Lessons from the Pros

Specialty Skills

What is Driving Your Trading?

If I told you that P&L (profit and loss) are not as important to your trading success as you might think; you’d probably say that I am missing a couple of beers short of a six-pack. But, actually I am saying that. However, allow me to qualify that statement. If you have been trading for several years, say 5 or 6, then you could use P&L as your scorecard because you will have been in the trenches long enough to neutralize the prospect of luck being the principal reason that you have made consistent profits. You cannot and will not sustain profit and winning over an extended period without adhering to proven strategies, unwavering follow-through and keeping all of your commitments. However, trading erratically where you throw trades up on the wall and hope that you make a profit will leave you with low (or likely no) profitability. In other words, if you stay there long enough you are going to lose. Chance winning comes once in a while but it will not sustain over a long period of time. That’s the way it is with trading. Early on, in the first few years of trading, profit is much too erratic to use as the barometer of success. In fact, profits as a novice can actually be detrimental because they instill a false sense of confidence causing bad habits to proliferate. You start thinking that the lucky wins were due to nonexistent skills and these bad habits are very hard to break.

Free WorkshopThink about your trading for a moment; what is motivating you? You may be like so many other traders around the planet in that you trade, and trade, and trade. In fact, you may have daily or trade session targets, but rather than discontinue trading when you hit those daily targets you continue to trade and more times than not end up giving back those gains as well taking a loss for the day. Now, the logical inference is that if you had a target amount of profit and hit that profit target you should stop trading. So, what compels you to continue? It could actually be a number of things, like the belief that the trend is going strong and why not stay on the train, or feeling “lucky” like this is your day and why not take advantage of it. The underlying reason is quite simple … it has to do with greed. When we look at greed, most of you will recognize the fact that it is ubiquitous for traders and that you have experienced it way too often. However, did you also realize that greed is just the flip side of fear? Greed is simply the fear of not having enough or as much as you want along with the impatience of wanting it all right now.

Trading is ultimately about money. The trader wants to expand his capital. But, here is the paradox…trading is difficult and arguably the most challenging venture on the planet because of the psychological turmoil that is activated in the trader when he enters the trade – the fear of loss, the fear of being wrong, and the fear of failure. The point is that consistently “successful” trading is “not” about making money in any one trade. Consistently successful trading is a process; a process that requires a devotion to preparation, analysis, planning, implementation and execution. Because trading is so difficult, like any similarly arduous endeavor, it requires an activation of all of your resources (internal and external) to bear on the process. You only have a total of 100% of attention to focus on what-matters-most. If you are overly invested in P&L then you are diminishing that valuable percentage of attention in direct proportion to the amount of distortion and distraction caused by the intensity of fear and greed. By “overly invested” I mean that when you are in the trenches of a trade it is not the time to be focused on money. One of the more important points is to be dispassionate about the outcome while you are in the throes of the effort; that is to do and be the best that you can during the trade and to resonate with the reality of what your focused efforts will attract. In other words, when that final outcome of the trade has transpired this reflects reality…it is what it is. If you are so intently focused on the result of your process during the process, you are necessarily diminishing your attention and your ability to keep firing on all cylinders as you move toward the desired result.

I have often talked about having a sensory rich vision of what you want to achieve. This is a very powerful tool to connect with the passionate white-hot energy of why you want to be successful as a trader. It is your trading purpose, which ties the what-matters-most in your life to the what-matters-most in the trade. During the civil rights era there was a saying, “Keep your eyes on the prize.” This may seem contradictory; to say on the one hand you must be dispassionate about the ultimate outcome and also have a sensory rich vision of the outcome. Actually, the sensory rich vision is a tool to “refuel your perseverance” at the beginning of your trading session and during those times when your energy and your ability to sustain emotional strength and endurance in the trade are waning. This is when you want to deliver that shot of epinephrine (adrenalin) to the system. However, when you are in the game and on the court, this is not the time to stop and drink Gatorade or get a breather or fixate on whether or not you are winning or losing. When you are in the heat of battle, this is the time to engender a fierce focus on what you are thinking, feeling and doing as it relates to the process of trading; which is to continuously be in a position of “skill optimization.”

Skill optimization is when you have consistently nurtured and built your skills; i.e., your abilities, your “chops.” Skill building is one of the only things that you should “always” be focused upon in your trading process. The skill building formula is P + ER + FL + H where P = protocols (strategies, procedures, set-ups and rules); ER = effective routines (making your behavior consistent – erratic behavior diminishes to the point of dissolution); FL = feedback loop (where you measure, verify and document whether or not your protocols and routines are providing the expected hit rate); and H = habit formation (taking the entire process and repeating it religiously until it has become unconscious competence). The skill building formula, if followed dutifully, is where you have developed capacity for emotional strength and endurance to do what is in the interest of your highest and best trader each and every time you open a trade. Employing the skill building formula is where you take the process of trading and master it. This is what consistently successful trading is about; that is, process mastery. Trading moment to moment is not about P&L even though it is true that you trade to increase your capital. Process mastery cannot be achieved without the accompanying supportive mindset. Your mindset is the sum total of your thinking (beliefs, values, and internal conversations), your emotions and your behavior. All three of these variables (T+E+B) are intimately involved in your mindset and your results are direct reflections of your mindset.

So, if you are committed to doing your best in order to make money in your trading process, you must de-focus your attention from the money as you trade and intentionally re-focus on mastering your trading process. This necessarily means that you must develop your mindset. You must become and remain self-aware so that you are able to increase the mindfulness of your thoughts, emotions and behaviors. You must create consistency in your mechanical data (everything that relates to the mechanics of the trade – your preparation, planning and execution); and in your internal data (learning mental and emotional tools to manage your thoughts, emotions and behavior) in order to develop capacity for emotional strength and endurance during the trade. This process is no small task and it takes a willingness to be uncomfortable in order to grow and develop the necessary capacity for emotional strength and endurance. But, if you believe in yourself and take it one step at a time you’ll get that prize…the ability to trust in your plan, trade your plan, follow all of your rules, keep all of your commitments and move on when the trade is over. This is what we teach in the Online Trading AcademyMastering the Mental Game” Online and On-location courses. Ask your OTA representative for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading,

Dr. Woody Johnson

DISCLAIMER 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.

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