Specialty Skills

Self-Regulate To Successfully Manage Your Trade

Dr. Woody Johnson

Lydia looked with disdain at her screen, but underneath the anger brewed a cauldron of fear. She was facing a massive drawdown after getting excited by a blastoff candle while trading the Russell E-mini. Even though it was an extended rally, she couldn’t control her excitement as she entered an impulsive long trade based in large part on that candle. But, as trades like this often go, it literally “fell” apart at the supply zone that lurked like a low hanging concrete ceiling just above her entry.  Had Lydia been prepared by looking to the left on multiple time frames to identify prominent contrary levels as she had been taught, she would have noticed this right away.  Unfortunately, Lydia also had allowed her excitement to distort her judgment and distract her from what mattered most in the trade…having an odds enhanced plan based on a high probability entry and honoring all of her rules, which would have included avoiding this over-sized entry. To make matters worse, after getting filled she had moved her stop twice. The pain from the mounting loss finally drove her to exit the trade.  She was seething at her platform, but deep down she knew it was all her fault and felt like a loser and a failure. This wasn’t the first time she experienced this type of situation. Although it was still hard to understand since she had learned so much through the trading courses. In fact, as Lydia sat there staring at the chart, she became painfully aware that she had completely ignored that supply zone, which was now screaming at her. She knew she had to do something about this self-sabotaging behavior. She knew that it wasn’t a matter so much of mismanaging the trade, as it was failing to regulate her internal state which is where all the problems stemmed from.

Your internal state, that is, your underlying beliefs, biases, values and the emotions that they conjure, is what determines how you eventually behave.  For those of you who have taken trading courses, your instructors no doubt have aimed to impress upon you the critical importance of planning the trade, trading the plan, following all your rules and keeping commitments.  In pursuit of this, they surely have encouraged you to have a money management and risk management strategy as well; and to pay strict attention to price action, order flow and other indicators in the charts and the news that can provide data about trends, retracements, and reversals.  But, the bottom line is that it is your internal state, your mind-set that must be “regulated” before you can manage the mechanical data in a trade that you have opened or are about to open.

Self-regulation or the ability to manage your internal system of thoughts and emotions begins in infancy. Babies look to mom to find out what they are supposed to feel and consequently do.  A famous experiment on infants studies how babies who are put on a glass slab that appears to be a big drop will only venture forward across the illusory drop if mom on the other side reassures them through a relaxed and smiling demeanor (indicating that all is well). This experiment demonstrates the phenomenon of “social referencing.”  In other words, infants, children and to an extent adults will look to others to identify what they should feel and eventually should do. If these early relationships prove to be problematic; for instance, neglectful, abusive or rejecting parents/families, then the internal states are fraught with encoded experiences that become ingrained patterns of defense mechanisms originally designed to protect the individual.  Behaviors like shutting down, becoming aggressive, withdrawing or isolating to name a few are used to defend against the anxiety, fear, sadness and anger associated with the repeated experiences.  These defense mechanisms become entrenched over time and grow into habitual ways of dealing with the world. So, self-regulation is vital to the success of human beings in negotiating the challenges and pit-falls of life…and of trading.  We learn how to regulate though relationships. In fact, if those relationships are negative or toxic, poor self-regulation is further impaired often to disastrous levels.

The ability to self-regulate can be supported by attending to internal stimuli like destructive thoughts, errant emotions and negative arousal (eg. elevated heart rates, hyperventilation, and tension related perspiration). This means that you are monitoring yourself and aiming to increase your awareness of when these states emerge.  This becomes an opportunity to address and “mine” the moment. First, take a deep breath to calm and relax your system…get back into the present because when these default patterns are activated you become distracted and your attention becomes fragmented and you are responding to past events. Once you are again focused on the task at hand and in the moment, engage yourself through introspection and self-reflection and simply ask questions like: What must I be thinking or believing to experience these emotions or feelings? What is my objective in this situation?  What is my long term purpose? What is another alternative way to approach this that will optimize my outcomes in the direction of my long term results? Self-regulation, which is at the heart of self-discipline, is a requirement to managing your trades.

Lydia was not regulating her internal emotional state and she was consumed by what she didn’t want which fragmented her thinking. She was immersed in the issue rather than focused on what she truly wanted; i.e., to keep her commitments and manage the trade process. She knew what to do, but she was caught in a self-imposed straight jacket made of her own thinking and failed to regulate her internal state. The quality of your thinking is a direct derivative of your internal state. It’s important to use the opportunity of getting back into the moment to be on purpose, on target and on task by moving toward your goals and creating a focus on what matters most.  If you continue to take advantage of those times when you identify that your internal state is fragmented and frustrated you can then “mine” it because this state in fact holds the “treasure” of your growth. You can then dramatically increase the chances that you can get the results that you truly want and not results that stem from chaotic internal states by attending to what’s most important. Achievers have mastered this approach.  It doesn’t mean that they are not challenged or that things aren’t difficult; but, they use these situations as opportunities to ramp up their focus in their trading. They have modeled themselves on positive relationships. Self-regulation that leads to results oriented thinking is about identifying what galvanizes your focus and your passion.

We teach ways to self-regulate your internal state in the “Mastering the Mental Game” Online and On-location courses. Ask your Online Trading Academy representative for more information.  Learn to bring your best to the platform and keep it there; you’ll need it if you plan on being consistently successful. Also, get my book “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading,

Dr. Woody Johnson


This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.