Purposeful Practice, sizing up, and why to Keep a Trading Journal

Discussion in 'The 'On Professionalism' Thread Series' started by jack, Aug 25, 2013.

  1. jack

    jack Administrator Staff Member

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    This is the forth installment of the On Professionalism thread series.

    The previous installment thread can be found here:

    Meditation, Visualization, and Positive Self-Dialogue

    The index and first installment can be found here:
    On Professionalism




    If you haven't guessed by now: Trading psychology is my favorite subject by far when it comes to trading as a craft. Unfortunately, people often discredit or ignore trading psychology, and even when they dive into the subject they are met with a lot of crossovers into self help fluff. I, however, will strive to focus on where trading psychology meets performance enhancement and focus, and you'll find my take on trading psychology has a lot more in common with sports psychology than it does with other soft subjects.

    Let me give you an example:

    Ever watch a star basketball player during their warm up session? Notice how they can often sink 10 baskets in a row while making it look easy? But, when it's down to game point or a foul shot that could turn the game in their teem's favor, how often do they mess up? (A lot more than the shots they take during practice is the answer.)

    The difference is stress under pressure, and knowing it really counts.

    Just like an athlete, you need to be a well-oiled machine that is built to perform well. You need to have your style, form, method and follow through so well ingrained into your very being that your body would act swiftly on the right trading conditions without even having to think about it. But this doesn't happen overnight. It takes practice (just like an athlete) to get to that level, and even star athletes still make mistakes.

    "Purposeful Practice" in trading is going to be your new goal (after the routine building as mentioned in the previous installment.) This is where you will go over your trade plan and reproduce well executed trades over and over again until identifying your desired setup, trading it, and exiting properly become second nature.

    Though, it's not just about identification of trading setups based on your trade plan, you must walk through the whole process:

    • Reviewing the market.
    • Narrowing down the types of setups you want to look for.
    • Identifying a potential setup.
    • Identifying the price point you're interested in (not just punching in blindly.)
    • Identifying the stop you need to stay in the trade (what you are willing to pay to see the result of the trade setup.)
    • Assessing this risk and if it's worth taking the trade on (always focus on risk first, profit second.)
    • Identifying the profit target you think is appropriate for the trade.
    • Placing the order when it is time (be that punching in or setting a limit order.)
    • Following the trade through and adjusting stops (to reduce risk, not increase it) and your take profit orders (to increase profit or close the trade should the market sentiment change,) as required and detailed by your trade plan.

    Unfortunately, how exactly you go about doing step is an area that's highly dependent on your specific trading strategy. You will have to take some discretionary measures here, but the key take away is that you aren't just "shooting from the hip", but instead you are taking a consistent, detailed, and reproducible approach to each trade setup. So write down your process as a checklist or in bullet points and stick to it.

    For absolute beginners, you'll be doing this in simulation mode (or "demo" in the forex world.) I personally don't like demo mode much since you will not mentally treat the risk the same way as if it was real money (or, specifically, your hard earned money) but if you have near zero experience trading then I can't in good conscience tell you to drop real money into the market just yet. So start in 'sim' mode and get a few weeks of this rhythm going.

    For everyone else, start doing this with little to no size. The smallest contract size your broker offers in the futures and forex world (being micro or mini sized.) If you are trading stocks at a DMA firm / active trading DMA broker, then 100 shares on slower moving symbols (on NYSE: GE or F, on TMX: BBD.B or YRI.)

    You will not "size up" til you are able to reproduce the expected results of your strategy with nearly zero errors. What that means is, if you were to go back on paper and map out all the signals you should have taken on the day given your strategy, did you end up taking them all and execute them properly in real life? We aren't just taking about taking the trade either, you have to follow the strategy through on your stops, position sizing, and risk management without error or deviation from your plan.

    Guess what? You'll find trading gets really boring really quick when you are following your plan like a robot...but that's the point; You are reinforcing, through repetition, positive habits formed by trading well. Your mind needs to stop being emotionally reactive to each trade, and treat each trade as a simple (potentially even boring,) process of analysis, identification, execution, management, and closure.

    Once you are able to complete at least a week of near flawless execution of this process, then size up (increase the risk by increasing the position size) and keep the practice process up for another few days at this new size. When doing this, pay attention to your performance, did notice a chance with your discipline? Did you have trouble executing well? Have you made more errors than before?

    If not, then every few days, keep adding a little more risk until you start to feel uncomfortable, or start making errors with your practice process and routine. This is your unconscious telling you something, and you need to work out what makes you nervous and uncomfortable at these new risk levels (I mentioned in one of the first installments of this thread series that our brains have been wired to equate financial risk/loss with mortal danger/fear. So this exercise helps identify your pain thresholds before they sneak up on you and cause you to do silly trades.)

    I will caution you though, do not keep adding size if your trade starts to risk a sum greater than 2% of your total account balance, as I do not recommend going past this point in general (and I actually recommend risking less even at peak performance, but that's more about position sizing and surviving a trading career, which I'll talk more about in another installment.) Once you are established and consistently profitable then you can revisit what maximum risk levels you can reasonably work within, but til then be more concerned with preserving capital in your account before anything else.

    So by adding size and discovering your points of pain indirectly through performance brings us to our next tool. The Journal.

    Keeping a journal:

    Despite the popular sentiment of traders who suggest keeping a journal, I don't think you need to write every single trade down on paper.

    I do, however, strongly suggest you pick up a journal or notebook and keep it handy to write down anything that you think is worth remembering. Particularly as it relates to your thoughts and feelings toward a trade that went bad.

    If you made a mistake and want to remember what happened or what caused it: Write it down. If you got into a fight with a family member and put on a series of bad trades in your frustration...write it down. If you felt annoyed by the morning news broadcast and this affected your early morning routine, which then piled into your morning trades resulting in an execution error... write, it, down.

    You want to record what triggers your mistakes, how you felt, and what conditions did you trade under. This will help you later when the same conditions appear and you remember the journal entry.

    As time moves forward, our brains naturally start downplaying negative experiences in our autobiographical memory. We are wired to do this as a natural way of staying happy (since feeling and reliving a negative emotion for a long time after it first took place can be depressing.)

    After enough time has passed, you can remember a given negative event from an objective point of view, but hardly remember the exact emotional connection or pain of said negative event.

    When we are trying to recall minor trading errors from even a few days ago, our unconscious is so good at downplaying their impact on us that you'll find it hard to recall much about them at all. Your journal will help you recall what thoughts and feelings were truly experienced at the time a mistake was made, and through enough observation, your journal can help you understand the negative patterns that affect your trading performance.

    As a side benefit, journals can help you keep track of trade ideas and "light bulb" moments as well. I can't tell you how many moments of insight I've lost because I failed to write them down in time before they left my active memory.

    Einstein himself was said to never remember his own phone number, and famously said that he'd never commit to memory what he can easily commit to paper.

    During the weekends, read your journal and highlight what's interesting… look for patterns in your thoughts, see what you might be able to focus on later or what might need improving.

    Don't be restrictive in the format or frequency of your journaling… you'll most likely stop using it if you feel it's bothersome to keep it up. Just make sure it's handy and you write something down every time you notice a deviation from your regular trading routine.



    The next installment in the On Professionalism thread series can be found here:

    Clean your Charts
     

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