What is innate that has an impact on our trading are habits. MIT’s McGovern Institute for Brain Research suggests that habit formation is indeed an innate ability which is perfected through experience. In particular,  their research focused on the costs and rewards of certain choices using pattern recognition, much like trading.

Neuroscientists led by Institute Professor Ann Graybiel found that untrained monkeys performing a simple visual scanning task gradually developed efficient patterns that allowed them to minimize the time it took to receive their reward.

The findings not only help reveal how the brain forms habits, but also could shed light on neurological disorders where amplified habit-formation results in highly repetitive behavior, such as Tourette’s syndrome, obsessive-compulsive disorder and schizophrenia, says Graybiel.

The process of trading, from scanning the markets for a setup to closing the position, consists of a sequence of tasks. Over time we create habits by combining these tasks together in a process. Our tendency is to use heuristics or mental shortcuts to make the tasks easier on our brains. In doing so we open ourselves up to certain cognitive biases such as framing, anchoring and confirmation bias. If these are formed early in a trading career they can be detrimental to our equity curves and potential as a successful trader.

So perhaps good traders aren’t born but rather made. Traders are made by the habits they form. It takes, on average, 21 days to form a habit while taking much longer to unlearn one. Certain characteristic traits, namely Conscientiousness with two of its facets–self-efficacy and self-discipline, lend themselves nicely to forming good habits. Other characteristic traits, such as Neuroticism, can lead to bad habits. It’s therefore important to know what characteristic traits you bring to the markets.

If you’ve been in the markets for a while and find yourself unsuccessful, the culprit may be the habits and biases you’ve formed early in your trading. As humans our brains have a difficult time in distinguishing between good and bad habits. The good news is that bad habits can be changed into good habits through interrupting the habit cycle and changing the routine. Interrupting the cycle is easier than it sounds and well worth the effort as longevity in the markets as a successful trader is the reward.

Something I’ve noticed over the years in working with traders was confirmed in the research conducted by Barclays. Most US based traders want financial satisfaction yet are unwilling to work on discipline issues that prevent that satisfaction. Most don’t want to figure out which trading style is best for their personality. Most don’t want to put in the hours of necessary homework to keep abreast of their place of business, the markets. Most would rather have someone tell them exactly what to do and when.

The US ranks 5th in wanting financial satisfaction yet third to last in a desire for discipline. There is some ambiguity in their wording but overall it’s a good snapshot. Discipline is key in being successful in the markets, this I know. Trading is like a diet, it takes discipline to work. Seems too many are more willing to pay for a magic pill to take the weight off while they sleep or watch television. Think about it.

I like to ask traders I work with a question along the lines of the question I’d asked my therapy clients. The question goes something like this: “Where is this stock going to be in 3 days?” or some derivation thereof. So much can be learned and planned for by asking such a simple question. Most common responses typically favor a move in the direction they are trading but not much else. Usually the lack of depth in the answer is due to a lack of knowledge about how to gauge a potential move. Here’s a few simple suggestions:

• Use the Average True Range (ATR) to see volatility
• Gauge tendencies with shorter period moving averages like a 5 day SMA. How does the stock react to it?
• Check the peers and/or sector etf and see where the stock is in relation to them. Is it under/over performing, etc.
• Look to the left for levels of significance (support/resistance)

Life can be difficult if we fail to give any forethought as to what’s on the horizon and do our best to plan for it. Opportunities can be missed and simple setbacks can seem insurmountable. The same can be said of trading.

It’s my belief that without targets, we participate aimlessly in the markets eventually leaving broke and disgruntled. Without an idea of where a trade would be in 5 days the possibility of leaving profits on the table increases significantly amongst other unhealthy scenarios. Targets are good for:

• Setting personal goals
• Knowing when to scale out of a winner
• Keeping a proactive approach, versus a reactive one, to the markets
• Managing risk

It’s hard to imagine not wanting to set parameters for the potentiality of each trade I take, directional or not. I’ve seen many a day trade turn into a swing trade and eventually end up a large loser. It’s amazing how we as humans can justify the crap we do. We don’t need to know the future to be successful in the markets with any kind of longevity, but having an idea of the possible scenarios goes a long way.

Most people use the turn of the calendar year to set goals to improve their standing, lose weight, exercise, read more, get out more, spend more time with their family, etc. Sadly, it also seems that by February most of those well intentioned goals have turned into disappointments. Perhaps the bar was set too high or too many bars set, I don’t know.

As a therapist, January was my busiest time as lots of people wanted to improve aspects of their lives. I remember helping individuals work through their problems, set goals and prepare for the unexpected. I remember one client in particular, a dancer (and mom) at a high profile club here in Dallas. She was struggling with addiction and had recently been in a car crash caused by her drug abuse that left life changing scars on her face and body. In short, her life had changed without her permission and she was looking for help.

As I sat and listened to her concerns and fears I realized that she had no idea of the changes that were coming. What she failed to realize is that when we change it impacts the relationships that we have with others. Shallow, I know, but some people don’t want us to change and thus stray as those changes occur, especially regarding addiction. Her “boyfriend” was the first to go, soon after therapy started.

She saw herself as defective now, damaged goods with nothing more than the unconditional love of her son. The biggest struggle she had in therapy was breaking down the defensive patterns that she had formed over the years. She was a master at externalizing her issues because it was always someone or something else causing problems. Coupling that with the daily rationalization for using, she had formed her self-concept in stone.

I see parts of her in many people I interact with on a daily basis. Though most of us are not aware of it, we influence much of what we see around us. We create feedback that supports our beliefs, our lifestyle. This feedback contributes to our self-concept, who we are.

This self-concept is the foundation upon which we make our comparisons, appraisals, and decisions. I see the self-concept in traders all the time as I talk with them about their market participation. The concern I’m seeing is that too many are building their self-concept based on others’ and I believe that’s unhealthy.

Be who YOU are and trade accordingly. Form YOUR own opinion on individual names, sectors and markets and trade accordingly. Use strategies and systems as a framework rather than gospel and trade accordingly. Look at seasonality and other statistics as what has been and not so much what will be and trade accordingly. Manage risk and trade accordingly. Make 2011 the year YOU trade accordingly.

It’s extremely easy to run some numbers on the exported data from your brokerage account. See if you can figure out the “sweet spot” for holding periods or whether you make more on the long or short side. Information gleaned from your trading data can be priceless.

As we all know, the market changes and thus our strategies and systems adapt to accommodate. Here’s where you can truly learn from your trade history. Compare this years’ data with prior years’ data and see how the changes have worked over longer periods of time. This type of research is referred to as drift.

As an example, when a pizza company wants to improve their pizza they methodically change sauce, crust, toppings, etc (market approach). They run taste tests (metrics) along the way to see if the changes made were better or worse. As they moved from pizza 1 to pizza 2 to pizza 3 they collect the data on the small and barely noticeable changes made. When they arrived at an acceptable iteration, and this is key, they would compare it with the original pizza.

When the original was compared with #7 there were drastic changes but those changes weren’t noticeable when comparing the gradual changes between pizza #6 and pizza #7. This drift that occurred had formed a belief that the changes made were acceptable as they were assumed to be small an unnoticed by taste testers.

Applying the same approach to trading histories can show drift in our strategies. Perhaps you’ve tweaked your signals several times throughout the year and it appears to be working. What does the drift look like when comparing your current approach to that of 2009? What has changed? What aspects of those changes were in your control? Have the changes improved your returns?

You could go on and on running analysis on your trade metrics and improve your market participation. It’s not easy work to run the calculations but definitely worth it once the results are produced and information is gleaned. Check with your online broker and ask about exporting data from your trading account. Some brokers have decent metrics built in such as realtick. One nice solution I’ve found is offered through Ninja Trader which has the ability to connect to popular online brokers such as Interactive Brokers, MB Trading, TD Ameritrade and others.

Take some time between now and the end of the year to find out what worked and what didn’t. Enjoy the fruits of your labor in 2011 as your market participation will improve. If you have ideas or suggestions of other resources please use the comment section below so that others may benefit as well.

I got to the point as a therapist when a client would start the blame game I’d cut them off. I’d hand them a notepad and pen and ask them to write down five things that have gone reasonably well for them lately. Depending upon the speed at which the client could create the list gave me an idea of how difficult it would be to work with them. Those that were quick to create the list were also those that took back control of their emotions and life with greater ease.

Can the same can be said of trading? How many poorly taken trades can you recall from your history? Thumb through your trading journal and see what stands out. How many negative references are in there? How many positive references? If there are more negative than positive entries I’d suggest that you focus more on the latter.

We all know that very few who embark on a career as a trader make it. We also know that damn near everyone we talk to is a profitable trader, right? How can that be? WHO CARES!?! Be honest with yourself and learn from your mistakes. Exploit the things you do correctly in the market and turn a profit. At the end of the day it’s just you and your equity curve. You can choose to bullshit your buddies and tell them what a great trader you are (knowing that you’re more than likely break-even or negative) or strive to become a profitable trader and grow.

Trading is a business, not some fantasy league or hobby that we throw money at purely for entertainment. Treat it as such and keep the expenses low while looking for ways to increase revenue. To focus on losing trades while attempting to pass blame is pointless and the easy way out. There’s a reason the trade went against you, find out why. Understand that trades can and do go against you so manage risk before the trade is entered to minimize the loss, both financially and psychologically.

When you blame others, you give up your power to change.
-Dr. Robert Anthony

Over the years I’ve been fortunate enough to get to know thousands of market participants. Some are long-term investors others are scalping pennies per trade on thousands of shares while others manage millions of other people’s money. The interesting theme I picked up on with nearly every one of them is that they each experienced panic and uncertainty at certain times in the market. Oftentimes, this panic stems from the inability to make sense of the market, to gain control of market participation. Thoughts such as whether or not too much capital is at work or perhaps not enough or even whether or not to be in the market at all seemed to consume them.

This ambivalence can consume and debilitate even the best market participants. The uncertainty or self-doubt about market participation is common yet finding a solution is not. The greater the level of uncertainty felt the higher the odds are that risk is being misperceived. Here are some questions that I’ve asked to assess whether risk was real or perceived:

• What are your reactions, both physical and emotional, to a losing trade? A winning trade?
• Have you rationalized recent losses?
• Has your out-of-market homework/research fallen behind?
• Do you monitor your positions by dollars or percentages?
• Have you ever not taken a trade that made sense simply because you were burned before?
• Has the number of indicators you use to enter/manage/exit a position increased/decreased lately?
• Do you know the Beta of your portfolio?
• What would others say about you when asked about your risk management?

In a sense, managing risk involves managing the emotional side of trading so that the focus can be on the cognitive side of trading. As an example, if I’m concerned with the direction of the market because my traditional analysis methods are giving unclear signals then it probably doesn’t make much sense for me to participate. My biases will impact the data, whether it’s of a technical or fundamental nature, and lead to poor decisions. If I’m unable to clearly define what sectors are leading and which are lagging and, more importantly, why they are moving in the direction they are, then my risk is skewed. It’s times like these that large losses can accrue as objectivity is clouded by subjectivity.

I’ve always used sleep as a gauge to help me know if I’m in-line with real risk. If I’m able to sleep at night and wake up excited to participate in the market then I know that the odds are good I’m managing my risk. If I’m unable to get a good night’s sleep and lay awake wondering about positions I have on the odds are good that my risk management is off. Yea, I’m pretty simple.

Blame, excuses, justification, rationalization and other forms of fault finding are all part of the process of running from ownership. “The devil made me do it”, “this is not like me to do this”, “I had a momentary lapse of reason”, on and on. It’s painfully obvious that our society would rather push off all accountability as it’s much easier to play the role of a victim. This crap will not fly in the markets and many have experienced it firsthand and walk away broke and bitter.

In the markets it’s just you and your money at the end of the day. Did you have more income trades than expenses or was today one you’d rather forget? It’s so easy to let a losing day slide, just one time, and chalk it up to market manipulation or some other nefarious act. Simply move on to the next opportunity and forget about the loss. BS! You won’t last long with that type of thinking.

I’m guilty, far from perfect in some aspects of my life when it comes to accountability. It’s called human nature and you can learn more about it by studying locus of control. In trading though, shoveling failure in someone else’s direction is pointless and why many participants find a mechanical system of trading much more effective than a discretionary system. Discretionary trading and a lack of accountability do not work well together.

One way to address a lack of accountability (discipline) is to design a system that gets you in and out of a position without much thought. If you enter a position via technical analysis then the same should take you out. Perhaps your system has built in scaling and you automatically take a percentage off at certain levels. Whatever the system, make it your own and don’t forget that the market is dynamic and thus your system will need adjustments over time.

Fear of losing: Nobody wants to lose—doesn’t matter if it’s a spelling bee in the 5^th grade or a newly entered long position in a stock that just broke through resistance. Losing sucks. Losing reminds us that perhaps we aren’t as good as we thought (hoped).

Fear of being wrong: Remember that time you blurted out the wrong answer and everyone laughed? Still sticks with you after all these years and screws with your mind. That new short position you just took is about to get squeezed—or at least that’s the thought running through your mind, right?

Fear of missing out: This is where we can really let our imperfections shine as we buy at the top and sell at the bottom. But hey, we didn’t miss out on the action! Succumbing to the fear of missing a potential move and jumping in mid-stream trumps any good trading plan or preparation. This is a lack of self-discipline and causes much of the psychological damage seen in the markets.

Fear impedes our ability to be creative. Fear suffocates, debilitates, and causes many to wonder “what if…” rather than “why not…” Hope is used as a remedy by the fearful, but often gets smashed and is soon replaced with self-help books, talk therapy and medication.

Courage is what’s needed—the courage to fail. With proper planning, risk can be managed and success can be found. Having the courage to step off the curb lends itself nicely to creating who you are as a market participant. Define your risk, adhere to your trading plan and fear becomes a fleeting thought rather than a debilitating one.

It’s OK to lose. Just make sure that it’s within your defined risk/reward and move on.

It’s OK to be wrong. What’s not OK is to be stubborn and stick with a losing position.

It’s OK to miss out. There are thousands of other names out there, find your trade.

If you want to become a better trader you need to realize that fear cannot be eliminated. It can, however, be used as an edge in your market participation. For me, one of my favorite times to sell premium is after a large, quick move—puts for fear and calls for greed.

“To conquer fear is the beginning of wisdom.” ~ Bertrand Russell

For those that don’t know, I’m a premium seller and that’s a trading style that fits perfectly with my life style and accounts for a majority of my market participation. I’m constantly monitoring this strategy and tweaking it to adapt in the ever changing market conditions. For the remainder of my time and capital I take a much more discretionary approach and consider this trading as an educational journey of sorts. I’m looking for the next trend, trading breakouts, selling volatility pre-earnings, etc. Here are a few things that have influenced how I participated in the market over the past 6 months.

• Weekly options. I’ve come to the realization that I can increase my returns significantly through the use of weeklys. It’s a beautiful thing.
• StockTwits. I continue to meet incredible people through this awesome network of like-minded individuals. Definite positive influence on my trading but that doesn’t come without careful moderation.
• Television. Haven’t watched CNBC, Bloomberg, FBN or any other ilk during the trading day. I used to have the TV on but muted and found that it was still distracting. Today, I don’t even turn the TV on in my office unless I’m watching a sporting event.
• Think Or Swim’s “OnDemand” Simply amazing! I can pull up any day and trade it again. Every tick, bid/ask spread, and chart are replayed.

To simply list the influences is only the beginning of my biannual inventory. I now take a long hard look at whether or not the influence is having a positive impact on my trading. I comb through each position I’ve taken (via my trading journal) to see if there is a theme. I’m also looking for any dependencies that may arise which would suggest a powerful influence. Such dependencies may be found in an indicator, a statistic, an individual, etc.

As an example, weekly options are rather new but I can see the impact they are having on my equity curve which is one of the most powerful ways to influence a trader’s participation. The influence has become so powerful that I’ve opened a separate account and trading journal just for weekly options. I’ve found over the years that if I separate different strategies into different accounts it’s easier to ferret out the influences. This is just one example of how spending a few hours processing something as simple as influence can pay off.

The markets are dynamic and I believe that to be successful my trading must be dynamic as well. I am constantly looking to improve my market participation and defining those things that influence my trading is one of my favorite ways to do so. By focusing on those things which are having a positive influence on me and removing those that contribute to the noise and confusion I adapt and survive to trade another day.