Rather than think of trading as a means of making or losing money, think
of what you can learn from each trade and from trading in general. Think
of trading as going to university but with a pop quiz every day.
Focus on what you are learning as you go through the trading experience.
Every time you exit a position, look at the trade and try to identify
what you learned rather than how much money you made or lost. Ask yourself,
did I analyze the commodity correctly? Did I understand the driving
forces that caused it to move? What should I learn before my next trade?
Did I follow my plan? Did I enter the trade well? Did I exit the trade well?
What were my emotions while I entered/exited the trade? What could I
have done better? What did I do well? What did I do poorly?
Your answers should give you some idea of the kinds of questions you
can ask yourself to further your education. The point is to focus like a laser
beam on learning, not on your profit and loss.
Normally, people focus on how much money they made or lost. But,
in a way, that is irrelevant. Money will be made or lost on every trade. The
real issue is whether your bankroll is increasing over a longer period of
time, say a month, a quarter, or even a year. It is highly unlikely that you
will make money over the long run if you do not constantly improve as a
trader, particularly if you are not currently a profitable trader.
I have been a professional trader for more than 20 years and have only
one year that was even close to a losing year. But I still spend a tremendous
amount of time trying to improve my craft.
One of the best techniques for improving trading is to keep a trading
journal. This is a simple book where you enter every day such information
as what trades you are considering, why you are entering the trade and why
exit, and other information about your trades. You should also put your
emotions and reactions in the journal. In particular, you should put down
your emotional state of mind when you are trading. The idea is to take an
emotional snapshot of yourself each day. Are you feeling cool, calm, and
collected? Then you are far more likely to make money that day. Are you
feeling anxious? Then you are far more likely to lose money that day.
One of my primary reasons for buying Commodity Trading Consumer
Research (CTCR) from Bruce Babcock was that it gave me the opportunity
to interview and learn from some of the best traders in the world and it also
allowed me access to books, systems, and other products so that I could
learn more.
If I do not constantly strive to learn then I will be caught when market
conditions change. I used mechanical trading systems extensively back in
the 1970s and 1980s. I got very nervous about the efficacy of them in the late
1980s when I saw Mint (a very large commodity money manager) acquire
$1 billion under management. They were the first to achieve that amount
of money. They used a standard trend-following method based roughly on
a 40-day moving average.
I felt that if there was a company with a billion dollars under management
then that particular style would find it very difficult to make money
because it had so much buying and selling power that it was the market.
It would dominate the market so much that it would not be able to make
money. There would not be enough liquidity in most markets to allow it to
diversify.
Remember, Mint was only the tip of the iceberg. It had a billion dollars
but there were lots of other plain vanilla trend followers in the market at
the same time. After all, I was one of them. I wasn’t doing anything special
in my trend-following systems.
I felt that the returns to trend-following systems would degrade because
there was too much money flowing into the market all at the same
time and that the profits from the systems would not be as high as they had
been in the past. I decided that I would have to change my method of entry
and exit. You see, I use fundamentals to determine the direction that I want
to trade in and used mechanical systems for the entry and exit. If mechanical
systems were being overused then I would have to learn an entirely
different method of entry and exit. I ended up switching to a classic chart
analysis method.
It turns out that trend-following systems did, in fact, go through a period
of poor performance. (I think that the amount of money under management
of trend-following systems has been reduced, as a percentage of
the total amount under management, and that trend-following systems will
again produce good results.)
The point is that I had to be aware that what I had been doing may
not work in the future and that I had to learn a new skill or I was out of
business. I had to make sure that I had backup skills in case my current
skills were no longer being rewarded by the market. Conditions change:
Make sure that you are prepared for it.
A focus on constant learning is essential if you are going to be in this
game for a long time. Market conditions change; you must be alert to those
changes and have a depth of knowledge to draw from if you need to change
your trading strategies or tactics.
I believe that trading success is built on the excellent execution of a
few fundamentals. You don’t need to get fancy, just focus on the fundamentals.
I think that you will find that most of your losing trades come
from breaking a few fundamental rules, such as not placing and sticking to
a preset stop loss level.
Switching the focus onto learning and away from profits and losses
helps to reduce the emotions associated with trading. You can look at
each trade much more objectively because you almost don’t care if you
made or lost money. In a curious way, you might even “enjoy” losing trades
more than winning trades because you can usually learn more from the
experience.
Notice that this point of view helps to promote good trading practices.
Remember, you should be noting everything you did right in the trade as
well as what you did wrong. This will reinforce behavior that produces
profitable trades. In a way, the definition of a good trade changes. A trade
becomes a good trade when you learn something new, not only when it
makes money.
Notice how powerful a different mind-set can be. Making or losing
money on a given trade becomes no big deal. Instead, you try to analyze
your trading dispassionately to see how to improve. You are almost forced
to be objective.
The flip side is that a tremendous pressure will be taken off of you.
You are no longer judged (by yourself) by the success or failure of your
last trade. The pressure of success is replaced by the pressure to improve
as a trader. That is a much better pressure to feel and will lead to better
trading and more profits. It is much better to kick yourself for not learning
as much as you could than to kick yourself for losing more money. You will
be motivated to study your trading rather than feeling sorry for yourself or
angry with yourself.
Focusing on your own trading will also keep you from relying on others
for your profits. It is possible to use systems and ideas from others
profitably, but you will never learn anything. In the final analysis that is
okay, but few people have the self-discipline to simply follow a system.
Most people want to have some input into the trading decision. This ties
back to the ego problem.
You don’t need to get fancy in your trading. Just execute a few basics
well. Your education-based feedback mechanism will show you what you
are doing well. I have a friend who only trades reversal days. I keep trying
to get him to try another method but he says to me that he is making a
living doing this so why screw up a good thing?
The bottom line is that changing your focus from making money to
constantly learning will sharply reduce your stress level, keep you focused
on learning how to make more money, and increase your self-discipline.
