A Reader Asks About Self-Development

 

The ABC “Wide World of Sports” TV program used to talk about the thrill of victory…and the agony of defeat. These kinds of ups and downs apply in many areas, not just in sports.

In the markets, there’s no worse agony than losing a lot of money. The financial loss hurts. The blow to your confidence and self-esteem hurts even more.

Recently, I received an email from a reader who has been struggling to get it right in the markets. He writes “I have lost more money than I would like to admit and the pattern would likely continue if I did continue…for now….”.

No doubt, many of you could have written this at one point or another. I know that I could have. I’ve been there. My intention here is not to shame the reader. Actually, I would like to applaud him for his honesty and openness. Rather, I want all of my other readers to realize that they are not alone in their struggles or challenges. Most likely, what they are going through is all too familiar to many of us. Trading and investing require enormous skill and psychological strength, which develop over time and only after many ups and downs.

When traders and investors hear the terms “peak performance”, they often think that its lessons don’t apply to them. But if they want to get better, then I would suggest that they pay attention to it. Every day I am reminded that people in the markets need the lessons of peak performance if they want move from failure to success or if they want to go to the next level.

I have detailed my journey in the markets, and how I met with a great deal of failure and difficulty before I met with any sustained success. Believe me, I know all about the agony of defeat. I’ve struggled more than I ever thought that I would. In an effort to right the ship, I studied everything out there about the markets. This led me to the field of peak performance, which has a great deal to offer people about how to develop skills and how to mimic the patterns of top performers. As I go through in my book, Peak Performance Trading and Investing, we can take our profits to the next level by applying the lessons of peak performance.

Knowing about my journey, warts and all, the reader acknowledges that “It seems that I will have to get my studying hat on before I can get there”. Correct. If you’re struggling, then the first thing to do is put less emphasis on trading or on making money. You want to stop trading entirely. Instead, you need to identify where you’re going wrong and how to get back on track. As I wrote in my article “How to Bounce Back From Failure in Trading”, we need to get our style sorted and then to take one – and only one—step in the direction of improvement. Trying to do many things at a time could overwhelm or frustrate you.

The difficult part comes when you are just starting out, like this reader. How do you choose what that one thing should be? How do you decide what to tackle now and what to leave for later? Or as the reader asked me about my own journey in the markets, “How did you organize what needed to be learnt, when and how?”. Good question. For this, we need a blueprint for our self-development.

I came up with a blueprint all by myself, entirely by accident. As I was seeking to rebuild my performance, I was floundering about for something—anything—that would work. I wanted to build a circle of competency, however small, and work out gradually from there. After much trial and error, I ended up with a blueprint. In my book, I talk about the three steps of trading and investing:

  1. Plan the Trade
  2. Trade the Plan
  3. Review and Tweak

There is a simple logic behind this order. The foundation or building block of any good trading performance is a solid plan. When I was struggling in my first job as a prop trader, there were several reasons why I wasn’t performing. I was often putting on positions impulsively; my position size was too large; and I would get out of positions at the wrong time, usually because I held on too long. But ultimately, as I studied successful traders and investors, I realized that these were all symptoms of a much more insidious disease: I didn’t have a plan. I could BS myself, but the fact remained that I didn’t have a methodology or a plan.

Every interviewee in Market Wizards said that you needed a methodology in order to succeed in the markets. Moreover, they could all describe in detail exactly what their own plan was. It was then that I realized I needed to figure out what my plan was and to make it a core of my trading and investing. As Benjamin Franklin quipped, “Failing to plan is planning to fail”.

The reasons why we need a plan became obvious to me as I did my research. A plan is what you use to filter out noise and pay attention just to the signal; to make solid, unbiased decisions; and to remain consistent in your decision-making. If you don’t have a plan, then it’s too easy to get lazy, inconsistent or undisciplined and just start punting around. Even worse, you could freeze like a deer in headlights, not knowing what to do when you have to take action. The plan is your best offense and your best defense, all wrapped up in a nice package. This is why you need to have a plan as the first step in your success.

The one thing about plans is that you need a plan, but it doesn’t need to be a perfect plan. It just needs to be workable and have some chance of success.  Moreover, as I detail in my article “How Do You Start Trading Without a Methodology”, it is perfectly acceptable to copy someone else’s plan instead of having your own. In fact, if you are starting out, I would encourage you to borrow someone else’s plan, because you are more likely to succeed that way. There are numerous resources on the Internet or in the bookstore that are either free or low-cost and which have all of the ingredients of a winning plan. The one caveat is that the methodology should suit your personality and make use of your strengths. If you’re a trained research scientist, then you should be doing more cerebral and research-driven; if you are a great athlete or poker player, then you might want to pursue a shorter timeframe as it mimics what you’re already good at.

What are the elements of a good plan? It should cover everything you need to make money. That means how to find positions to get into; when to put them on; when to take them off; position sizing; and overall risk management. Moreover, it should obey certain principles that are common to all good trading plans. In my book, I call these the Basic Truths of Trading. These are the principles that every winner in the markets sticks to.

Most beginners and people who are struggling benefit greatly from the introduction of a plan. It gives their decision-making more structure, consistency and discipline. With a properly structured plan, especially a checklist, making the right decisions in the markets should become much less taxing and more straightforward. Just remember: the plan is your friend. If you trust it and stick to it, you will be fine.

However, sticking to a plan or executing it properly are actually huge challenges. Many beginners or traders that are struggling get into trouble because they have a plan but can’t stick to it. They know what to do…but don’t know how to do it. Even more frustrating, they could be getting it right most of the time and then abandon their plan 5% of the time, with disastrous consequences. They are struggling to be consistent.

But it makes sense. Our brains mess with us. So many times, we are tempted by some BS that we tell ourselves. “I’ll do it just one time”. “Just to hold on to this loser, because it could come back”. “If I put on this one trade, it will make me rich”. Our brains are sophisticated, multi-dimensional systems and they are not always rational. Unfortunately, this can wreak havoc with our decision-making processes if we don’t have the right workaround.

I ran into this exact issue myself. After casting about for a methodology that would work, and that I could imitate, I eventually found one. It was out of a book, where it was presented well and easy to follow. It was essentially a step-by-step checklist. I started using it, doing all of the preparatory work necessary and going one step at a time. But I couldn’t or wouldn’t stick to all of the steps. I wouldn’t cut losers when I needed to, nor would I be rigorous enough about the entry points on positions. Thus, my results were poor, even though it was a proven system that has spawned many successful imitators. It was just like with an electronic device: if you don’t use it according to the instructions, you will get subpar results. The lightbulb went off: I needed to learn how to stick to this system and make it perform.  

This is why I identified Trading the Plan as the second step to take in creating peak performance. The second step in my own self-development was to master the execution of the system. However, this doesn’t come overnight. It’s a long, drawn-out process which requires a lot of trial and error. It requires numerous repetitions to build the skill and automaticity necessary. To make this work, you need to learn to execute your plan flawlessly. Your Trading the Plan should enable to carry out your plan flawlessly. It is what unlocks the potential that is contained in your plan.

We build this skill just like we would any other skill: through arduous practice. I read up on a lot of peak performers in many fields, especially sports, and the research into their development. It turned out that most peak performers developed mastery only after 10,000 hours of deliberate practice. For many masters, that meant almost ten years of constant effort before they achieved mastery. Moreover, deliberate practice is not just any old practice; it’s arduous practice which is designed to be develop specific skills. Practice is leisurely shooting hoops in your driveway; deliberate practice is not leaving practice until you’ve hit 100 jumpshots in a row from each of 5 different positions on the court.

Fortunately for many traders and investors who are beginners or who are struggling, it’s relatively easy to come up with a plan that could work. The more important-and more difficult—task is to stick to it. When you’re still developing, you should reframe your task. You are not trying to make money and you are not trying to see what happens. Your number one goal should be to stick to your system, no matter what the short-term results may be. Once you can follow your system completely, then several things happen:

  1. You will see how it actually performs as designed.
  2. You will figure out what you can improve on in the system—and know that you will be able to reap the fruits of that improvement.
  3. You believe in yourself, because you can successfully follow any system.

After much trial and error, and lots of reviewing my own work, I was able to follow the system that I had borrowed. I wasn’t 100%, but I was able to get all of the major points correct. Surprise, surprise, I turned around my results and became successful. This was like having a weight removed from my shoulders, for two reasons. The first is that I was able to get the kind of results that I wanted. The second is that I was finally able to execute on my plan. It felt like trying to learn a new technique in sports for many months and then finally getting it to work. What a relief!

For me, the hardest thing about this whole development step was accepting that my task was one of sticking to the plan. I was floundering about for some time trying to get results from my plan, but not making progress. I only came to this when I threw up my hands one day and said “I know that this plan works, all I need to do is stick to it”. This was when I started focusing exclusively on sticking to the plan. I didn’t realize it then, but this shifted my focus away from making money (and thus from short-term results) and squarely on to process. By paying attention to the craft and not to the money, the results took care of themselves. This single-minded focus on sticking to the plan was what led to me executing it, and then to trusting the system—the core of having a good system.

The next step in my development came later. Once I started sticking to my system, I was getting good results and became confident that I could generate P&L. This was a massive boost to my confidence. It also led me to rethink how I do things. The first is that I was able to review my work better. By now, I had the right benchmark— how I did compared to my plan, and how the plan itself was doing. If I wasn’t sticking to the plan, that made it easy to evaluate my work—all I had to do was to find out which part of the plan I missed and try again. If I was sticking to the plan but not fully comfortable with my results, then there was another option available to me: tweaking the plan. For instance, I found that a lot of my winning positions would continue to run after I closed them out. After that, I moved from having a fixed take profit to using trailing stop losses, which would permit me to capture more upside from the biggest winners. That would go on to skew the results a bit more in my favor. Similarly, I could adapt my system for other markets that had similarities and slowly work out the kinks.

The virtue of this is that it will help you to identify and dispense with a lot of “trading psychology” problems. Many of the issues that people think are psychological will usually have their root in methodology. Did you close a position in a panic and lose a lot of money unnecessarily? Well, it could be a psychological problem, but first you want to make sure that you were following your plan. (You did have one, right?). Did you stick to your stop loss regime? Was your position the right size in the first place? Usually people close out positions in a panic if they’re too big, because they are trading outside of what’s psychologically comfortable. The excess risk forces them off their game plan. Bottom line: have a well-defined plan, stick to it, and trade positions that you’re comfortable with, and a lot of the trading psychology issues should clear up. In fact, if you keep the risk down, then investing and trading should be less of an emotional rollercoaster. I deal with this in my article “How To Be More Consistent In Your Trading”.

Then I realized that this is actually how top performers develop. They are constantly reviewing their work and looking for things that they can change and improve. Top athletes keep detailed records and watch hours and hours of film of their games. They think of tweaks that they want to make and then practice them relentlessly. Chess grandmasters review all of their games in great detail, looking for any areas where they can improve. And the best traders constantly review their own performance, looking for what they can do better or differently. While I sort of lucked into this realization, it follows the same pattern that top performers use to develop. The surprise is not that people use this approach to improving their performance in the markets; rather, the surprise is that it’s not more widespread!

The comparison to sports is interesting because the reader actually recognizes this. He writes in his email, “If I were to make observations as to how I developed from a sports perspective it would seem that I have to learn the basics and hone them to the point of them becoming unconscious processes that operate with minimal effort”. Exactly. That is the whole point of developing a plan and then building the right skills in the right order: it becomes automatic and unconscious. You become able to perform at an elite level but at the same time, everything flows.

These three core steps have been the core steps in my development. I have singled them out on purpose as the key ways to go for anyone who is beginning, recovering or trying to find their way in the markets. Just getting these three steps correct will get well on your way to success. You want to master these steps, especially the interplay between them, if you want to succeed. Once you have refined your plan to something lean and mean, and you are 100% confident that you can stick to it, then you are ready to go.

The mental game is a big part of this, but as I have emphasized, you will notice that your mental game improves naturally becomes an outgrowth of getting everything else right. Once you have a system that works, you can execute it flawlessly and you trust it, then you will find that your emotions slowly dampen over time. You will feel much more confident and collected, no matter what the market throws at you.

In terms of my own personal development, I became interested in the mental game because it’s clear that the mental game is the difference between “good” and “the best”. There is a place for it, and I write extensively about some key tools of the mental game, including my Visualization resource page, my Mindfulness series and the Peak Performance Course. But if you are a beginner or just finding your way, it’s better to walk before you run. Get a handle on these basic steps and you will see a quantum leap in your results. Only then should you worry about fine-tuning your performance with some of the mental game tools. Self-development means doing the right things in the right order.

If you are unhappy with your results and committed to turning it around, then I can only say this: it can be done. You will need to find the right development framework (ie the one that I’m suggesting) and then work very, very hard to make it happen. It will be frustrating and test your patience. There will be times when you question whether or not all of the effort is worth it; whether or not you’re making any progress; when you doubt that you’ll ever make it. Know that this is all quite common. You’ll just need to take the attitude of “one step at a time” and keep working away.

The journey to successful trading starts with a single step. Just like in “How To Bounce Back from Failure”, identify one thing that you can do differently or better. Then get started. Resolve to Plan the Trade; Trade The Plan; and Tweak and Review. Stick to the plan, and you’ll get there.

 

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading

 

 

 

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