Trading Truths, To Learn Or Liquidate By #4: Self Awareness

Knowing Me & Knowing You

As the famous Abba song line suggests, it is in knowing and understanding yourself that ultimately you come to have a better understand and empathy of others. There are few careers out there where this mantra is more relevant or a greater determinate of long term success or pending doom than trading.

In the entirety of the trading process and the most prominent glitch or disconnect in the smooth running of the system is the the human input. The weak link in the proverbial chain is us. All other aspects of the business are relatively well scripted and defined, the trades you should and shouldn’t take, the set ups, the trading rules, risk management practices, the high probability plays are identified in advance. The loose cannon and foil for all this careful planning and routine is the trader. With this in mind the requirement for self mastery becomes blatantly apparent, or at least it should do!

Self Awareness

As the trader becomes more experienced, racking up wins, losses and draws (break-even exits) the more the trader is aware that a key to long term success is enhancing the level of self awareness. It becomes apparent that once you master the basic of the day to day activities of the game the routine, one of the key differentiators is how you go about managing yourself and your contribution to the process. One of the absolute essentials to achieving this is journalling.

The trade journal is a traders tool like no other, it allows you to record all dimensions of the trading experience and when used correctly can be the beacon of enlightenment with respect to self awareness. The key to really capitalising on the value of the trading journal is to record not just the technical and strategic aspects of the trading day but to make detailed notes regarding both your physical and psychological responses throughout the day.

By detailing your physcial and psychological responses to the markets over time you can build up a detailed picture of how you react under varying conditions. Whether market are quiet and you record feelings of frustration, finding yourself playing with various chart settings or looking at new instruments out of boredom or markets are fast moving and  you feel a heightened sense of excitement , lack of proper focus and attention to detail. In adverse market conditions you might  find yourself losing your temper, heightened feelings of anxiety, depression etc. Keeping a proper trading journal can help you to identify the way you respond in these conditions.

By recording these responses you can eventually develop a study of your personal patterns of responses to market activities that can be charted like any other data, you can learn to decipher feelings that have value to you trading business and those that don’t have value and are a detriment to your trading business. With in depth data you can develop and understanding with respect to which feelings are subconscious pattern recognition to situations you have witnessed countless times and should regard as valuable feedback or those responses that are the opposite and form the foundation of impulsive reactions which are the most commonly negative and disruptive to positive progress.

In Knowing me, I can trade you

Once you have a clearer read on your own responses and start to master the value of the data, you can in time apply your knowledge to the experience of other market participants. Remember the markets are made up of a vast amount of humans trading the same charts you are looking at and in many instances experiencing similar responses to the price action that you are having. So once you learn to highlight the higher value responses and the lower value negative responses you can start to grasp the broader market response to moves. Hence in sideways markets you can learn to see the true value of remaining patient and waiting for your set ups. In faster moving environments you can remember to remain focused and calm and in adverse conditions you can begin to decipher the more valuable responses.

This higher degree of self awareness allows you to more effectively trade the market of other traders as you can begin to put yourself in the shoes of other participants. By means of an example you can learn that when you are in a winning position where price is moving in your favour instead of rushing to cut your position for short term gratification, you can start to think in terms of other players who are experiencing a move adverse to their position and start to think of the mistakes you have made in their position, changing your trade plan through panic, moving stops for example, only to see price push further than you could have envisaged. By being aware of these dynamics and and your false low value responses you can enhance your own returns.

Read the rest of the Trading Truths series here