we maintain focus during the conduct of our analysis.

Maintaining focus can be difficult. Not only will you face distractions from external sources, such as the phone ringing right during a prime setup, or your partner asking for a lightbulb to be changed, or your children asking for help with their homework, but you also face internal distractions from your negative fear-based trading mindset. These internal distractions may be less obvious to the novice trader, but the results can be devastating for your profitability.

If you have not yet mastered your negative fear-based trading psychology, then you are going to face never ending distractions that divert your focus from the job at hand – consistent implementation of your trading plan.
Regardless of how these fears manifest within your trading – complacency, boredom, doubt, procrastination, denial – they will lead only to inconsistent and unprofessional application of your trading plan. And that cannot lead to long term consistent profits.

How do we deal with this negative fear-based trading psychology? Well, that subject cannot be addressed in one article. I’m currently working on a complete home-study program on the mastery of trading psychology, which will provide you with the tools, strategies and techniques for overcoming these issues.

However in the meantime this statement from Ms Fine provides you with a really simple tool to add to your trading toolkit, to ensure you maintain focus during your analysis despite any internal or external distractions.
The process is similar for both long term traders and short term traders. But let’s talk short term first, because that’s primarily what I do.

As a day trader, your success comes from consistent application of your trading plan. Success comes from conducting analysis on a regular basis throughout the trading session, either on the close of each candle or on a price-alert as price reaches a certain preset level, and then acting appropriately to enter, manage or exit your trades.
What do you need to do to ensure that your focus remains on the process of trading?

Here’s what I do:
1. Document the analysis and decision making process. Have clearly defined actionable steps that you need to carry out every candle to reach your decision to hold, enter, exit, or adjust your stop loss or profit targets.
2. Set an alarm to go off prior to every candle. If I trade off 5 minute charts, I have an alarm go off 30 seconds before the close of each candle to allow me to pause and check my thoughts. If my thoughts are not related to the objective analysis of the market and the correct implementation of my plan, then they’re discarded. My focus is then returned to the documented trading process.

This works regardless of timeframe. If I was trading off one hour charts, I’d set an alarm to activate just prior to the close of each one hour candle. If I was trading off one minute charts, I’d still set an alarm to go off just before the close of each one minute candle. If I was just waiting for a price setup at a particular price level, and had no intentions of trading until price hit that level, then I’d just set an alarm for price hitting that target.

Setting an alarm for timeframes of 15 minutes upwards is certainly a great idea, as you won’t necessarily be sitting watching the screen the whole time in-between candles. However, you might ask whether it’s really necessary for very short timeframes, such as one minute charts. The fact is though, that it is necessary, and it does work. It is amazing how often I find my mind wandering elsewhere. More often than not, it’s thinking about something unrelated to my trading plan. The alarm interrupts this thought pattern, and allows a return of thought and focus to what’s important.

Try it, and if you find yourself suddenly wondering what the MACD shows, and it’s not part of your plan, discard that thought – it’s irrelevant to this trade. If you find yourself suddenly thinking that you need to win this next trade to get back to breakeven, discard that thought – it’s irrelevant to this trade. If you find yourself wondering where you should go next holidays, discard the thought. Once again, it’s irrelevant. Interrupt any unwanted thoughts, and think something else that will help you trade your plan in a consistent manner.
Oh, and so that you don’t burn out through having an alarm go off every minute for an eight hour trading session, let’s add a step 3:

3. If you are trading a very short timeframe, program breaks into your session, to get away from the markets. Relax, recharge and refresh yourself, so that you can keep up this pace.

For longer term traders, let’s say someone trading off daily charts, the problems are the same. In your case, you have a process that needs to be followed to come up with your decisions to enter a trade, exit a trade, or modify target or stop levels.

In this case, you still need to implement step one, documented actionable steps that allow for consistent application of your plan. Consider something like a checklist, or flowchart.

You can probably dispense with the alarms, as you only need to complete the process once. However for longer term traders, I’d recommend including statements within your documented process to remind you to check your thoughts, and return them to the process of trading.

Perhaps prefix every step with a documented reminder such as, “I am a professional trader, and a professional trader trades their plan in a consistent manner”. Then, the act of commencing each step of your nightly analysis, will serve as a regular interrupt to unwanted thoughts, and a return of your focus to the job at hand.

This way, there’s no need to be going and checking other indicators for further confirmation, when it’s not part of your plan. There’s no need to be checking other news sources for further justification of your decisions, when it’s not part of your plan. There’s no need to be emailing or phoning your friends to seek their thoughts on a particular stock or chart, when it’s not part of your documented process. These are actions of people who have lost focus, and whose trading destiny is being led by their fear and greed.

As a professional trader, you simply follow your steps. And use your alarms, or documented checklist steps, to interrupt any unwanted thoughts, and return your focus to the business of trading.

So, if you don’t already have a checklist or flowchart set up for all actions that must be carried out during your analysis, then create one. And place in it reminders to monitor your thoughts, and reject anything that is unrelated to the current task at hand.

And if you day trade, set up an alarm, either price based if you simply wait for price to hit certain levels before making trading decisions, or a countdown timer if your decisions are time-based. Then reject any thoughts that are unrelated to the process of trading. And follow your plan with consistency.

Wishing you happy, and focused, trading,

Author:

Lance Beggs.
www.yourtradingcoach.com

Fatigue management is a favorite topic of mine, due to my interest in aviation and in particular aviation safety. In military aviation, in both a training and operational environment, fatigue management is recognized as an essential function of command, in order to minimize risk and enhance operational effectiveness.

The same applies to the management of your trading business. As a trader, fatigue will reduce the quality of your work – your preparation, your market analysis, your trade execution, your trade management decisions, your focus, your patience, your ability to psychologically accept a loss and your ability to stick to the process of trading.

Here’s a great quote on the dangers of fatigue, sticking to my military theme.

“Some of the COs were awfully heartless and brutal. A few had no idea about how to command men or judge a soldier’s capabilities. Too often they would order young boys to lug a dead weight for miles, and when the young fellows reached the front they would be too exhausted to fight. I have seen them in tears, too tired to struggle on. They furnished an easy target for enemy gunners. More than one frail, green kid got cut down due to such incompetence in officer’s ranks.”

…PTE Vincent E Goodwin, WWI Diary

Ok, you’re not at war and your life is probably not at risk from the markets, but the results can still be devastating.

As a retail trader, you’re CEO of your own trading business, as well as the trader. As CEO, are you pushing your trader too far, trying to achieve too much too soon, without sufficient time for rest and recuperation? If so, if not managed properly, the results can be financially devastating.

Life is tough. There are many demands on an adult. For many of us, on top of a full-time job and a full-time family, we decide that we’re just not happy and need to work at developing another income stream to replace that job we despise. For varying reasons, often the allure of easy money, we’re attracted to the financial markets, and before we know it we’re burning the candle at both ends – effectively working at a third full-time commitment.

Being so busy, sleep is the first thing that gets sacrificed.

But how does that affect us, and our trading results?

Let’s look firstly at a quote from a publication, ‘Beyond the Midnight Oil: An Inquiry into Managing Fatigue in Transport’ published in the year 2000:

“17 hours of sustained wakefulness leads to a decrease in performance equivalent to a blood alcohol content (BAC) of 0.05 per cent. The decrease in performance after staying awake for 24 hours is equivalent to a BAC of 0.1 per cent. A person with a BAC of 0.05 per cent is twice as likely to have an accident as a person with zero BAC, while a person with a BAC of 0.1 per cent is seven times more likely to have an accident.”

For those in countries where Blood Alcohol Content is measured differently, in Australia a BAC of 0.05 is the legal limit for driving. So 17 hours of sustained wakefulness leads to reduction in performance, equivalent to being drunk.

You wouldn’t trade drunk, would you, so why would you trade fatigued?

Maybe you wouldn’t start trading after being awake for 17 hours – the above example was quite extreme. And maybe in small doses the occasional late night may not be too much of a problem for you. After all, you can catch up on one or two late nights quite easily.

However, if lack of sleep moves beyond the occasional late night and becomes a habit, you WILL experience problems. Cumulative fatigue WILL directly impact your health, your mental well being and your trading performance. And the results won’t be good.

The result of trader fatigue is a reduction in ability to focus or concentrate on the task at hand, and a reduction in the quality of your decisions. Both of which lead to inconsistent and undisciplined application of your trading plan processes, the end result being a drawdown in equity. Not good!

How much sleep should we get?

Typical advice is eight hours of uninterrupted sleep per night, however the actual requirements vary per person and may be anywhere from 7 to 9 hours per night for an average adult, with children and teenagers needing even more. Even then, lifestyle can demand further sleep. If you’re involved in a physically demanding job or sporting activity, increased sleep may be essential to overcome the rigors of your daily routine and allow your body time to rest, repair and recharge.

The best way to work out your natural sleep requirements, and at the same time identify factors that may be affecting your sleep, is to use a Sleep Diary. For the next month, record the following information each morning:

The time periods in which you slept in the last 24 hours (eg. 10pm to 6:30am)
The quantity of sleep (eg. 8.5 hours)
The quality of sleep – give it a score on a 1 to 10 scale
Observed symptoms of fatigue or tiredness before bed (eg. irritable and stressed)
Positive factors affecting your sleep (eg. extra layer of drapes added to keep out first light)
Negative factors affecting your sleep (eg. had a coffee at 9pm, neighbor’s dog barking at 6am)
How you feel on waking? (eg. didn’t want to get out of bed yet)

Ok, it’s not too scientific. But it will allow you to identify your optimal sleep duration, and discover factors that are affecting your quality and quantity of sleep.

Fatigue Management for Traders

A general rule I’ve used in the military which applies well for trading, is that you can consider yourself suffering from acute fatigue if you have experienced:

Less than 5 hours sleep in the last 24 hours,
Less than 12 hours sleep in the last 48 hours, and/or
Currently been awake for longer than the amount of sleep you’ve had in the last 48 hours.

If this applies to you, DO NOT TRADE.

In addition to this, you need to monitor yourself. The effects of cumulative fatigue especially, can sneak up on you without you being aware. Be on alert for the following symptoms:

Any physical symptoms such as generally feeling tired, having heavy eyelids or yawning.
Blank stares at the computer screen (where did those last two candles come from?)
Mood changes such as irritability or apathy. Seriously, you DO NOT want to talk to me when I’m fatigued!!
Difficulty in focus or concentration, showing up as a failure to follow your defined trading plan processes. This will often manifest as failure to carry out basic tasks, such as incorrectly positioning your stops, incorrectly setting your position size, or incorrect execution (there’s nothing worse than going long when you meant to go short.)
Difficulty in communication, both in deciding what needs to be said, and in how to say it. This applies not only to direct conversation with another person in your trading environment, but also to online chat, or any other means of communication.
Difficulty in recording trade and personal performance parameters in your trading log or journal.
A general lack of motivation.
And of course, slow and confused market analysis.

These symptoms will of course also show up in tasks and activities conducted outside of trading. Along with another big one – difficulty getting to sleep and/or a restless sleep, as you just can’t slow down your mind from its desperate attempt to solve all your problems.

Most important of all though, you need to understand that these symptoms are often difficult to pick up in yourself, and may be apparent to others well before you’re willing to admit them. Certainly, my wife seems to ‘sense’ my irritability and lack of patience, well before I do. And as annoying as it is to be told that you’re not very nice to be around at the moment, it’s a great indicator of potential fatigue.

If you need to operate with reduced sleep for a period of time, consider not trading, or at the very least seek the assistance of your partner or another person to provide an independent assessment of your behavior, and potential levels of fatigue.

If you find yourself with a sleep deficit, the only way to correct this is to get sleep. The strategic use of caffeine may help for a very short period of time, as does a relaxation or meditation session, but they’re not viable long term solutions. The ONLY way to correct a sleep deficit is to get sleep. You need to cut down on non-sleep activities somewhere, perhaps even taking a day off trading.

The following factors though will assist in improving your quality of sleep. Consider implementing them into your normal sleep routine:

Minimize daily stress and anxiety through relaxation exercises.
Don’t rigidly stick to your fixed bedtime. If you feel tired before that time, go to bed.
If possible, allow yourself to wake naturally when your body is ready, rather than through the use of alarms. If this is not possible during the week, it should be over the weekend when you don’t have to work.
Have a pre-bedtime routine for 15 or so minutes, in which you relax and allow yourself to wind down. Consider having a notepad in which you write down any thoughts or concerns – they’re on paper now, so they’ll be there when you get up. You don’t need to worry about them till then.
Declare your intent for a good night’s sleep when you first close your eyes.
Ensure a quiet, dark, comfortable environment. Seek assistance from others in your house, or your neighbors, in minimizing noise that may affect your sleep. Consider the use of ear plugs if necessary, or an airconditioner to drown out external noise. Consider the use of an eye mask, or extra layers of curtains to keep out light. Set a cool but comfortable temperature.
Ensure no caffeine is taken within the 3-4 hours prior to bed.
Avoid cigarettes (or nicotine patches) or alcohol prior to bed.
Ensure regular exercise is not conducted just prior to bed.
Turn down your phone and answering machine.
Turn your clock away from you so you cannot look at it during the night.\And if you can’t sleep after 15 – 20 minutes, consider getting up and conducting a relaxing activity until you feel ready for sleep again. Don’t just lay there worrying.
Have a regular ‘waking’ routine starting with a stretch and a positive affirmation. Get the day off to a great start.

Of course, if sleep difficulties persist, and chronic fatigue begins impacting on your behavior and performance, seek advice from a general practitioner or psychologist.

And please, be sure to make sleeping pills or other medications an absolute last resort, and only under direction from a health care professional.

Sleep is essential for peak performance trading, so give it the priority it deserves in your trading business.

Happy sleeping!

Author
Lance Beggs
http://www.yourtradingcoach.com

“How you think when you lose determines how long it will be until you win.”
… Gilbert Keith Chesterton, 1874-1936

As if learning to trade wasn’t already hard enough…

If you’ve been in this game more than a few months you would quite likely have experienced a trading slump at some stage – a sudden or gradual loss of form which lasts well beyond what should normally be expected.

Missing setups entirely due to lack of focus… hesitation at entry … holding losers past their stop… all the while to a mental backdrop of doubt, frustration, anger, confusion, and continually negative self-talk.

Peak trading performance requires the trader to be in an optimal state – confident and focused, operating in sync with the market, with the ability to execute trades without hesitation.

What makes a slump so difficult to overcome is not just the fact that you’re in a sub-optimal state, but that the normal human reactions to the slump tend to maintain it or even worsen it. Continued drawdown can undermine your confidence and your motivation, leading to increased anxiety and continued poor performance. The process is self-perpetuating.

The markets are an unpredictable environment. Trade outcomes are never certain, and this naturally creates an environment of stress. If you’ve traded long enough to have some degree of success, then you will have developed ways to manage this stress and in fact may find it motivating. However when the stress increases to the point at which you start to doubt our ability to meet the demands of the trading environment, or to meet your expectations, you can find yourself very quickly digging yourself into a hole of despair, and a trading slump which if not addressed quickly could prove both financially and psychologically damaging.

So, what can be done to help us out of the hole?

1. Take a Break from Trading.

The first and most important action is to immediately break the cycle. Get away from the markets for a while.

It’s important to realize that any anxiety you’re suffering during a trading slump, is a normal human reaction. It’s your body’s way of dealing with the stress of the market environment and your perceived inability to meet its demands or your expectations – a part of your standard fight or flight response.

However the state of mind that results from this anxiety is not conducive to good trading.

So if you start to observe persistent negative thoughts, feelings or emotions, such as indecision, frustration and a general feeling of hopelessness, take immediate action to break this cycle.

Close out any open positions. Close down your trading platform. And take a break for a couple of days away from the markets. Rediscover the other priorities in your life – your family and friends.

An opportunity to relax away from the markets won’t solve your problems, but it allows you to place your trading problems into perspective. It’s not the end of the world. And this new, fresher perspective can then help you objectively identify and deal with the problem through other methods below.

Of course, it can be quite difficult to recognize a slump when you’re consumed by the anxiety and fear it generates, so I encourage you to consider objectively defining when and how you will force yourself away from the markets. Recognizing that a drawdown is one of the precursors to my entering a slump, my trading plan includes a requirement to take a break for the remainder of the session if I hit a certain level of intra-day drawdown. And similarly for an intra-week drawdown. I consider it like a stop-loss on the day or week. While I may not have yet entered a downward spiral of negativity and self-doubt, I recognize its potential to develop from this situation. The fact that I reach this level of drawdown is an indication that I’m not aligned with the flow of the market. So, it’s time to get out of there and take a break before the situation gets out of hand.

Professional traders are fortunate to have a Risk Manager who will inform them when it’s time to take a break. As a retail trader you’re responsible for implementing that function yourself. Be sure to place rules in your plan that tell you the exact conditions that require you to stop trading and take a break.

2. Discover a New Way of Looking at Trading Slumps

Jim Rohn says “Success is not to be pursued; it is to be attracted by the person you become.”

Trading success requires confidence. But confidence does not just come from knowing how to identify and act on good trading opportunities. It also comes from learning how to deal with adversity. It comes from facing a slump and working through the challenge to overcome it.

So, when you find yourself in a slump, embrace the opportunity. This is your chance for personal growth. It’s an opportunity to become a better trader. It’s an opportunity to establish a winning feeling, not a false one based on hope, but one with substance in which you know that whatever comes in the future, you’re ready for it and you can deal with it.

Enjoy the challenge.

3. Learn to Relax.

I find one of the most beneficial parts of my trading plan is that it includes a routine of relaxation prior to the session as well as exercises for maintaining a relaxed state during the session.

My preferred techniques are through the use of breathing exercises, as well as practice in Tai Chi and Chi Gung.

Learning to breathe properly is one of the simplest means of dramatically improving the quality of your life. As Taoist Lineage Master, Bruce Frantzis, says, “If there were only one thing I could do to help Westerners, it would be to teach them to breathe well.”

Of course, everyone will have their preferred techniques, so you need to find what works for you. You may prefer the use of affirmations and guided visualizations or meditation. You may find value in biofeedback techniques, as highly recommended by Dr Brett Steenbarger.

Some people surprisingly find physical exercise to be more relaxing, certainly in terms of providing an outlet for their stress.

Try several approaches, find what you enjoy the most, and implement a routine of relaxation into your trading session. Not only will you be trading in a better physical and mental state, but it will also increase the likelihood of you maintaining that optimal state when faced with increased stress, reducing the likelihood of entering a slump.

Likewise, relaxation is an essential part of your recovery process when you have found yourself in a slump. The physical and mental state that dug you deeper and deeper into the hole, is not conducive to working your way out of that hole. Relaxation is an effective tool for rapidly improving your physical and mental state.

Closely related to relaxation, is the highly recommended practice of reviewing your life to identify any external stressors. If your trading is being impacted by problems outside of the markets, then you need to take steps to manage these issues before returning to the markets. So, having relaxed, spend some time reviewing all non-trading aspects of your life, and deal with any family, work, financial or other stressors.

4. Use Your Journal to Monitor Your Physical and Mental State

A trading journal is a key tool in capturing a slide towards a trading slump, before it’s too late.

Most people seem to just record their trade stats – entry price, exit price and P&L. While this is nice, they’re missing two great areas of opportunity.

I like to record the following, in addition to trade stats:

(a) Any insights on market structure gained while observing price action flow, and
(b) Any insights gained during regular checks of myself, including my ability to follow my trading process as well as my current physical and psychological state.

The market structure insights keep me focused on price action, instead of allowing my mind to wander away from the process of trading.

And the insights about my physical and psychological state alert me to patterns of thought, feelings, emotions, behavior or actions which are potential indicators of trading problems.

Another great extension of this concept is the use of your trading journal to also understand how your body and mind act when in an optimal state, not just a negative state. Whenever you find yourself with that winning feeling, record everything you observe about that feeling – how your body feels, the types of thoughts, how you feel about yourself and your potential to master this game of trading. By knowing the characteristics for when you’re in the zone, you can review them and use this information to help you more easily regain this state.

Now, if you find yourself currently in a trading slump and haven’t been using a journal, you’re not too late to receive the benefits. There’s no reason why today can’t be the day you change your processes and implement this highly regarded trading tool. The use of a journal, even over a short period of time, may allow you to start identifying patterns to your thoughts and behaviors, providing you with insights that can lead you out of the slump. And at the very least, the use of a journal will give you a greater sense of control over future results, which is essential for minimizing the depth and duration of your slump.

5. Review Your Strategy.

A word of caution – too many traders panic when they find themselves in a drawdown and immediately start altering their plan. New traders in particular will rarely last past three losses in a row, without searching for additional indicators to use as a filter, or alternate indicators to trigger a trade entry or exit. This is absolutely the worst thing to do. If your strategy has proven to be successful in the past, or in back testing, then do not be too quick to abandon it.

Drawdowns are a normal occurrence, for any strategy and all traders.

Having taken an opportunity for a break from the market and relaxing and refreshing our body and mind, we can now objectively consider the need for a review. The key is in determining whether or not any current drawdown is within the realms of normal behavior, in accordance with expectations.

So, review your past testing or trade history. If you find that similar drawdowns have occurred in the past and been overcome, then you’ve possibly got no need to amend your plan.

However, if you find that this occurrence is well beyond anything that you ever anticipated or experienced before, then you have some work to do. Your strategy will need a thorough review. In particular, you need to assess whether the slump and associated drawdown are a result of your own lapse in discipline, or whether your strategy is failing to adapt to current market environments.

If you’re a discretionary trader as I am, you’ll quite often find that what entered you into the slump was trader error – a lapse in discipline which resulted in an outsized loss or string of losses. And from there the problem is compounded by further poor decisions and actions, as a result of the negative influence of any drawdown induced fear and anxiety. The challenge then is identifying your errors, putting plans in place to minimize recurrence (if at all possible), reinforcing correct behavior, and moving forward again better than you were before.

6. Review and Reinforce Correct Behavior.

I highly encourage all traders to keep a Success File. This is a folder or file containing chart printouts and notes showing examples of well executed trades. And it need not just be the winners – be sure to include losing or breakeven trades which were expertly managed in order to minimize risk.

The beauty of this Success File is that you can pull it out at any time to remind yourself that you can play this game successfully. Reviewing and reinforcing the patterns associated with success can quickly assist in overcoming any current lack of confidence.

Another option for reviewing and reinforcing correct trading practice is through the use of a Market Replay feature available on some trading platforms. After recording the trading session, you can review it with hindsight to identify all the setups which meet your trading plan criteria, then replay the price action in these areas over and over again, training yourself to see the opportunity as it appears at the right hand edge of the screen, and practicing the ideal entry and exit in order to minimize risk and maximize opportunity. This is a tremendously valuable tool available to traders. If your platform doesn’t have one, either ask the company to create one, or find a new platform.

7. Start Again with Reduced Risk and With a Focus on the Process of Trading Rather than the Outcome.

Having taken the steps above, at some point we will feel increased confidence and the need to get back into the markets.

It’s important to not rush this stage – take it slow and steady.

I’d encourage live simulation trading initially, until you feel you’re reading the market well and have proven consistency. Yes, it doesn’t have the same level of emotion, but why risk more money in a live environment until you’ve proven you’re in tune with the market.

When ready to go live though, please consider the following additional risk control measures:

(a) Reduce your position size. Until you’ve proven you’re back to your best, a reduction in size is recommended in order to reduce any further downside risk. Only increase size again when consistency and confidence have been proven at the new level. And increase in gradual increments until you’ve reached your normal size.

(b) Limit your trading to the markets, timeframes and setups that have historically provided you with the greatest success.

(c) Aim to focus on the process of trading, rather than the outcome. Set goals for good execution of your trading ideas. Linda Raschke, in her Slump Busting Techniques presentation on INO TV, tells the story of a trader who regained his trading rhythm and form through absorbing himself in the price action. This is a great concept for ensuring your focus is intimately involved in the process of price action analysis, rather than on your equity balance. Just watch price and provide a running commentary, with no expectation of trading. Call the swings and turn points. Call the changes in trend, or bias. In fact just observe and report on any observations as they occur. This will get you in sync with the flow of price. Before you know it, you’ll be identifying setups and high probability trading opportunities and entering and managing the trades with confidence.

(d) Aim to get some wins under your belt. This may appear to contradict point (c), however that’s not really the case. While it’s usually wise to focus on the process rather than the outcome of your trading, at times such as this it’s especially important to also notch up a few winning sessions. Success will build your confidence. And increased confidence will lead to better trading and further success. It builds upon itself, in a process that is essentially the opposite of your descent into the slump. So, while the analysis, trade execution and management involve focus on the process of trading, keep one eye partly focused on the bottom line. Do not let any reasonable session profits turn into an overall loss. And most important – avoid large losses! Your aim is to get a win or two under your belt. Celebrate the wins and look at this success as the foundation from which you will emerge with new strength. Celebrate your successes. Print out charts from trades which were well managed. Record notes about the decisions made in a taking these trades. If you have a replay feature on your platform, replay these trades a number of times, internalizing the patterns of price flow and personal behavior. Success comes from repeating more of what works, not just from preventing what doesn’t work.

Summary

The challenge of a slump is that you’ve placed yourself in a state in which you now doubt your ability to achieve your trading goals. Combined with poor results, this mindset can develop into a downward spiral of negativity which can be challenging to overcome.

Slumps will always be a part of your trading life.

Success comes in implementing strategies to recognize the slump early, minimize the damage they provide, and in regaining your confidence and self-belief as quickly as possible.

Success comes from knowing that no matter what the market provides in the future, you can handle it.

Cheers,

Author
Lance Beggs.
http://www.yourtradingcoach.com

Nothing annoys me more than a good trade which was not entered due to hesitation.

So let me show you a good trade setup which I missed last night and share a little strategy that I SHOULD have used to help me pull the trigger.

I generally don’t like to use the wordshould, as it’s always easy to see in hindsight, but hesitation at entry is one of my ongoing problems. I’m well aware of it and well aware of what I need to do to manage it. This time, I fell into my old ‘lack of focus’ habit and missed a great opportunity.

The following chart is the British Pound fx currency futures (6B), 1 minute chart, from Jan 5^th 2010. Spot forex traders should refer to GBP/USD if you wish to look at it on your own platform.

Point A occurred at 23:20 local time (08:20 ET, 13:20 GMT). Price rallied on reduced momentum into an area of overhead resistance. My analysis had identified this as a good area of opportunity for a counter-trend entry.

Candle A was the first to breach the area, although closed just short of my lower resistance zone boundary. I was anticipating a push a little higher intending to enter at about the midpoint of the zone in the vicinity of 1.6045. I watched the next three minutes continue to hold at the lower boundary of my resistance zone, waiting and waiting for that little push higher.

Of course, the push higher didn’t come and a rapid drop left me sitting on the sidelines angry at my poor performance.

What should I have done?

The best way to manage this that I’ve found is to simply get some orders into the system as soon as price gets to the setup zone.

I liked the setup in this example. I was confident that supply would once again overcome demand in this area and drive price lower. So the way I should have managed this was through bracketing price with both a limit order at 1.6045 and a stop entry order at 1.6035 as shown below.

The stop entry order would have been positioned to trigger on the break of the low of candle A, which first breached the resistance zone.

By doing this, I still allowed myself the opportunity to enter at the better price of 1.6045, but also ensured that I would still be in the trade at 1.6035 if price did not make it to my preferred level.

As one of the entries filled, I would have simply cancelled the other.

Of course, you must be happy with the stop entry price. In this case, it satisfied my risk:reward requirements (just), so I would have been happy with a 1.6035 entry.

So that’s the general concept… just get some trades onto the system. I’m not 100% committing to them. If price action then invalidates my trade premise I’ll cancel the orders. If price action leads to a better entry option, then I’ll move the orders. But the hardest part for me is just getting something onto the system, so I get that out of the way early.

Price is not always bracketed either, with the actual plan being adjusted as price action dictates. Sometimes I’ll just place a limit order; sometimes just a stop entry order. But I always aim to get something onto the system.

If unsure, I’ll place orders well away from the setup area where I’m sure it won’t inadvertently trigger. On the above chart, for example, I might simply place a limit order well above the resistance zone upper boundary, perhaps around 1.6060. With the hard part (order placement) now out of the way, and increased focus due to having a working order in the system, I now monitor price flow and adjust the entry order as necessary, either moving it closer to price if the setup is validated, or cancelling it if price fails to act in accordance with my expectations.

Of course, with only placing a limit entry order I’ll still miss some trades. But at least with the order in the system I’ll hopefully not be hesitating so much and can work that entry order closer to price, as price action unfolds.

For those of you who use clearly defined entry triggers rather than discretionary entries, this plan may still prove workable with some minor variation.

It doesn’t matter what trigger you use – a MA crossover, a pattern breakout, or whatever – if your suffer from hesitation once your trigger displays then try getting an order onto the system earlier as you see the trigger approaching. Then just move it to the correct point as the trigger occurs. Like me, you might find it psychologically easier to move an existing working order, than in placing an initial entry order.

As always, play around with this on a demo platform first to see if it’s something that works for you.

And please consider the risk of any additional working orders you may place in the system. Failure to cancel excess working orders may result in inadvertent fills – so maintain awareness of your current orders and do not exit your platform without first confirming they’re all gone. And have a plan for platform or internet failure. I always ensure that every working entry order has an attached stop loss order. At the very least though, have your broker’s phone number available for immediate assistance.

Happy trading,
Lance Beggs
http://www.yourtradingcoach.com