Personality can be defined as a dynamic and organized set of characteristics possessed by a person that uniquely influences his or her cognitions, motivations, and behaviors in various situations. One such situation is trading and the basis for the personality assessment that I created called the MAP (Market Awareness Profile).

The Big Five factors of personality are broad dimensions of personality and have been a staple in personality theory since the 1960s. I chose to use this model for the MAP for the same reasons I chose it when doing my doctoral dissertation—reliability. The five broad domains discussed in the model are:

• Openness to change
• Conscientiousness
• Extroversion
• Agreeableness
• Neuroticism

In a series of posts over the next few months I’m going to discuss not only these broad dimensions, but the six facets that accompany each of the dimensions. For this post I’ve decided to start with extroversion as most people are familiar with it and have probably believe they are or have been called either an extrovert or introvert.

Extroversion and introversion are most typically viewed as being on a continuum and that each of us reside there, somewhere. The important thing to remember though is that we can fluctuate during different periods of our lives. As an example, I may be an extrovert when trading and an introvert while riding on the train to work. Introversion is not the same as being shy. It is more of a choice than a fear of social encounters. I may choose to be alone on the train so that I can focus on a task versus being alone because I lack self-confidence and a belief that I could contribute at a social level.

In trading, an extrovert may be more inclined to take risks and thrive off trading with “an edge” whereas an introvert may be more prone to an aversion of risk. Both can be debilitating to trading success if not kept in check. This task is often hard to do alone and one of the reasons why traders who are held accountable by a “boss” are more likely to be successful versus going it alone and unchecked.

One of the more defined facets of the extroversion scale is assertiveness. High scorers on this facet are more likely to approach trading with confidence, as they do life. The key is to not let this turn into over confidence as the market has a way of humbling those that do. Odds are good that these traders will attempt to buy bottoms and sell tops. They are less inclined to have a trend following system or strategy which would require patience.

Low scorers tend to not fight the tape and trade with the flow and follow trends. They are more likely to use a conservative system or strategy that buys/sells only after confirmation of a break of resistance/support. Odds are good that fundamental analysis is a part of their system as well and that price action is typically left for larger time-frames such as daily and weekly periods.

Obviously, as stated earlier, we will find ourselves employing a strategy or following a system akin to those just mentioned. We may also have experienced several different strategies and systems and still feel as though the holy grail is out of reach. On the other hand, perhaps we’ve found a system or strategy that fits our personality and the marriage is one of success. If you are at that point, congratulations! If you are not quite there, patience, perseverance and the insight gained from a personality profile could lend itself nicely to the journey.

Now if you read this post and think it’s a bunch of crap, I offer this. Hundreds of thousands, if not millions of people are aware of moving averages and have heard and/or tried a system based upon a cross of the moving averages. In fact, there are some well known systems that are out there for anyone to use and some traders have proven to be quite successful using them. Why then is it that so many people fail at being a successful trader with all these proven systems out there? I’d argue that a big piece of that puzzle is the baggage (personality) that we each bring to the market.

I’d further argue that if you’ve been lucky enough to weather the markets for a period of time that you have tried several strategies and systems. Perhaps you’ve found one that fits your personality and you’ve found success. How much time, money, effort and other resources were spent to get to where you are now? If you’d only known then what you knew now, you could have saved so much. That is why I believe having a good idea of what you’re wired for in life can and does impact your trading. With that knowledge, you can save valuable resources and get to where you want to be more efficiently.

I grew up in the Northwest corner of Wyoming and as such loved the outdoors. One of my favorite activities was fishing, especially fly fishing. I used to fly fish in Yellowstone park quite regularly and loved the challenge of landing a huge fish with the small hook disguised as a fly. The problem I had though was that I could literally go through 30 different flies trying to find the one that would work. This was not an easy process and at times was very frustrating. Over the years I learned patience from this process because I knew if I found the right fly I’d land the big one.

When I first started trading I had a similar frustration at times as I moved from one stock to another trying to land the big one. After several failed attempts I found what works for me and haven’t really ventured far from that. I still have to exercise patience as some times I feel like getting in the market even though my strategy tells me not to.

As a premium seller I am an odds maker of sorts and when you have to pay out it hurts, financially and mentally. Every option cycle I’m in the market selling that low probability chance that the market will make it to a certain level by expiration. At times it’s gut wrenching while at other times I find myself extremely bored.  I find myself wanting to trade something, anything, and then I remember to exercise patience and move on. At times I have to physically remove myself from the office and go do something else.

Yes, cash is a position, and you can keep out of the markets if you’re not comfortable shorting (buy a put for heaven’s sake) or don’t know how. My point is that if you are trading to trade, your odds of success are low. Stop! It’s been rather easy lately to make a decent return trading as it seemed that every dip was bought and stocks didn’t know how to make a lower low. The market has changed recently and it may be some time before solid opportunities present themselves again. Protect your trading capital so when a high probable trade comes along, you can act upon it.

Some have said that trading is 90% mental and 10% technical and that successful traders learn to remove emotions (or at least control them) from their trading decisions. The TESTED method is a process to help remove emotions from your trading and allow yourself to be proactive in your trading. An example follows that shows how important it is to use the TESTED method and the process used in the proper order. The first step, and probably most important, is the Target and that is where we will begin.

Target

A key decision that needs to be made is where you think a certain stock is headed, or at least where it’s capable of heading. We’ll use a metaphor for trading that involves a trip. Let’s say we wanted to hold a conference in Las Vegas, and so a plan was mapped out and a date was agreed upon. Some of us would fly others would drive, and some might actually walk. The point is that we all know where to go (target), and there are several ways to get there. In the end, we all meet at the same point.

Trading is the same way in that we might think AAPL is going to $200 a share and so we can choose to buy stock, options, or even single stock futures. Simply put, we all agree upon the price (target) and that will determine the instrument we choose to trade AAPL.

Looking at AAPL, we can see that the stock is at $186 a share and we can compare the target using both stock and options. Our initial investment with the purchase of the $185 calls would be $1,200 and we would have 45 days for AAPL to get to our target of $200. If we purchased the same amount of stock, our initial investments would be $18,600 and we wouldn’t be limited by time as we are with options. Two decisions need to be made at this point and that will divide traders into two camps. One decision would be how much you are willing to risk in the trade with your initial investment. Obviously the option is roughly $1K and the stock is $19K. The second decision is whether or not we want to have time as a factor in our trade. Regardless of our decision, we are still figuring on AAPL making it to $200 a share.

To take this example even further, we could make a few assumptions. Let’s say that AAPL did make it to $200 but it took 30 days to do it. If we bought the $185 option and APPL is now at $200, we have $15 intrinsic value in our option. However, our option cost us $1,200 so we are actually up $300 (minus the 15 days of time value, so we could roughly estimate that we would be up $315). If we bought the stock at $186 a share and it is now at $200 we made $1,400. Notice the big difference in the two choices with the same target in mind. Take the return on investment (ROI) and you can see that with the stock we had a 7% return and with the option we had a 26% return. Obviously there is more to this equation, and one is the time it will take to get to the target.

The time frame gets you to answer the question of how long it will take for your trade to progress to the point of exit (Target). That exit can come in the form of a triggered stop or, preferably, a triggered limit order. Take into consideration the ATR, Beta, and the average gain over a 6 month period of the stock you are trading to help you determine the time it will take to reach your target. Once you have an idea of the number of days it will take to make it to your target, you should double it in case you are wrong and the stock trends sideways or moves against you for a day or two (if you are trading with the purchase of an option, triple the amount of time).

If you look at the chart of AAPL, we can see that for the 6 month period, it is basically where it was in December. This method of using a 6 month average wouldn’t work so we would need to find a trend of at least two months where we can get an average monthly gain. If you look at AAPL back in mid March, the stock was at $120 a share and today it is up around $185 which translates into a $65 move. Divide that by the number of months and you can see that AAPL has the potential to move in great strides in a short period of time. You can also see that AAPL has no problem moving down either and the moves down actually outpace the moves up.

Another way to find a timeframe is to use the ATR and cut that in half. AAPL’s ATR is $5.47 for the last month so take $2.75 and you can expect roughly that much of a move every two days or so. This is the roughest of estimates and the method is rather subjective, so always err on the side of caution and reduce the expected moves. The whole point of this exercise is to get you to look at the left-hand side of the chart and really understand what the potentiality of the stock is. Using the information from our example, we can see that AAPL should have no problem reaching our $200 price target within a week’s time so we will focus on the July calls or buy the stock outright.
This time frame would fall under the category of a “swing trade” and as such we can expect to be in the trade anywhere form 2-8 days. The other categories would be a “day trade” a “momentum trade” and an “investment” with the timeframes being 2-8 hours, 2-8 weeks, and 2-8 months respectively. Hopefully you have an idea of what kind of time frame matches your lifestyle and as such can choose the appropriate target and timeframe. Now that we have the time frame and target in mind, we need to decide where to get in this trade.

Entry

Deciding where to get in a trade can mean the difference between success and failure. Oftentimes, the typical “get me in with a break above the prior day’s high/low” is what most traders use as an entry point. This method does not work as many times a prior day’s low/high is breached by traders to trigger orders like that, and then they take it in the opposite direction. The key is to not become a trader who is filled and then stopped out within hours. The TESTED method uses the Average True Range (ATR) of the stock to help us in figuring out a nice entry.

The ATR (20) of AAPL is $5.47, so if we wanted to decide on an entry, we would need that number to help us be more exact in our order entry. We use a 20 period ATR because that represents a month in the market and gives us a nice snapshot of the potential movement of our stock. Regardless of whether we are trading straight stock or options, we need that ATR.

Let’s say that we want to use 10% of the ATR to get an entry defined, and that would be roughly $0.55. Take that $0.55 and add it to the prior day’s high and that would give you a more accurate entry. In the case of AAPL, the close of the prior day’s candle was $186.10 and if you add the $0.55, your entry would be $186.65.
Microsoft (MSFT) has an ATR of $0.67, so if we took 10% of that, we would have $0.07 that we would add to the prior day’s high. It is simple to see that using a percentage of the ATR allows you to compare APPL to APPL and not APPL to MSFT as the case would be if using the traditional “$0.03 above the prior day’s high” tactic for entry. We can, and should, use the percentage of the ATR for stops as well.

Stop

A stop is the ultimate “double edged sword” and is probably one of the most misunderstood and wrongly used tools in trading. You can use a stop to get you in a trade and to get you out of a trade. Think of a stop as the horn in our car. We “beep” it when we want to get someone’s attention. In this case, that someone is our broker and we need to either get in a trade or out of one. Using our trade example of AAPL, we can look at possible stops for this trade and how we would set those stops up. With options, you oftentimes hear something like “set your stop at a 30% loss in value”. In our example, we would have purchased our option for $12.00 and 30% of that is $3.60 so our stop would be $8.40. This may work fine for the casual trader. However, as a proactive trader, we actually want to use the movement of the stock to get us in and out of a trade. Think about that. Options have volatility and that alone can cause price fluctuation that can dissipate instantly as the trading day progresses. The daily swings in volatility alone could trigger our stop and get us out of a good trade.

A proper stop on options should be tied back to the actual stock’s price movement. If you look at AAPL again, you can see that the stock has shown some support at the $177 level and that is what we would use as our initial stop. Its “initial” in that we are going back to our ATR and taking that 10% ($0.55) and subtracting it from the $177 to get our stop of $176.45. Once again, we use AAPL’s potential to get us out of the trade and not just some arbitrary number like “$0.03 below the low”. Interestingly enough, the stop for our option trade using this method would equal a 55% loss on our initial investment of $12. As stated before, if you are not comfortable with that potential loss, then you should be looking for a different stock to trade or a different instrument. In doing so, you allow yourself to remain emotionally detached from the trade and you can proactively prepare yourself before you even submit the order.

Thoughts

To truly become a proactive trader, you need to believe that your trade WILL go the direction you thought. This shows that you have belief in your system that finds your trade setups in the first place. If you put your trade on and the first thing you do is mark your stop or think “I hope this goes well”, then you are bound to fail as a trader. Successful traders do not hope. They do the research and use their system to find good candidates and enter the trades. It is at that point that they manage risk. They know exactly how much they have at risk and are perfectly fine if they lose that much. Why? Because it is baked into their system, and every trade does not go the way they thought. You need to be the same way in your trading.

You need to have the courage to fail, step off the curb, and enter the trade. Expect that the trade will go your way and use the power of positive thinking. Set your target, entry and your stop and then you know, at any point during the life of the trade, where you stand. If your target gets hit and you see the stock continue to go the same direction, you can’t get mad. You simply put the positive trade aside and evaluate it in a couple weeks to figure out why it continued to go beyond your target. It is at that point that perhaps you make an adjustment to your system. Perhaps you find out that it was a news item that caused the surge and then you know that it was atypical, rather than the norm, and no adjustment is needed.

In going through this thought process, you prepare yourself emotionally and as a result remove the chance of trading on emotion once in the trade. As an example, you need to be fully prepared to lose the amount invested in a single trade if your stop is triggered. If you aren’t fully prepared to take that risk, then you need to adjust the size of your trade or move on to another trade. If you prepare and emotionally accept the fact that you could be wrong, your trading becomes more mechanical and less emotional. Take some time to role-play the different scenarios and see what your reactions would be.

Evaluation

Oftentimes traders beat themselves up because they left money on the table or set a stop too tight and vow to never do it again. That vow usually leads to trading on emotions and compounded losses that go along with poor trading. Very few traders actually keep a trading journal or any form of report that can be accessed at a later date to perform analysis. Think about that for a minute. We use charts which are made up of historical prices to help predict what is capable in the future; why not do the same for our trading? In keeping a good record, you allow yourself the ability to come back at a later date and assess the trade when all emotions are removed. We suggest a 2 week period from the date the transaction was closed. Going back in and looking at your trades to find out what you did wrong is easy. When was the last time you looked at your trades and figured out what you did right? Take the time to diagnose your trades, find out what you did right, and replicate that time and time again.
One of the easiest ways is to get a notebook and a pen or pencil and keep tabs of your trades.

A full-time professional trader should spend AT LEAST 30 MINUTES A DAY journaling. An intermediate-term trader should spend at least two hours a week or more journaling. You should review your journal every 30-60 trades or every quarter, whichever comes first. By working every day to document the market’s actions and your own actions, you will improve your understanding of the markets and of yourself.

Discipline

Trading is like a diet; you need discipline in order to be successful. Although this is the last topic I discuss it is probably the cog of the wheel in your journey to proactive trading. Over the years, I’ve seen traders (at least in their mind) come into my office and show me massive losses. Some of the losses could be attributed to not understanding the markets, but a majority of the losses were due to a lack of discipline.

Being a disciplined trader means following your system and sticking to it no matter what your feelings or thoughts are. If your stop-loss is at 30% and you hit that mark, then you methodically move onto the next trade and visit this loss in a couple of weeks when the emotions are removed. It is when you pull that stop and start looking at the chart for the next level of support that you get in trouble. Soon, that 30% loss is 50% and you are thinking about doubling down to dollar cost average. Before long you have amassed a 75% loss and doubled down. It is at this point that you begin to tell yourself that you will never do it again, hoping that your position will just get to break-even. There are numerous “systems” out there for trading and thousands of traders trade them. Why is it that some of the traders are successful and some fail? Discipline!

Conclusion

Hopefully you have a better understanding of the TESTED method and are prepared to become a proactive trader. The first step is to find a Target and figure out how long it will take to get there. Once you have the Target you can fine-tune your Entry using the ATR. Don’t forget to place your Stop as that will remove the temptation of hanging onto a trade that you shouldn’t. Hanging onto losers is what reactive traders do rather than prepare and accept that stops do get hit and trades do go against you.

As a proactive trader you have taken the steps and your Thoughts are clear and you fully understand how the trade works. About two weeks after you’ve closed the trade out you will want to go back and Evaluate it. This allows you to find the things you are doing well as well as the things you are doing that you shouldn’t be. Finally, you must exercise Discipline throughout your career as a trader.

One common mistake I’ve seen over the years in working with traders, especially new ones, is an attempt to trade everything and anything. A common thread that I found was that they believed that if their “job” was that of a trader then they needed to be trading. Not true! Trading isn’t the same as manual labor where if you’re not working the job doesn’t get done. Trading is about discipline and patience.

Discipline is needed to wait for the high percentage plays that WILL come your way and when they do, you pull the trigger. One of the greatest tools available to anyone is the watch list, yet few know how to properly use one. The easiest to manage are those of the electronic version and most brokerages have either a software or web based platform that includes a watch list function.

I’ve always taught that a watch list should be treated like a garden and that the soil will need to be prepared, seeds chosen for planting, water applied frequently and weeds to be removed as needed. To say the least, it’s not as easy to keep a good watch list as you might think. In fact, the most common excuse I hear is that there are too many stocks to look at and keep up with on a daily basis. Let’s break it down so you can see that it’s not that difficult.

TILLING

The tilling of the soil is actually going out and using a scanning service to find the types of trade setups that work for you and your trading style. There are many great ones out there but I personally like to keep it simple and focus on a few highly probable setups.

• Ascending/Descending Triangles
• Bullish/Bearish Breakouts

SEEDS

I use the above mentioned setups because they fit my trading style and I like the odds of being successful. That doesn’t mean you should use the exact same scans. I don’t like tomatoes so I don’t plant them in my garden but I do like spinach. Point is, like the seeds you plant in a garden, look for setups that match your trading style. If you don’t like volatile stocks then stay away with stocks that have a beta over 1.5. If you prefer to be a longer-term investor then incorporate fundamental data. Perhaps a scan for moving average crosses is more your style, I don’t know and nobody really knows but you.

WATERING

Take the time to invest in your future as a trader by looking at your watch list on a daily basis. Perhaps you can’t or don’t need to look at it daily but at the very least spend an hour on the weekend watering your potential trades. What good is a garden if it doesn’t get the water needed. So too is the watch list as you may have trades that setup and you miss them.

WEEDING

Managing your watch list is just like weeding a garden—if it doesn’t belong in there get it out. In other words, if the stock didn’t setup the way you thought it would, take it off of your watch list. If you’ve got 50 stocks on your watch list you should be more than willing to weed it out and only keep those stocks that have potential.

A few other suggestions that might help in developing and maintaining your watch list are diversification and exploration.

I remember one client of mine a few years ago from California. He came to my office and opened up his brokerage account and his whole portfolio was in real estate/ home builders. He was from a tech background and struggled with the fact that his portfolio was so “volatile” and I chuckled inside. I went on to explain that diversification is done for a reason and offered suggestions as to how to diversify his portfolio.

Use the different sectors and find out which ones the stocks in your watch list belong to. Don’t assume, verify! Get your feet wet and learn in the process as this knowledge will go a long way in helping you become a better trader. Grasp a better understanding of sector rotation and delve into macro economics a bit.

Take the time to explore and find new opportunities in the markets. You’ll eventually gravitate to the sectors and setups that match your trading style. The key is that if you work at it the journey to finding what works for you will be a shorter. Once there, you’ll have the ability to truly focus on managing both the trades your in and your watch list.

I’ve always been a market technician and have used levels of support/resistance from day one. I use charting to form my main thesis of what I see as the potential move in stocks. Funny thing about technical analysis is that there are literally hundreds of ways to interpret the data. I guess that’s what makes a market as well since multiple time frames are used to trade with and create the daily, weekly, monthly flow.

Back in my days as a therapist I would strive to help individuals overcome their obstacles by working from a psychology of use. At times, I’d see 3-4 clients in a day that were all suffering from the same mental illness. Oftentimes, the same or very similar dialogue would occur with each client but their progress would vary significantly. I referred to it as a failure to process. In other words, some folks would come just to come and talk while others came to “get fixed.”

The same thing can be said about the markets. Some people come to just trade, most lose some and win some but mainly stay stagnant. Others will come to the market each day looking to “get fixed” and profit from their progress towards mastery. Much like the dialogue in my office, the price action and market flow is similar for each participant. The key is, as the video below suggests, “There’s no inherent meaning in information, it’s what we do with that information that matters.” Trade well!

In Adlerian psychology there are what’s known as safeguarding behaviors and they have a place in trading as well. Basically, we as humans want to protect ourselves from three threats to the self.

1. Physical harm – we might get sick, die, etc.
2. Social threat – we might not look good in the eyes of others.
3. Loss of self-esteem – we might not look good in our own eyes.

What follows are the six primary safeguarding techniques that we all use to protect ourselves from the threats listed above.

Symptoms

Developing symptoms provides an opportunity to avoid an instance where one might feel threatened. As an example, if I were to get a headache on Sunday night knowing that the markets were open the next day and I’ve been short during a 40 point bull run.

Nobody enters a trade hoping to lose money. Rather, we all trade to win and that’s what successful traders strive for. If headaches, fatigue, day-dreaming or other symptoms manifest themselves regularly then perhaps a little self-analysis is in need.

Excuses

We are typically aware of the excuses we use and everyone has a favorite. Often times as traders we fall prey to this “if only” game and it can be debilitating. As an example, I might find myself saying “if only the FOMC statement wasn’t so hawkish I wouldn’t have lost so much money.”

Excuses are most likely done consciously whereas symptoms may be more from the unconsciousness. Therefore, the key is to recognize excuses that you might be throwing out there that are hindering your ability to succeed in trading. Take charge of your own actions and be accountable for each trading decision you make.

Aggression

There are several ways that aggression can manifest itself in life and it’s typically a secondary emotion. Depreciation is where we might put others down to make ourselves feel better. Accusations are a common form of aggression. Self-accusation and guilt are a few other examples. The point is that aggression is a no win situation in which objectivity is often tossed out the window. Trading on emotions is one of the worst things you can do.

In poker, when a bad beat has occurred, the player has the tendency to become aggressive and seek revenge. This is often referred to as playing on tilt and the same thing occurs in trading. A certain stock took us for a few dollars and we might cuss at the monitor or throw the mouse. Next thing you know, we’re back in their looking for a new entry and probably armed with twice the trade size that should be used.

Aggression is common and it’s not a bad thing to be aggressive. In fact, aggression is needed to be successful in trading. The key is that you don’t want it to become debilitating and causing you to trade on tilt. Focus on aggression more as fuel rather than a force as you need to be in control and work the throttle.

Distance Seeking

• Relating to movement, we can find ourselves doing some pretty bizarre things when we step back and take a look. Here are a few “styles” of distance seeking that we all might have seen once or twice.
• Backward movement-actually moving away from the challenge. The inability to step off the curb and pull the trigger on a trade.
• Standing still-entails buying time. As an example we might not have all 483 indicators lined up correctly to place the trade.
• Hesitation-failure to pull the trigger again, but more from a procrastination standpoint. Maybe the account hasn’t been funded yet. OK, but ask yourself why it hasn’t been funded and perhaps you can get at the root of the need for distance.
• Creating obstacles-examples of this distance seeking tactic would be waiting for outside variables to hinder your trading. I need to get that 42 inch monitor so I can see the charts better.

Anxiety

In my tenure as a therapist I dealt with clients who had debilitating tendencies that were often related to anxiety. What’s a better way to safeguard self-esteem than to become so afraid of life, people, etc. that you can’t even function. By taking the time with my clients to find out what it was they were trying to avoid they were able to manage their anxiety without meds.

As a trader we can become so anxious about losing money or having others know about our losses, etc. that we choose not to trade at all or trade poorly. One of the basic tenets of Adlerian psychology is that we all strive for perfection or superiority. As traders we sometimes put undue pressure on ourselves by saying things like ” I need to make $800 per day trading to meet my outflow.” What happens when that “goal” isn’t met? The result is often times manifested in performance anxiety and once again objectivity has left and larger than normal trade sizes start to appear. All the while striving for that $800 daily goal and the end result is anxiety.

Exclusion Tendency

In order to avoid future events I look to narrow my approach to trading so I focus on fewer strategies or setups and become extremely rigid. The end result is that I may only make 1-2 trades a month and that puts a lot of undue pressure on those few trades to be successful. The rigid, inflexible trader is easily broken as they are unable to adapt to a changing market environment. Many of the above mentioned safeguarding tendencies will manifest themselves and it can be painful both to the account and the ego.

The inability to adapt to such changes finds traders trading what they feel rather than what they see. If I’m holding up 3 fingers and asking how many you see…the answer should be 3 and not you asking me to hold up 4 because you feel as though that’s what I should hold up.

Conclusion

There’s nothing wrong with not wanting to look like a fool in front of others or not ever wanting to lose on a trade although the latter is highly unlikely. What is wrong is if you perform some of these safeguarding behaviors and they themselves hinder your ability to trade objectively. Often times traders are unaware of all the baggage they bring to the market on a daily basis. Unfortunately, most have to take a sizable hit and reach for the proverbial “rock bottom” before they figure out that something has to change.

One of the most underused and often overlooked tools that any trader can use is the trading journal. I suggest that if you don’t have one then get one now. If you do have one and don’t use it, kick yourself in the pants and get busy. Learn, trade, grow, share!

As a former therapist, one of the areas I would focus on with clients is the way in which they would perceive their situations. Using a technique called re-framing; I would help them see their “problems” from a different perspective.  Often times, clients would be able to overcome roadblocks simply by combating their negative perception of situations. This was quick and a huge relief for my clients and similar techniques are used elsewhere.

In my wife’s marketing career she would work on value re-framing with products for the company she worked for. In other words, she would bring about new value to an existing product simply by finding a new market or context for that product. Drug companies often use this same technique during clinical trials of drugs where the drug didn’t do A, but it sure did do B. Rather than scrap the research done on the drug; they simply market it as a solution to B.

How can this be used in trading? After a trade is completed go back in and diagnose the trade.  I suggest doing it several days after the trade is completed as this will help in bringing clarity as most emotions will be in check as time passes. Here are a few questions you can ask yourself as you diagnose your trades.

• Was it an income trade or a business expense?
  • Did you practice proper risk management?
  • Was the income/expense larger than you expected?
• What did you do right and what was done wrong?
  • Was your stop too tight and the stock ended up going the way you thought?
  • Did you exit too early and leave some money on the table?
  • Was the target met?
• What would you have done differently?
  • Used a wider stop
  • Given a more aggressive target
  • Checked sector/market performance
• What did you do that you would do again?
  • Used proper risk management
  • Used time (theta) to my advantage

Be honest with yourself and learn what you did wrong and, more importantly, what you did correctly. This process will allow you to discover new strengths and weaknesses that you might have. The idea is to focus on the positive and then negative. It’s easy to focus on the negative so avoid doing that first but rather after you’ve built yourself up. Here’s the key…Turn the items that you’ve deemed as negative into a positive light. It may be difficult at first, but worth it.

You might find that, over time, you are just no good when it comes to a certain stock or sector and thus you can avoid that stock/sector, etc.  As an example, I found out that over a period of time that some of my biggest losing days were Fridays; regardless of the asset. As a result, I turned that into a positive by doing two things-not trading on Fridays and doing core research instead. Both of these activities increased my equity curve!

The image to the left should be recognizable by most of us as the American alphabet. It is from these 26 letters that billions of people are able to communicate on a daily basis. We learn the alphabet early on with rhymes and rote memorization so that we may contribute to society through our interactions. We all progress at different speeds, but eventually we all get to the point where we can recognize all the letters in the alphabet. It is at that point that we build upon that foundation and begin to spell words like C-A-T and T-R-E-E. These words are then combined to form sentences which consist of several words. From those sentences we form paragraphs and so on until we are able to write and communicate with others through pattern recognition.

This ability of pattern recognition isn’t anything new or even earth shattering–it’s common sense. Just like the alphabet, which is in a pattern, we can discern the different patterns in lots of things. Take a look at the image below and you can recognize a pattern as well where there are higher highs and higher lows. Unlike the alphabet and some other patterns that have a beginning and an end, some patterns are continuous. Such would be the case for a chart that shows price action in a publicly traded company.

We could begin to see patterns in the line above and learn to predict or assume what has the higher probability of occurring next. As an example, looking at this pattern above we might safely assume that the odds are greater that the line will move lower from here as it has in the past. This does not necessarily mean that it will, but the odds are in the favor of such a move. It is this assumptive process that will serve not as an ends, but more of a means to and end. This pattern recognition assumes that the next move would be lower and thus helps us to proceed further. Information that we’ve gathered from the past can help us predict what the future may hold and this is the basic tenet of technical analysis.

Technical analysis can even be performed on your own trading account and patterns begin to emerge where you can recognize when your trading is “on” as your account grows and when the dollar amount pulls back you can assume that your trading is “off.” This ability to recognize the patterns as your account fluctuates in price is a decent beginning, but nowhere near the wealth of information that can be gleaned from your trading history.

Trading journals are one of the most underused indicators that every trader has at their disposal. Why is it that such a powerful indicator is underused? I’d venture a guess that a majority of traders don’t keep a trading journal because of the time it takes to keep one. I could be wrong, but over the years as I’ve mentored traders from all walks of life, time was the number one reason for failure. Second on the list was not knowing what a trading journal was so after reading this article, you now have no excuses as to why you don’t keep a trading journal.

Below is a list of what I’d recommend to have in a trading journal and, as with anything in life, you’ll get out of the journal what you put into it.

If you are able, ATTACH CHARTS TO ALL ENTRIES! Remember the pattern recognition? Something may not have stood out in the heat of the moment, but several weeks later you may see similar chart patterns to this one. It is at that time that you begin to find common threads and themes of your trading which will allow you to exploit those things you do well and avoid those things you do poorly.

The above should be easily done and would suffice for the most part. However, if you really want to excel at this then a comment section is where the real clarity comes from as you listen to yourself. Take a moment and run through questions like this to get a better understanding of what’s going of for you at that moment and document it. Here’s some examples of what you could ask yourself:

Write as often as you can in your trading journal and get into the habit of writing in it on a daily basis. When you close a trade, income or expense, take the time to capture your emotions at that point. A good idea is to come back and revisit your journal entries on a quarterly basis and add to them as you are now emotionally removed from them. You might even begin to sense a change in emotion as you read your prior entries…run with that and profit from recognizing your patterns.

While pursuing my doctorate in ‘99 I had the opportunity to see Dr. Albert Ellis give a lecture in Pittsburgh and will always be grateful for that. He was the old curmudgeon and everything that I expected. For those that don’t know, he created rational emotive behavior therapy (REBT) and I used it with several of my clients over the years.

REBT is a cognitive therapy and thus focuses mainly on thought processes and works from the assumption that, for the most part, we as humans are our own worst enemies. I for one can attest to this notion as I’ve seen it play out in my own life on several occasions.

One of the key pitfalls that we tend to fall into is what Ellis called “musterbation.” When you hear yourself saying things like “I must get into shape” or “I must make $ 1000 a day trading” you are musterbating.You can substitute “should” “need” and other similar words and get the same result.

The cliff notes version of REBT can best be summed up in the image below. The belief (B) that we have about the musterbation statement (A) leads to an emotional consequence (C). It’s the irrational belief (B) that is screwing you up and that’s where the work needs to begin (starging with D).

At times, the beliefs become debilitating in that confidence suffers and focus becomes less objective in favor of the irrational beliefs. As I mentioned earlier, a belief that I’ve heard numerous times as a mentor was something like “I need to make $ X a day.” It’s good to have goals, but it’s what happens if those goals aren’t met that causes issues. If I don’t make $ X then I’m not a good trader and I’ll have to move to the next strategy/market to become a better trader. If I don’t make $ X today then I’ll have to assume more risk tomorrow and make $ 2X . Before long, that $ X per day becomes your worst enemy as it saps your mental energy.

This is just one example of musterbation and I’m sure you’ve thought of a few while reading this post. The worksheet above was created by other cognitive behaviorist to help their clients overcome the irrational beliefs. I used something similar with my clients back in the day and thought you might find it useful.

Bottom line is that with the New Year upon us I know many people like to create goals and tend to set the bar a bit too high at times. One suggestion I’d have for those that focus on making $ x/day is to rather focus on stopping trading if $ x is lost/day. Think about that one for a minute. How about a goal of becoming a better trader by doing X,Y,Z? It could be managing risk better, practicing a strict stop strategy, keeping a trading journal, whatever. The point is that if you become a better trader then the $ X/day takes care of itself and you avoid putting undue pressure on yourself.

I’d love to get your thoughts/feedback on this. Perhaps you have something that works for you, let me know what it is.  Whatever goals/aspirations you have for 2010 I hope that they contributes to a better quality of life for you. Let’s roll!