Wednesday, January 28, 2009

Trading With Patience: Using Trading Metrics to Aid Trading Psychology

One of the themes from the trader performance book that is also a major focus of the new book on learning to coach yourself is the importance of keeping statistics on your trading. Recall that a cornerstone of the solution-focused approach is that working on weaknesses will at best take deficient performance and turn it to average. That can be helpful, but in itself will not make you a stellar performer. To get to that proverbial next level, you need to build on your strengths and become more consistent in drawing upon them.

But how can you build on strengths if you're not fully aware of what they are, and if you're not targeting them with positive goals that you work on daily? Keeping score of your trading helps you better understand what you do when you're at your best. It also helps you track your progress in living up to your performance ideals.

The notion of psychometrics is that trading statistics reveal trading psychology. How you trade is a reflection of how you think and feel. There is no better way of getting into your head than by getting into your trading account and examining what you're doing, what is working for you, and what isn't.

A great example of this occurred in my recent trading. I sliced and diced my recent P/L trade by trade and found one factor that reliably predicted my daily profitability: the time of entry of my first trade. If I traded very early in the morning session for my first trade, I was more likely to be unprofitable on the day than if my first trade occurred later. Indeed, by reviewing my results, I was able to determine that entries within the first ten minutes of trading drastically reduced my daily P/L performance.

Here is where psychometrics reveal psychology. The very early entries reflected a lack of patience on my part. I became wedded to a particular market scenario, and I was afraid of missing out on that move. Instead of waiting for market action to confirm my scenario, I tried to front-run the trend. As a psychologist, I know full well that in any dance with the market, you want the market to lead. My job is to follow market direction; not gratify my ego by predicting market action. But once my ego became attached to the anticipated move, all my fancy education and training went out the window.

So how do psychometrics help? Once I realized that my very early trading was hurting me, I created a hard and fast rule that I could not enter the market within the first 10-15 minutes of trading. I also created a psychological exercise for myself in which I could simply calm myself before the market open and visualize myself trading with extreme patience. During those exercises, I reminded myself that my opportunity was not limited to the opening moments of the day; that I was operating in an environment of plenty, not scarcity.

As a result, my batting average of winning to losing trades has improved and my equity curve, which took a dip, returned to a nice, positive slope. Equally important, I'm trading more in control, more at peace with myself. But it took a hard look at the metrics to bang sense into my head. I'm 54 years old, been trading since the late 1970s, have an advanced degree in psychology, and I'm still working on myself and working on my trading.

But that's what I love about the business: I'm working on myself by working on my trading.