Thursday, November 12, 2009

Discovering Your Trading Patterns: The First Step Toward Change

(Note: For those coming to this strand late, the first two posts in the series were about preparing to win and the preview/review process in trading).

When you preview the day ahead and review the day just traded, you are doing the same thing that you do with markets: you're looking for patterns. This time, however, you are looking for *your* patterns as a trader. Your pattern search is for the common threads that underlie your best trades and your worst.

We can think of learning loops as intentional processes that turn our best patterns--what we can call our "best practices"--into habit patterns. Those same loops can be used intentionally to disrupt our worst practices, so that they cannot activate themselves in habit-like fashion.

The challenge is that we can enact patterns of behavior without being consciously aware of those patterns. This happens in all spheres of life, from our moods (automatic negative thinking making us feel angry or depressed) to our relationships (misreading what another person is saying by taking it personally).

Many times, traders do not have multiple problems. They have a single pattern that appears in their trading multiple times. If they can isolate and change that pattern, the improvement in performance can be significant.

Even less recognized are our solution patterns. We enact patterns of positive behavior all the time and yet are not necessarily aware of what we're doing and how we're doing it. If we don't know our "best practices"--whether in work or relationships--we cannot harness those and make them more consistent parts of ourselves.

One way in which trading journals can be useful is in identifying the patterns that make up our best and worst practices. By cataloging our best and worst trades each day or week and then examining them to see what made them succeed or fail, we will begin to see patterns jump out at us over time. These may be patterns of market conditions and specific kinds of setups; they may also be personal patterns: how we prepared for the trade, how we executed it, our mindset at the time of trading, etc.

When keeping such a journal, the important thing is to track both what was happening in the market *and* what was going on with you at the time of your best and worst trading. After dozens of journal entries, you'll notice the same themes cropping up day over day: these are the ones that speak to your patterns.

Knowing your patterns does not guarantee that you will change those patterns, but it is the first step in the direction of change. You cannot work on yourself if you don't know what to work on. Acting as your own coach means knowing where your strengths and weaknesses lie, so that you can make the most of who you are, build the best within you, and minimize your weak areas.

Here are some posts that will aid your process of self-discovery: