Trading Psychology Plan

We continue to discuss the importance of trading AND planning saying that:  (1) you can't trade without a plan that first defines a trading methodology (2) the plan should then further defines the components of the trading methodology that can be turned into trading setups (3) the specific setups and trade quantity needs to 'match' the trader's personality.  The objective is to have created a plan that includes core repetitive setups with a positive expectancy that you can recognize realtime AND that you have accepted the implications of in terms of related risk reward - BUT this might not be enough - there still may be issues as related to emotion AND fear that circumvent the implementation of the plan.

So what about a trading psychology plan?  A plan that includes a series of steps that start where method implementation 'hangs-up'.  The objective of this plan would be to take the trader's action - give an honest assessment/understanding of the action - define a 'setup' for replacing the action.  For instance - take the excerpt from the interview about the trader who didn't trade AND view it in terms of a trading psychology plan.

Trading Plan - Methodology
15 to 20 trades a day
makes money on paper

Trader Actions
didn't trade
pick out the winning trades and let the losers go
learning by watching the market

Psychology
create excuse for not trading
anticipate negative outcome
fear [pain] avoidance

Trading Plan - Psychology
accept losing as part of trading
accept possibility of winning
replace focus of winning/losing with objective of following plan
implement plan in steps instead of all at once
 

Trader Self Talk - Question/Answer

Like a trading methodology plan as a key to making the transition from method to realtime trading ~ making a trading psychology plan is instrumental in making the transition from trader action to trader psychology AND THEN from trader psychology BACK to trading method AND real time trading - a plan to deal with the emotion/fear issues that either circumvent the method implementation OR keeps a trader from trading at all. 

The plan itself will have to include a ‘look in the mirror’ AND an ‘honest’ assessment of what you see [don’t break the mirror first].  You will have to ask tough questions AND the quality of those questions will be instrumental in getting from step to step.  I liken this to some of the trading questions I receive AND my ability to then give a general answer OR a specific answer.  Someone may ask should I go long when ttMomentum turns green BUT with no further information about market conditions regarding continuation/congestion – direction/counter – other related indicators. 

Relating this to any kind of problem solving questions ~ HOW is anyone supposed to answer such general questions with more then a general answer at best – let alone give an answer that will aid in developing a workable solution/plan - specific questions that will ALLOW an answer with pertinent content is extremely necessary.  Regarding the 'look in the mirror' questions - equally important will be to ask questions that are of a neutral non-judgmental nature in order to allow a constructive usable answer.  So consider a trader asking questions like:  WHY can’t I trade – WHY am I such a failure - WHAT is wrong with me – etc.  Not only do I view these as ‘unanswerable’ questions – I also see them as destructive type questions that will push you into [OR further into] an emotional snowball further intensifying the problems you are supposedly trying to construct a plan to solve ~ as you give answers like:  BECAUSE I am a loser - BECAUSE I am too stupid - etc.   

I see no way that a trader could ever expect to make that transition from emotion to method when they are asking questions like this OR letting themselves think like this ~ your questions will direct your further thinking AND thought processing as you answer AND certainly explains why emotional issues are so prevalent in trading – as the trader further creates AND worsens the emotions that are their primary problem[s] to begin with. 

Negative self talk not only prevents us from solving problems BUT depending on how extensive this becomes – what is referred to as cognitive distortion – it may even prevent the person from even acknowledging that there is a possible solution.  A continual series of self talk including I can’t do it instead of WHAT can I do - both disqualifies that any positive experiences have ever existed to draw from AND directs thinking away from constructive actions.  Asking the neutral questions – the WHAT can I/HOW can I – can lead to actionable answers that acknowledges the potential for a positive solution.

Emotions Are Part Of Life

I do not think that emotions are good/bad OR should be viewed that way - they exist in everyone as a part of life.  What becomes important is your understanding of YOUR emotions - what they are AND how they further effect the way you act - again without judgment AND with the objective of controlling the emotion instead of having it control you ~ AND in this specific case - keeping the emotion from circumventing your trading plan.

Trading Psychology Plan

Like any kind of planning/plan making - analogizing the process to things that you have done before AND can relate to from experience will be very useful.  In this case it would be the development of your trading methodology plan AND making it personal to you.  Emotion AND fear have some general types BUT which ones most impact you will be extremely individual AND the trader must have a plan for both identifying what is most impacting them AND then have a plan for dealing with [I don't think the objective is to eliminate the emotion] the outcome the emotion brings.  I would like to analogize to the trading method plan AND trading indicators - to a psychology indicator attempting to measure when you are going from a neutral trading psychology to over-emotional AND thus leave your trading method plan for the actions that the specific emotions lead to.

The steps to this kind of plan were outlined/discussed in the training session - I believe that the absolute key to this plan will be defining your actions brought on by emotion/fear accurately AND without further judgment.  From here - you have enabled a base for controlling the emotion by replacing it with evaluation AND doing so as a conscious act where the objective becomes overcoming the impact emotional responses have on trading.  

I don't think that eliminating emotions is the objective - NOR do I even think it's necessarily a good thing.  For instance:  IF I am confused AND that causes me an emotional response of hesitation.  I actually want to see/feel that emotion - it becomes a warning to me that I should wait AND try to find more clarity to the chart/market - asking myself what needs to happen for me to take the next trade.  

Shift The Focus Of What The Emotion Represents

I understand the issue - WHAT IF the emotion is the norm instead of a warning of trading conditions.

• make a list of your emotions/fears AND rank the extreme of the emotion
• determine whether the emotion has reached an unwarranted extreme
• shift the focus of what the emotion represents

For instance:  you find that being stopped out on the entry bar of a trade elicits an emotional extreme - AND you further feel that IF you can be stopped out that quickly on the entry bar of a trade - THEN this represents that you are too stupid to trade AND might as well quit trading [now try to take the next trade that is setup].  

Is this extreme AND the following self talk warranted OR a logical conclusion - you will never be able to answer this [OR keep it from reaching the extreme it reaches] with out shifting the focus by asking yourself:  (1) was the trade a plan trade AND IF so - how often will that same setup/trade go on to a partial profit - isn't losing part of trading that is to be expected regardless that sometimes it may happen immediately - was there anything i can consistently see in my entry timing that could have made a difference.  (2) was the trade a non-plan trade AND IF so - what did i miss in the setup identification.  (3) did you just make a mistake AND IF so - shift the focus from the emotional extreme response to NOT being perfect - take your stop AND go on to the next setup.

Realtime Chatroom Example

This chart was discussed in the chatroom explaining why I felt the 1st blue circle buy as a re-entry to a previous buy which had been trailed flat - was really a poor trade basis mex flow - AND actually the yellow circle should have been done as a sell IF any trade was going to be done at that time.  I got lucky AND got 2 bars out of the buy instead of being stopped on the entry bar ~ the point was that I did feel emotion from doing a trade that I immediately recognized as a mistake to me BUT the emotion did not control further actions - it was a mistake AND in this case the buy was exited with the reverse at the 2nd blue circle.

Cognitive Distortions 

There are a number of ways that your thoughts can become distorted - recognizing and refuting these distorted thoughts are necessary as part of the plan to control the emotion. Consider the following cognitive distortions that are common to your thinking in general AND then how they show up in your trading in specific.

All or nothing thinking:  No shades of gray exist so IF your performance is not perfect - you view yourself as a complete failure.

Overgeneralization:  One single negative event is viewed as an endless pattern of defeat.

Disqualifying the positive:  You discount all positive experiences.

Jumping to conclusions:  You make negative interpretations that are factually unsupported. You feel that you know what other people think of you [mind reading]. You make negative predictions AND you are certain that they must come true [fortuneteller error].

Magnification or minimization: You may exaggerate the importance of an error or someone else’s achievements. You may underrate your own strengths or someone else’s weaknesses.

Emotional Reasoning:  You believe that your emotions mirror reality - I feel it so it must be true.

Should Statements:  You motivate yourself with shoulds-oughts-musts [woulda coulda shoulda] which leads to guilt. When you direct these statements inwardly you experience exaggerated feelings of anger-frustration-resentment.

Labeling and mislabeling:  You label yourself inappropriately - I am a loser ~ you label others wrongly - YOU are a stupid idiot.  When you do this to other people it makes it difficult for you to continue speaking positively with them - this has the same effect in your ability to continue to talk to yourself constructively.

Personalization:  You blame yourself for a negative external event for which you were not primarily responsible - a friend that you have a date with becomes ill and calls you to cancel AND you blame yourself for the cancellation.