FIGS: Focused, Intensive Goal Setting

 

Many traders that I work with involve me in their performance reviews.  Sometimes they create weekly reviews, sometimes monthly or quarterly.  Invariably these reviews summarize what they did wrong over this period and how they could improve.  They set lots of goals, but then that's often the last I hear about those goals until the next review period!

There are three big problems with the goal-setting of many (and perhaps most) traders:

1)  Too Many Goals - By setting a large number of goals, traders have difficulties prioritizing the changes they want to make, and they find it difficult to give each of the goals proper attention.  As a result, they chronically feel as though they are falling short in achieving their goals and lose motivation.  Goals should move us forward, not discourage us!

2)  Vague Goals - A trader may set a goal of trading with greater discipline, so that they stop overtrading.  Great!  How are they going to do that?  How will they monitor performance to know that they're making progress?  A vague goal is only a good intention; it's not likely to energize or shape performance.  My experience is that vague goals get the least follow-through.

3)  Goals Lacking Vision - The best goals are tied to a vision of what is possible.  We want goals to bring out the best in us.  We want goals to excite and challenge us.  Many of the goals set by traders are prioritized to-do lists.  That turns the pursuit of goals into chores, robbing us of energy and enthusiasm.  If there's no emotion and excitement associated with our goals, we're unlikely to put forth our best efforts toward change.

In short, we don't see things as they are; we see them as *we* are.  Our moods and energy level help shape our perceptions and actions.  If we are overloaded with too many goals, vague goals, and goals not tied to an inspiring vision of the future, we are likely to lose our passion for markets and trading.  

Consider the radically different alternative of FIGS:  Focused, Intensive Goal Setting.  What if, at any given time, we worked on one goal and one goal only.  Suppose we worked on it every single day and made it the focus on each day's efforts.  And suppose we made it an emotionally intensive goal, where we actively rehearse and *feel* the consequences of not reaching the goal and the joy and benefits of making progress on the goal.  Suppose we grow--as people and as traders--by working one goal at a time in FIGS fashion, rather than by creating laundry lists of changes that are "shoulds" rather than "musts".

We see FIGS at work among people who work on their recovery from drug and alcohol dependence and addiction.  At some point, they "hit bottom" and make recovery their number one life priority.  They attend AA meetings every day, connect with a sponsor who helps them through rough patches, and work on their sobriety one day at a time.  What makes such change efforts powerful is the emotional commitment to reaching goals.  After someone has hit bottom, they *hate* their old habits and ways.  They never want to go back to the consequences they created for themselves and others.  Their goals are focused, but also intensive, because the goals aren't mere items on a list or in a journal.  The goals carry emotional intensity.

We don't change because we want to.  We change because we must:  we *need* to.  Without urgency, we don't sustain change efforts and simply relapse into old ways.  When goal setting is focused and intensive, we more readily create the conditions of urgency that help us see ourselves and others in new ways.  

FIGS starts with a simple question: What changes do you need to make?

Further Reading:

Mastering the Art of Goal Setting

How Goal Setting Helps Performance

When Goal Setting Falls Short

How Emotion Sets Our Goals in Motion

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Turning Goals Into Consistent Habit Patterns

My recent post took a look at setting effective trading goals. Properly formulated, these goals focus our development, bridging our real selves--who we are now--with our ideals. Setting goals, however, is easy compared with acting upon them over time. Many of us set well-meaning goals at the start of a year, only to forget our resolutions.

So how do we make goals actual tools for self-development? One answer that I came to in writing my new book is that goal setting must be a process of emotional commitment, not just an intellectual exercise. "The secret to goal setting," I note in the book, "is providing your goals with emotional force. If your goal is a want, you'll pursue it until the feeling of desire subsides. If your goal is a must-have, a burning need...it becomes an organizing principle, a life focus."

In Alcoholics Anonymous, the goal is sobriety. Members spend a great deal of time sharing their stories of lost relationships, lost jobs, and lost health. They openly talk about the horrors of their relapses. Why? Because this keeps them emotionally connected to their goal. AA focuses on the reasons for the goal; every single meeting members remind themselves that they are alcoholics, powerless against alcohol. They can only find sobriety in their connectedness to others and in their relationship with a Higher Power. Next to that, everything else seems inconsequential.

An effective trading journal is like an AA meeting. It is an emotional communication that reminds the trader why he or she is seeking particular goals. The vision of success, the horrors of going through massive drawdowns, the feelings of disgust at missing opportunities due to a lack of nerve or discipline: these keep us connected to our goals.

Once you're emotionally connected to a goal--clearly seeing its necessity--discipline is not necessary. You will automatically gravitate to doing what you know you need to do. It's a bit like the procrastinator: when the assignment is due in several weeks, there's no urgency. When the assignment is due the next day--with one's bonus on the line--the drive to work kicks in with full force.

It is when the perception of "Reach your goal, or else!" arises, that we act decisively. Often it's the "or else"--the clear awareness of the consequences should we not fulfill our aims--that helps turn goals into consistent actions. The man who has had a heart attack may have struggled with his diet for years. Now, aware of his mortality, he has no problem following a heart-healthy regimen. His goal, under the pressure of necessity, becomes a habit pattern.

It helps to clearly visualize what would happen should we fail to meet our goals. What would happen to us? How would we feel about ourselves? Many a drive for greatness was sparked by the hatred of mediocrity. We will ourselves forward only when stasis becomes more uncomfortable than the efforts demanded by self development.
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Trading Psychology Techniques - 1: Keeping a Trading Journal

As mentioned in the previous post and the recent Forbes article, I will be posting a series dealing with research-backed methods for improving both our psychology and our trading performance.  I am doing this because so much of the writing I see in the area of trading psychology is long on what to do and short on how to do it.  This series will focus on the how-to's, to help traders better coach themselves.

The focus of this post is on the proper construction and use of trading journals.  Several evidence-based approaches to psychological change make substantial use of journaling, including cognitive therapy.  Like many cognitive-behavioral methods, journaling can improve our self-awareness, making us more mindful both of what we are doing well and what needs improvement.

Traders often keep journals, but in ways that are not especially helpful.  A few common journaling mistakes are:

1)  Inconsistency - Journal entries are sometimes detailed, sometimes sketchy.  They are sometimes more frequent, sometimes less frequent.  The trader lacks a consistent journaling process.  The frequency of the journal is often out of line with the frequency of trading.  If traders are making multiple decisions per week, for example, it makes sense to keep a weekly journal.  If the trader is making multiple decisions daily, a daily journal will be useful.

2)  Isolation of Entries - A trader writes a journal entry one day, then the next day, then the next.  Very often, the entries do not reference one another:  they are written in isolation.  As a result, the trader gets little cumulative benefit from the journal process.  It is very common that traders never look over journal entries from a week or a month ago, and thus don't fully learn from experience.

3)  Focus on Reporting - The trader's journal entries report what happened during the day--sometimes in detail--but spend relatively little time analyzing why these things happened and what they can learn from them.  The journal ends up being more descriptive than prescriptive.  The journal as a reporting tool is not necessarily a performance-building tool.

4)  Focus on Venting - The trader's journal expresses frustrations and focuses on things that went wrong, mistakes made, etc.  There is little time spent on what the trader did well, and there is little constructive writing about how the trader could correct the mistakes.  A useful journal is a constructive journal; it isn't mired in negativity.

5)  Narrowness of Focus - The journal focuses mainly in one or two areas, not with trading overall.  For example, the journal may focus on psychology and not actual trading decisions.  The journal might focus on entries and exits, but not position and risk management.  It is uncanny that the areas left out of journals are often those most important to work on!

So, what are some best practices regarding the keeping of journals?

1)  Frequency - Note that, in cognitive therapy, people keep journals daily and make multiple entries per day.  They write in the journal as soon after significant events occur.  That allows them to observe what happened, how they processed the event, how that processing impacted them emotionally, and how they might process the occurrence differently and more constructively.  By journaling often, the person becomes very aware of their thinking and grows in the ability to address problem patterns before they occur.  The frequent journaling becomes a tool for building positive habit patterns.  

2)  Backward and Forward Looking - The ideal journal entry notes something distinctive that was done right or something distinctive that needs improvement.  In both cases, the focus in on clearly identifying what was done right or wrong and why it was desirable or undesirable.  Then the journal entry looks forward to identify a concrete goal based on the observation and a specific plan for implementing that plan going forward.  For example, the journal entry might identify a way of scaling into a position that was very effective in several trades.  This becomes a concrete goal to implement going forward, perhaps with a position management checklist to be used in coming trading sessions.

3)  Reviewing as Well as Viewing - If the journal entry sets a goal and a plan for reaching that goal, the next entry should spend some time reviewing how well the goal was reached.  If the goal wasn't fully met, modifications in plans can be made going forward.  If the goal was reached, there might be some reflection on how to make the improved practice part of an ongoing process.  If a goal is worth setting, it's worth implementing and reviewing!

4)  Keeping it Doable - Focused goal-setting and review is more effective than scattershot approaches to change.  You might want to work on one main goal per week or month, depending upon the frequency of your trading.  You don't want journaling to become unduly burdensome, and you don't want to be setting different goals every day, never truly building changes into robust habit patterns.

I like keeping journals in apps that allow you to share the entries with teammates and colleagues and that allow you to tag entries and sort through them during your reviews.  As I mentioned in a previous post, an app like Evernote allows your journal to become truly multimedia and interactive.  Pulling up all your entries on a given topic, such as risk management, is a great way to track your progress and learning.  At SMB, for example, trading journals structured as daily report cards are routinely shared with mentors to facilitate feedback and learning.

The bottom line is that the focus should be on journaling as an ongoing learning and performance-enhancement process.  Keeping a journal has minimal value unless it is part of a cumulative process of assessment and deliberate practice.

Further Reading:

Supercharging Your Trading Journal

Formatting Your Trading Journal for Success

TraderFeed Home Page and Index

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Goal Setting for Traders: What Works

It is often thought that setting goals is helpful for motivation and performance. The psychological research, however, suggests that this isn't the case. Goals can either help or hinder performance, depending upon how they are structured. If traders are going to act as their own trading coaches, it is important that they know how to set goals that are most likely to produce good results.

The research of Locke and Latham suggests that goals impact performance in several ways:

* Directing - Goals direct our activity toward priorities and away from aspects of performance that are less important.

* Energizing - Goals can motivate us to pursue particular ends, particularly if the goals are sufficiently challenging that they prod us to make special efforts.

* Persisting - If we have a valued goal, we are more likely to persist in efforts at performance improvement than if goals are lacking.

* Knowing - Goals activate knowledge and skills that are relevant to performance improvement.

Goals will be most likely to accomplish the above if performers are committed to their pursuit and truly value those goals. Locke and Latham note that a public commitment to a goal can be highly effective, enhancing the performer's level of dedication and effort. Performers also need to believe that they are capable of reaching their goals (self-efficacy), and they need to set goals that are neither so easy nor so difficult that they discourage sustained efforts.

A large body of research, including the work on deliberative practice, suggests that goals are not effective by themselves. Rather, it is regular and accurate feedback about goal progress and attainment that facilitates learning, skill development, and motivation. Traders will often set a goal and then set it aside, hoping that the mere act of setting an objective will be helpful. Rather, the value of goals is in their ability to channel efforts at learning. Tracking goal progress and creating new subgoals based on this regular feedback lies at the heart of expertise development.

Goals are also most likely to be effective if they are relatively short-term, channeling immediate efforts and providing rapid feedback. That doesn't mean that long-term goals are irrelevant or unhelpful, but rather suggests that a performer will derive the greatest benefit from dividing long-term goals into concrete short-term objectives.

Finally, there is evidence that process goals can be more effective than all-or-none outcome goals. A process goal for a trader might be to limit losses to a certain number of ticks per trade; an outcome goal might be to make a certain dollar amount per week or month. The latter is highly dependent upon market conditions and not entirely within the trader's control. Process goals, alternatively, focus on what the trader can control directly and thus reinforce self-efficacy.

The proper setting of goals, tracking of performance for feedback, and creation of new objectives is a fantastic use for trading journals. If your goal pursuit and journaling feel burdensome, there's a strong likelihood that you're setting the wrong kinds of goals. Ideally, goals should challenge and motivate us, build our skills, and enhance our sense of mastery.

RELEVANT POSTS:

Building Self-Efficacy With a Solution Focus

Self-Efficacy and the Psychology of Consumer Debt
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Mastering the Art of Goal Setting

Many people set goals in their minds, thinking that the setting of the goal will somehow make things happen.  If goal setting itself got things done, a lot more New Year's resolutions would be fulfilled by December 31st.  The reality is that the setting of a goal is only the start of a productivity process.  How we set and act upon goals will determine whether they in fact become realities.

Think of goal setting as operating on three levels.  On the largest, longest-term level, goals should represent our visions, aspiration, and ideals.  No one was ever energized by an item on a daily to-do sheet.  What motivates us is what inspires us.  It's the vision, the ideal, the dream that makes us jump out of bed in the morning.

The recent Forbes article is one of the most important things I've written, hands down.  It explains precisely how large goals draw upon our reserves and energize us.  When we tap into our deepest sources of motivation--our most fundamental ideals and values--we no longer have to push ourselves to do things.  We are now pulled toward our desired future.

It is the function of medium-term and short-term goals to divide and conquer, making the achievement of the grand goal challenging but doable.  When we create short and medium-term goals that move us forward meaningfully, we create small wins that accumulate into a more general sense of winning.  Those shorter-term goals organize us, but also ensure that we're not just doing things right, but also doing the right things.

When you read about the woman who is running 50 marathons in 50 days in support of a cherished cause, you realize that the right goal setting makes us far more than we are in our ordinary, daily lives.  The right goals form the structure of our days and weeks, but also transform us.  The art of goal setting is knowing what will bring the best out of you and making that a meaningful part of your daily reality.

Further Reading:  How Goal Setting Helps Performance
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How Goal Setting Helps Performance

A while ago, I wrote about what works in goal setting, according to the research of Locke and Latham.  One of their more interesting findings is that there is a positive, linear relationship between goal specificity and difficulty and performance.  When goals are specific, they direct and energize behavior far more effectively than when they are vague.  Difficult, challenging goals inspire greater efforts--and hence greater attainment--than easy goals.  If we think of goals as representing visions of the future, it is the most concrete and stirring vision that will bring out the best in us.

Key to the achievement of goals, according to the researchers, is self-efficacy.  People are much more likely to buy into and pursue goals if they believe themselves to be competent to reach those goals.  This is why the best goals embrace our strengths:  they represent ways in which we can leverage the best of who we are.  

Sometimes, people have gone through so many setbacks that they lack the sense of self-efficacy.  They come to believe that they can never reach their goals.  In that case, setting distant, difficult goals will not be helpful; the focus has to be on achieving small wins.  A series of small goals that are achieved provides multiple experiences of efficacy.  When you win, win, and win--even with relatively small goals--the boost to self-efficacy can inspire larger goals, which energize even further.  It may seem too daunting to lose 30 pounds for a heavy person, for example.  By focusing on losing one pound per week by eating smarter, it is much easier to create experiences of goal achievement, which then fuel the larger goal.

Where traders often fall short is not in goal setting, but in the feedback process following the pursuit of goals.  If a goal is not reached, something went wrong.  It is important to figure that out and make corrective efforts to pursue the goal in a new way.  Goal setting with feedback provides deliberate practice, because the feedback hones our efforts to reach goals.  It is very common in my experience that, when traders keep a journal, they write about their problems, but do not take the next steps of translating problems into challenging, specific goals.  Even when they do outline such goals, it is rare that the goals are revisited with concrete feedback that is used to guide future efforts.

Too much of life occurs in auto-pilot mode.  We take life--and markets--day to day, without an overarching plan and with no deadlines.  We act as if experience itself will teach us all we need to know, when it is guided experience--experience informed by goals and feedback--that gets us where we want to go.  One of the most important functions of a trading journal is as a chronicle of our goals, feedback, learning, and achievement.  We deliver our best efforts when we're on the path to becoming our very best.

Further Reading:  Setting the Right Goals
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Self-Efficacy and the Effective Coaching of Traders

One of my observations over the years is that the coaching of traders is most effective when it is goal-focused. A large body of research suggests that goal-setting facilitates improvements in performance by channeling and energizing efforts. As I noted in a recent post, "Effective goals must be important to the performer and must inspire commitment. While absolute outcome goals can be inspiring (such as setting a P/L goal for the year), more immediate process goals that pertain to day-to-day trading are most likely to generate feedback, review, and learning."

The role of goals in facilitating enhanced performance is consistent with the solution-focus outlined in recent posts. In solution-focused coaching, the idea is to identify and build upon strengths--including strengths that might be overlooked. No one is wholly dysfunctional; we do not fall into problem patterns all the time. Observing what we're doing when problems are *not* occurring often leads to solutions that reflect hidden strengths.

Coaching--including the self-coaching of traders and portfolio managers--is effective to the degree that it provides experiences of self-efficacy. In other words, whether a trader works on goal A or goal B may be less important than how he or she works on those goals. When a trader not only sets a goal but directs efforts toward reaching the goal over time, the result is an experience of oneself as efficacious. This experience enhances motivation and confidence, aiding future risk-taking and helping sustain the "flow" state of consciousness (the "zone") in which optimal performance can occur.

This is where the relationship between coach and trader becomes all-important. The coaching is most likely to be successful when the relationship affirms trader strengths, mirroring competencies and helping to sustain efforts at improvement. Such an emphasis is especially helpful to traders who are struggling with performance pressures, as the goal focus and the affirmative relationship help to sustain confidence and motivation during difficult times.

My general experience is that traders tend to set goals, but tend to be lax in structuring their work on those goals. How we pursue self-improvement is every bit as important as the ends we seek. We are most likely to internalize a positive sense of self--a sustained level of confidence and conviction--if we are generating experiences of efficacy on a daily and weekly basis.
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Formatting Your Trading Journal for Success

My recent posts have focused on using journals to improve trading. Everyone has a journal format that (one hopes) works best for them. Here I'll suggest a format that I find particularly useful.

The reason I'm offering the suggestion is that I continue to find that traders use journals in ways that are less than constructive. The greatest mistakes in journaling, I find, are:

1) Lack of Specifics - The journal contains vague, general intentions such as, "I need to trade less aggressively", without any indication of how the trader will accomplish this. If the intent is to trade less aggressively, then the journal should create a specific goal. An example from my own trading would be: "I'll enter positions with one unit and scale in with a second unit on the first pullback in NYSE TICK when my position is profitable." Notice how this makes the general intention so much more concrete. Now I have something constructive to implement and can grade myself on the implementation. If I only say, "I need to trade less aggressively", that's not goal-setting. That's Monday-morning quarterbacking, or me just wagging my finger at myself. Self-criticism by itself never improved anyone: it's self-criticism followed by constructive problem solving that does the trick.

2) Focus on Negatives - The worst journals are the ones that simply vent fear or frustration. They recite every bad or missed trade, everything that went wrong during the day. Not only is there an absence of constructive suggestions for improvement, but there is also an absence of ideas re: what the trader has done right. The idea is to learn from what you do right, not just what you do wrong. Indeed, focusing on strengths will enhance motivation and the sense of competence and efficacy. By staying exclusively problem-focused, it's all too easy to drain motivation and optimism.

So, how can we improve the above in a format for a trading journal?

My suggestion is starting the journal with a listing of your specific goal(s) for that trading day.
Those goals should be: a) chosen from your previous day's or week's trading; and b) taken from your trading rules. The goal should be either to improve a mistake you made, or to build upon something you did right. The goal should state specifically what you expect yourself to do during the coming day, so that you can rehearse the goal in your mind before the market opens and so that you can evaluate how you performed on the goal at the end of the day.

Notice that, before creating the journal, it's important to write out your trading rules in advance: everything that you want to follow to trade well. You can't hold yourself accountable for a rule that you don't create; that's perfectionism, and it's not helpful either. Rules should clearly state how you want to size positions, enter them, exit them, set stops, set exits, scale in and out of trades, etc. Your journal will track how well you follow these rules, not just whether you make money or not.

So you start with rules, notice when you do a particularly good or poor job following the rules, and then set goals for the next day based on the good or poor performance. The journal entry then gives yourself a grade at the end of the day for how well you performed on your goals and why you earned that grade. Include your daily P/L with your grade, so that you can quickly see how your performance rises and falls with your grades.

The journal keeps you constructive, keeps you learning, and keeps you working on the things that are most important. It is not a tool for simply rehashing the day or voicing your feelings; it is your tool for self-development: your means for coaching yourself.

RELEVANT POST:

When Coaching Works and Doesn't Work
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Coaching Traders at the Start of the Day

Today I'm at a prop firm all day and will spend the day rotating from trader to trader as they trade, helping them with their trading (and their psyches!) as they are trading. In between visits to the traders, I'm consulting with the firm's risk manager, so that I know how everyone is doing through the day. Is someone not seeing the market well? Is someone overtrading? Is someone chasing markets? There's no better time to work on those issues than when they are happening, live. Interrupting old patterns and replacing them with new, better ones is the essence of what we're all trying to do.

Break the old habits, build better ones.

Each meeting starts with a single question: What are we working on today? You can't get to where you want to go if you don't have your destination in mind.

We take a look at what has been going right and wrong the last few days and, out of that, comes a single goal for the day.

When I then sit in with the traders as they're trading, they are focused on markets. I'm focused on their goal. If the trader is achieving the goal, we focus on what he did right and how we can become more consistent with the good trading. If the trader is not achieving the goal, we take corrective action *before* the losses mount.

Much of this traders can do on their own if they can just set that one goal for the day and take the occasional break from the screens to assess whether or not they're living up to their goal. Not every day can be profitable, but--if you're setting and working your goal--every day can be a success, building confidence, self-efficacy, and mastery.
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The Importance of Having One Big Thing to Work On

I've read hundreds if not thousands of journal entries during my years of working with traders.  One pattern shows up among the traders who make greater success:

Their performance journals are highly focused.

The trader surveys his or her trading and identifies one big thing to work on that will make the greatest difference to the bottom line.  They sustain that single focus until they have demonstrated significant progress.  Then they move to another "big thing" goal to work on.

The lesser successful traders recount everything that has happened in their trading and what they need to do better next time.  Lots of good intentions, not many concrete goals.

It is difficult to sustain a sense of urgency when working on many things at one time.  When there are many goals, it's easy for a priority at one time to distract from efforts at other priorities.  

When I see the progress of traders with many goals, it is difficult to pinpoint where they have made dramatic improvements.  The more successful traders seem to be working on fewer things but they actually get more accomplished.

Here's the framework I'm using for my own trading:  one prioritized goal per month.  Each day I have a specific plan for working on that goal and each day I review my recent work on the goal and modify my plan.  If there are roughly 20 trading days in the month, that means that I have at least 20 reps in my workout, 20 trials in my deliberate practice.  The reality is that I have more than that, because I take midday breaks in my trading and treat morning and afternoon as separate trading "days".  So that means 40 reps, working on just that one goal.

Then a new goal the next month.

And the next month.

By the end of the year, the idea is to have 12 big things that you've accomplished, each making you better.  That's a big outcome, and it springs from a small beginning:  a single important thing to work on that will make a positive difference in your trading.  Keeping a report card on your trading is huge.  Focusing that report card takes it to the next level.

What's your One Big Thing?

Further Reading:

Mastering the Art of Goal Setting

TraderFeed Home Page and Index

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Setting Goals: A Trading Coach Essential

For those just dropping by, this is the fifth post in a series. The previous four posts have been:

* Preparation and the Perception of Time

* Discovering Your Trading Patterns

* Previewing and Reviewing Your Trading

* Preparing to Win

Several of the posts above discussed learning loops as the essential component of performance development. We become better performers when we learn from previous efforts and use that learning to guide future efforts.

The glue holding together these learning loops is goals. Goal-setting is what differentiates the intentional, process-driven, performance-oriented trader from the trader on autopilot.

This post provides a good introduction to goal-setting. Setting effective goals is also the subject of Lesson 34 in the Daily Trading Coach book.

Traders commonly make several mistakes in setting goals:

* Too Distant - By setting goals at very long time frames only, they do not concretely guide day to day, week to week performance;

* Too Vague - Goals should be process-oriented and spell out clearly what, specifically, you will be doing in the future and how you will be doing it;

* Too Burdensome - Traders will tackle too many goals at once and give up on the whole effort when it becomes overwhelming;

* Too Unrealistic - Traders will set perfectionistic goals ("I will make money every day of the week") that they cannot control and that leave them feeling discouraged when not reached.

One component of goal-setting that is often ignored is rewards. We're more likely to sustain an activity when we find it intrinsically and/or extrinsically rewarding. Let's face it: hard effort in any performance domain--whether it's physical conditioning in sports or countless rehearsals in preparation for a stage play--is not always fun. Even the most dedicated performers have to push themselves to reach their peak performance: that pushing means they necessarily go beyond their comfort zones.

Rewards provide an incentive for those pushes. In trading firms, one important incentive is capital allocation: traders are allotted larger buying power when they produce positive results. Trading firms that are well managed also provide meaningful psychological rewards, in terms of peer recognition.

Independent traders coaching themselves generally structure their own rewards. Those can be as simple as special vacations paid for out of market winnings: shared rewards are often doubly rewarding. In my own trading, I allocate size based upon my results during the year: that creates a tangible incentive to build profits and refrain from overtrading.

Although I prefer process goals (goals that entail trading well) to outcome (P/L) goals, I do emphasize in my own trading the goal of being profitable each month. This helps me manage risk during the month and also provides a benchmark for success that can be a focus each day and week.

Open your trading journal: What is your goal for today's trading? For this week? How will you know that you've reached your goal? What, specifically, will you do to achieve your goal? These are the questions that bring learning loops together. If they're not in your journal, the odds are good they're not there in your head--or in your trading.
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Becoming Truly Accountable For Our Trading Account

We have trading accounts, but how truly accountable are we for those?

What percentage of us routinely keeps informative data on our trading results?

What percentage of those traders keep regular journals to turn the trading data into actual goals and plans?

What percentage of those traders then tracks their goals and plans and holds themselves accountable them going forward?

Put it this way:  If you pursued greatness in any professional sport, how likely would it be to find success if you worked as hard at that sport as you currently do at your trading?

Could it be that the majority of traders fail to find success, not because they trade the wrong "setups" and styles, but because they pursue performance in ways that could not work in any performance field?  

In an excellent post, Bry Gomez from the Caylum Trading Institute points to a study from the American Society for Training and Development (ASTD) in which the probability of reaching a goal was studied as a function of the level of accountability for that goal.  Simply formulating a goal led to a probability of success of 10%.  Having a concrete plan for reaching the goal raised the odds of attaining the goal to 50%.  Having a specific person to whom you are accountable for the goal--and a specific time set to review performance with that person--led to an achievement rate of 95%.

In other words, it's not simply about having good intentions or even having good goals.  It's about leveraging the power of human relationships to become fully accountable for achieving those goals.  Creating daily report cards of performance and sharing those with peers becomes a best practice that can greatly improve performance, as Mike Bellafiore has observed in the development of traders.

We find our potential when we make life a team sport.

Further Reading:

Taking Journaling to the Next Level

TraderFeed Home Page and Index

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How to Trade With Peace of Mind

I love the idea of success as peace of mind.  It's being able to look yourself in the mirror and know that you've done the best you can, that you're not perfect, but that you're continually learning and improving.

Some traders trade to not lose and so they never really win.  Other traders cannot accept the wins they achieve and have to keep trading and keep trading until they eventually lose.  Neither group achieves the peace of mind that comes from focusing on the process of development rather than the recent outcome of performance.

Thanks to a savvy trader for passing along this Harvard Business Review article on goal-setting.  The article makes clear that the way in which we set goals greatly impacts the probability of our success and the mindset we're likely to come away with.  For example, research suggests that 41% of items on people's to-do lists never get done.  The average professional has 150 tasks to accomplish at any one time.  It's difficult to reach a point of peace of mind when you're continually trying to keep up with expanding demands.

The article stresses the importance of keeping goal-setting flexible and doable.  Flexible means revising goals at intervals: for example, setting monthly goals rather than annual ones.  Doable means that both the number of goals and their difficulty be set in such a way as to set us up for success rather than frustration.  Many big goals can be broken down into a sequence of smaller ones that create an ongoing sense of progress and momentum.

One exercise I recently discussed with traders is to define each day one thing in two categories that will be accomplished to make the day a productive, successful one.  Those categories include your most important goal for your trading and your most important goal for your personal life.  The trading goal is taken from your most recent performance and involves either building on a recent strength/success or correcting a recent mistake or shortcoming.  The personal goal involves building into your day some activity that generates happiness, fulfillment, energy, and/or closeness to others.  

So each day, you're exercising some function to become better in your work and to become better as a person.  Over time, the accumulation of small goals creates large changes.  The idea is to make each day a win, regardless of the P/L of the moment.  That creates peace of mind, and peace of mind frees us up to trade with open minds.

Further Reading:  What I See Among the Best Traders
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Viewing and Reviewing Your Trading

An excellent, successful SMB/Kershner trader I've known for years recently made a Q&A video where he shares valuable lessons from his development.  One of the important points he makes is the crucial role that review plays in honing trading skills.  I can vouch for the fact that he reviews his trading religiously every day and shares those reviews with a variety of colleagues.  He learns from the reviews and role models trader development for others: a great example of each one teach one.

As Les Brown notes above, a double review serves an important focusing purpose.  The first review occurs at the start of trading where you examine how your markets or stocks are setting up and you figure out--specifically--how you will apply your trading goals to the current market conditions.  For example, one of the things I'm working on in my trading is developing better estimates of how far moves can extend and adapting my scaling out of profitable positions to take better advantage of markets that expand their volume and volatility during the day.  My premarket review examines relative volume in real time and lays out a tentative plan for sizing and scaling.

Note that the idea here is not to simply review an abstract goal, but instead to actively apply that goal to upcoming performance.  A goal not actively applied is merely a good intention.  It is planning that gives goals their life.

At the end of the trading day comes the second review.  We examine how well we actually acted upon our plans and goals.  If I made progress on the goal, I will note how I did that in real time and will bring that positive learning lesson forward to the next day.  If I failed to move forward on the goal, I will dissect what went wrong.  Did I read the market incorrectly or fail to properly update my views on volume and volatility?  Did I become distracted and lose sight of my goal altogether?  Did I become too focused on sizing up that I missed the fact that the opportunity set was waning?  What I could have done better frames the goals for the next trading session, which will become plans in the morning review.

Every day.  

That is how learning compounds and develops into expertise.  That is what improves our odds of long-term success.  

Yet a further refinement is to conduct separate reviews of the various facets of trading:

*  How well did you develop sound ideas to trade?
*  How well did you enter positions and achieve favorable reward relative to risk?
*  How well did you scale into and/or out of positions to optimize profitability and manage risk?
*  How well did you manage yourself during the trade--and throughout the day--to sustain optimal focus and keep yourself in a peak performing state?

Just as a tennis player will work on different aspects of her or his game (the serve; backhand; net game; etc.), we view and review different facets of trading to ensure that our development extends to everything we do.  In a gym, you'll work different parts of your body--upper, midsection, lower--and you'll work on aerobic conditioning as well as strength.  So, too, do we work on different facets of what we do as a trader.

That is how developing ourselves as traders inevitably intersects with our personal development.  In refining our skills, we refine ourselves.  

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Self-Efficacy, Physical Exercise, and Goal Attainment

A wide range of research finds that physical exercise that improves aerobic conditioning improves both mood and self-esteem. Such exercise also has distinctive health benefits and helps reduce state anxiety and other forms of emotional distress.

One study, however, suggests that the link between aerobic conditioning and psychological well-being is due to a placebo effect: subjects who are specifically told that their exercise will help their psychological state show much greater improvements in well-being than those going through the same program and not told of the link.

An interpretation of this latter finding is that improvements in self-efficacy, not just aerobic conditioning per se, might be responsible for the link between exercise and psychological well-being. Research suggests that beliefs about the health benefits of exercise are often responsible for people starting their workout routines, but that improvements in self-efficacy are responsible for *continuing* these routines.

Self-efficacy--the belief that one is capable of engaging in positive actions and reaching desired goals--may thus be important to sustaining an exercise regime, but may also be the result of such routines. This creates a virtuous circle, in which efficacious actions enhance the sense of efficacy, which, in turn, fuel further goal-oriented behavior.

These research results hold a number of implications. First, it may be fruitless to engage in coaching and counseling efforts if one is lacking the basic self-efficacy beliefs needed to sustain goal-directed action. Stated otherwise, it may be important to first improve self-efficacy beliefs with immediate, emotionally-impactful experiences of efficacy before tackling larger life goals. Does it really make sense, for example, to help someone improve their trading discipline when, in fact, that person does not possess the self-efficacy needed to sustain personal discipline in other aspects of life?

Another, subtle implication is that programs designed to enhance self-efficacy in one arena may spill over and fuel self-efficacy in other areas of life. A sustained exercise program, for instance, may fuel the self-efficacy needed to tackle changes in one's relationship life or trading. Nothing so promotes goal-seeking as goal attainment: by tackling goals in a variety of life areas, a more general sense of self-efficacy--impelling further achievement--may result.

RELATED POSTS:

Self-Efficacy and Consumer Debt

Building Self-Efficacy With a Solution Focus

Self-Evaluation and Success
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Trading Psychology Challenges - 4: Frustration

Of all the psychology problems I observe among highly competitive traders, frustration is the most common.  Indeed, as I recently noted in a presentation to fund managers, frustration is a great example of the principle that strengths, taken to an extreme, can become vulnerabilities.  When we are achievement oriented and demanding of ourselves, having something get in our way breeds a natural frustration.  That frustration, in turn, triggers a fight/flight state and suddenly we are no longer nicely grounded in our brain's prefrontal cortex.  Instead, we activate motor areas to cope with the situation and act in ways that we would never entertain if we were calm and focused at the start of the trading day.

As the above quote suggests, frustration comes from expectation.  When we have a goal and the achievement of that goal becomes blocked, we are wired to take action to remove that block.  That can be helpful if, say, our path out the driveway is blocked by high, wind-blown snow.  The frustration of the situation can energize us to take out the shovel and remove the block.  But what if we cannot take remedial action?  If a car suddenly pulls in front of us without signaling and nearly causes an accident, there is no ready, constructive action we can take.  So we blow off steam and curse, hit our horn, etc.

Suppose, however, that we are in a *rush* to get to our destination.  We need to be on time, and the car suddenly pulls in front of us and causes us to get stuck at a red light.  That's when frustration is likely to be channeled as anger.  The inconvenience is now processed as a threat and our fight/flight mechanism goes into overdrive.  It's not just having a blocked goal that creates frustration; it's the *need* to reach that goal that sets us up for a performance-destroying response.  Should we react to the traffic situation by running the red light or suddenly switching lanes ourselves, we could create a real accident.  Those are actions we would never take under normal driving conditions.

As I point out in The Psychology of Trading, many times frustration and anger are responses to current situations that bring up the feelings from prior challenges and conflicts.  In such cases, our frustration seems out of proportion to the immediate situation.  That is because we are responding to past situations, not just the (similar) current one.  For example, if we experienced considerable difficulty learning in school, perhaps because of a learning disability, normal setbacks in trading can feel like past failures, eliciting self-criticism, negativity, and frustration.  In such cases, our frustration problems will not be limited to trading contexts.  When the past intrudes into the present, that typically affects a broad swath of life domains, including relationships and work.  If those patterns are interfering with many life areas, it can be very helpful to seek professional help.

When frustration is more situational and shows up dominantly in the trading context, the techniques described in The Daily Trading Coach, such as building positive associations and exposure methods, can be quite helpful.  (Another way to access resources relevant to frustration is to Google "Traderfeed frustration" and you'll see quite a few posts pertinent to the topic).  One particularly powerful approach is directly addressing the perceived *need* that fuels the shift from frustration to anger.  It is natural--and not necessarily problematic--to be frustrated when we don't reach a desired end.  When we tell ourselves that we *must* achieve that goal *now*, we set ourselves up for overreaction.

In such cases, training ourselves to embrace losses and learn from them is very helpful to our trading psychology.  Quite a few times, I have entered a good trade with a positive expected return and it hasn't worked out.  When that has occurred, I will say to myself, "That should have worked!"  That leads me to entertain the hypothesis that the market cannot sustain the expected direction and may indeed trade the other way.  That can be very useful when a breakout trade suddenly stalls and returns to a prior trading range.  Embracing the loss and now looking for a possible retracement of that range, given that others are similarly trapped, can turn the losing trade into a tuition for an even more profitable winning trade.

Other times, we may extract useful information about our trading mistakes from losing trades.  Perhaps our entry execution was sloppy, triggering us to work on firmer rules for entries.  That channels the frustration constructively, away from anger.  Many traders I work with become very alert to the cues of mind and body to recognize frustration as it's brewing.  They are able to recognize that as an emotional pattern that has cost them money in the past, and that triggers them to step back from screens and regain emotional equilibrium.  We are best able to change an emotionally driven pattern if we're aware of that pattern.  Mindfulness is a great antidote to reactive trading in the heat of battle.

Further Reading:  Separating Frustration From Your Trading

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Setting Effective Trading Goals

In my recent post, I described goals as bridges from the real self to our ideals. Research in psychology suggests that goals serve as tools for self-regulation, helping us control and direct our actions toward desired ends. Properly set, goals fulfill several purposes:

1) Motivation - Goals can inspire us to take the efforts needed to improve performance;

2) Learning - When goal-setting is followed by feedback and then by further goal-setting, we create loops that accelerate our learning;

3) Self-Efficacy - When we set challenging, but attainable goals, we build our sense of confidence and competence.

Research has found that goal-setting increases performance in sports and it can similarly enhance trading outcomes. A far-reaching review finds that how goals are set very much impacts their effectiveness. Effective goals must be important to the performer and must inspire commitment. While absolute outcome goals can be inspiring (such as setting a P/L goal for the year), more immediate process goals that pertain to day-to-day trading are most likely to generate feedback, review, and learning.

Among the most important process goals for traders are:

1) Risk management goals - Goals pertaining to trade sizing and drawdowns;

2) Idea generation goals - Goals pertaining to the process of generating sound trading ideas and formulating these into plans;

3) Execution goals - Goals pertaining to implementing trade ideas/plans so as to maximize reward and minimize risk;

4) Position management goals - Goals pertaining to the management of positions once they're entered, including hedging and scaling in/out;

5) Portfolio management goals - Goals pertaining to achieving good diversification among ideas and allocating capital effectively to those ideas;

6) Self-management goals - Goals pertaining to maintaining a constructive mindset for optimal decision-making;

7) Personal, non-trading goals - Goals that reflect desired outcomes in areas of life outside trading that might spill over into trading performance, including physical fitness, relationships, spirituality, etc.

Not all these goals will apply to all traders, but these are the ones I encounter most frequently in my work. Each goal, to be effective, must be grounded in a vision of one's ideals, so that performance can be measured and steps can be taken to address shortcomings. Effective goals are more than good intentions: they are emotional commitments to cultivate the self.
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Habits, Happiness, and a Potpourri of Weekend Ideas

*  This post from SMB builds on a TED talk that makes the case for doing something for 30 days as a way of building new patterns of behavior.  Viewed in that light, what we call "discipline" is not the goal of a change process, but an intermediate step.  It takes discipline to do something consistently and routinely for 30 days, but once we internalize the repetitions, what formerly took effort now becomes second nature.  Driving a car is a good example of this:  initially it takes effort and considerable conscious thought; eventually it becomes a natural part of us.  The goal of trading psychology should *not* be instilling discipline, but rather using discipline to instill positive habits.  

*  Per the above, choosing a single goal, identifying a specific change connected to that goal, making that change for 30 days, and keeping a 30-day journal to track results would be a much more effective program for change than tackling many goals at one time and never consistently implementing changes connected to those goals.  From this perspective, setting goals is not what creates change--it's turning those goals into consistent habits.

*  Abnormal Returns links a WSJ article about simple truths that investors typically get wrong.  One of those is assuming that making money will bring happiness.  Despite talk of a hedonic treadmill--that we maintain a relatively constant level of happiness through life--there is evidence that specific life changes are associated with improvements in happiness.  Interestingly, some of those changes are ones specific to lifestyle and not to monetary success per se:  spiritual development, healthier lifestyle, etc.

*  Interestingly, one of the best predictors of happiness in the study was the gap between how many hours you work per week and how many you would like to work.  Those who feel overworked (they'd like to work fewer hours) and those who feel underworked (they'd like to work more hours) are less happy than those who are working as much as they like. 

*  The positive psychology work of Ed Diener and colleagues also tends to challenge the notion of hedonic treadmill.  One important observation is that we have different happiness set points for different facets of life:  work, marriage, etc.  Also, our level of positive emotion can change more or less than our level of negative emotion.  An important component of positive experience, the authors note, is life satisfaction.  In many ways, focusing on life satisfaction is more important than focusing on the rises and falls in positive and negative mood.  

*  To bring the above topics together, it's interesting to speculate on what a 30-day program to increase happiness and life satisfaction might look like--and how such a program might impact one's work performance.  Suppose you dedicated X minutes per day to doing something that was deeply personally rewarding.  Might the resulting satisfaction broaden into other experiences during the day and build a much more general sense of well-being?  Not a bad personal project!

Further Reading:  Well-Being and Trading Performance
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What We Need to Turn Goals Into Lasting Changes

The last post took a look at the importance of prioritizing our goals and the activities that help us pursue our goals.  An excellent post from James Clear discusses the importance of habit formation, so that the changes we seek become internalized parts of ourselves and built into our daily routines.  The post cites evidence that such habit formation is most likely to occur if we structure our pursuit of goals, specifying what we'll do each day, when we'll do it, and how we'll do it.  Interestingly, however, we are most likely to turn our specific plans into habits if we focus on one goal at a time.  Doing one new thing the same way over many days is much more effective in developing new habits than trying to do many new things at once.

Clear cites research that suggests it takes over two months of repetition on average for a behavior to become truly internalized and automatic.  That's a significant period of time (and commitment) and helps explain why relapse is so common among people seeking changes.  If we do not sustain consistent effort over time, the new behavior does not become a consistent part of us.  In those first days and weeks of effort, habits are like cobwebs--easily broken.  It's only with significant repetition that they gain the strength of cables.

So there's a chicken-and-egg problem here.  We need repetition over time to build a habit, but it's precisely the absence of the right habits that make it difficult to repeat activities over time!  How can we become better at the process of habit formation?  

At root, there are only two reasons for devoting the resources to making changes:  extreme fear or profound inspiration.  We will change if we absolutely need to:  if the consequences of not making the change are so scary and aversive that we'll do anything to avoid them.  That's how alcoholics change after hitting bottom; it's why people who could never diet suddenly make big shifts in eating after a heart attack.  Fear creates a sense of urgency.

But the sense of urgency can also come from very high levels of inspiration.  We can become so energized and excited by a potential outcome that its pursuit becomes our absolute priority.  That's the motivation that keeps the entrepreneur doing the right things, or the Olympic gymnast.  It's not about being pushed by fear, but being pulled by an ideal.

The bottom line, however, is that we need a sense of urgency to keep doing something, the same way, for over two months.  Urgency is the great missing ingredient in most change efforts.  This is why goals, to be achieved, must be meaningful, not mere shoulds.  If a goal is a mere desired outcome that finds its way onto a to-do list, it will neither inspire the fear nor the inspiration to become an urgent priority.  Inevitably, competing activities will take over and we'll become a victim of relapse.

This, ultimately, is why setting and pursuing multiple goals doesn't work.  Once we dilute our goal-setting and pursuit, no one goal sustains the specialness--the sense of urgency--needed to become an automatic part of ourselves.  We only change when change is truly important to us...when it becomes a need and a must, not just a preference.  If we're looking to make changes in our trading, finding the one change that will make the greatest difference and tapping into the urgency of making that change is the best way to turn our best practices into robust, best processes.

Further Reading:  Three Best Practices of Best Traders
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Cognitive Behavioral Techniques for Changing Your Trading Psychology - Part Three: Overcoming Anger and Frustration

In the first post in this series, we took a look at the cognitive behavioral self-help techniques described in the new book by Dr. Seth Gillihan and how we can overcome our tendencies toward procrastination.  The second post in the series examined the fear of missing out (FOMO) in trading and specific techniques for moving past that fear.  This final installment deals with anger and frustration and methods for ensuring that these do not bias our decision-making.

We typically feel frustrated when we are pursuing a goal and find our path blocked.  If we want to reach a destination and we are slowed by traffic, we can respond to the situation with a flight-or-fight response, cursing the situation.  When the situation becomes more personal--if we believe that someone stands in the way of our achieving our goal--the frustration can become anger and even rage.  We most often experience anger if we believe our rights have been violated; that we have been mistreated or wronged.

In the case of trading, our goal is to make money through our ideas and this goal is often thwarted by the adverse behavior of the market.  We are faced with a loss instead of a gain and this can frustrate us.  If we tell ourselves that other market participants are somehow cheating or gaming the system, our frustration can turn to anger.  Once we're worked up in the flight-or-fight mode, we can make subsequent reactive decisions, turning one loss into many more.

If a core skill of short-term trading is pattern recognition, then success hinges upon a high degree of focus and open-mindedness.  When we lose peace of mind, we lose focus and openness and we trade what we want to see, not what we're actually seeing.

Dr. Gillihan outlines several powerful techniques for moving past frustration and anger, including:

1)  Know your triggers - Typically, there are a limited number of situations that have the power to set us off.  If we are aware of those situations, we can mentally rehearse them and practice calming self-talk.  For example, we can imagine ourselves losing on a trade, feeling frustrated, and then reminding ourselves that any edge in markets is only probabilistic and that losses are part of the game.  This acceptance can help us regroup and generate the next idea.  Self-awareness of triggers can also enable us to step back from trading temporarily when those occur, so that we don't allow frustration to impact our behavior.  One especially powerful technique when a trigger occurs is to remind yourself of the costs of anger and how acting on the trigger has hurt you in the past.  That way, frustrated behavior becomes the problem, not the triggering situation.

2)  Relax and breathe with your anger - If you temporarily lost your faculty of vision, you would not blindly put trades into the market.  The fight or flight response creates emotional blindness, so that you may no longer see yourself or the market clearly.  If you use emotional arousal as a cue to relax and breathe more deeply and regularly, you practice self-control.  Each episode of frustration thus poses an opportunity for you to achieve self mastery.  You can actually engage your competitive instincts and look forward to losses as opportunities to beat anger.  That way, every trade is a winning trade.  You either make money or you build inner strength.

3)  Practice acceptance - It is OK to lose as long as you exercise sound risk management in the sizing and management of your position.  As we recently saw in a post on turning mistakes into trading successes, it is not uncommon for a losing trade to lead you to reassess your view and eventually generate a much better trade idea--often in the opposite direction.  A sound trade that loses can provide useful information.  By accepting the loss as a tuition for learning, we can move past frustration and gain from the lessons learned.  I recently placed a good trade with high odds of taking out a prior market high.  We moved toward the high, stalled, and then started to reverse on higher volume.  I quickly got out of my trade at a small loss and flipped short, accepting that we had likely make the high for the day.  The subsequent down move, trapping the longs, more than made up for the loss on the long position.

We cannot prevent setbacks in life but we can ensure that we use these as sources of learning and development.  Every day can be profitable if we're always using experience to make ourselves better.  Once we realize that setbacks are opportunities, we can actually respond to them with gratitude.  If life is a classroom, our setbacks are our lessons and we can give thanks for the opportunity to grow.

Further Reading:  Trading With Gratitude and Appreciation

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