Know Thyself

Once in awhile I have traders tell me,

"Barry, just tell me exactly what to do and I'll do it."

Or another version of the same thing is:

"I want to trade just like you do."

And then there's this one:

"I want a trading method that is 100% objective."

It's understandable why people would say these things, but it demonstrates an ignorance of the realities of trading.

Trading is very individual because it is very emotional. You cannot simply pick up someone else's trading style for a very simple reason - it may not fit your risk tolerance or your psychological needs.

And then there's the other reason (which we all wrestle with): We simply have a hard time controlling ourselves when it comes to trading, and the reason for that is simple: We are all emotional about our money!

When I was a young and foolish trader I used to trade 12 hours per day. I did a lot of trades and they were all very short term. I learned a lot during that time, but it was not a successful approach for me.

Though I loved to trade (and still do), and I enjoyed the rush of placing a lot of trades (something I work very hard to avoid now), I found that I simply was not able to keep my mind in a peak state when I traded so frequently and for such long periods of time.

That is not true of all people. But that is true of me and it was a very important lesson for me to learn. I only wish I learned it sooner. I was very slow to recognize this fact, and even after recognizing it, I was slow to embrace it.

Like a lot of experienced traders, I've become much more conservative and cautious in my trading over the years. That also means I trade less frequently than I used to.

I separate my accounts into different types for different purposes. I do my long term investing through Schwab, I do my active trading through Interactive Brokers and I test new ideas and strategies in my Tradestation account. Keeping those 3 functions in separate accounts helps to keep them separate in my head.

I've also transitioned from doing so many short-term day trades to doing less frequent swing trading. The exception to this is that I do my testing on a very short-term day trading basis simply because it allows me to do more test trades in a shorter amount of time.

Not only do you need to "know thyself" when it comes to trading, but you may find that you need to change your trading style at different times in your life.

As an example, after my father died it was very hard for me to trade, especially day trade. I was going through the grieving process of losing him, and also dealing with the issue of moving my mother into our home and caring for her.

Clearly, this was not a period of time I should have been trading, and after trying to trade a bit periodically, I decided to put trading aside for awhile and give myself the emotional break I needed.

These principles hold true even if you trade an automated, computerized system. One of the advantages used to sell the idea of automated trading systems is that they take the emotion out of trading. I have not found this to be true.

When your system goes through a natural draw down period (and it will, because they all do), the temptation to pull the plug on the system is so great that most people cannot resist it. As soon as you do that, you are no longer trading the system. You have allowed your emotion to enter into the equation ... and most everyone I know who has traded a mechanical system has done this.

Why? Because they are watching the results of that system (with great emotion) and are just waiting to interfere with it when their emotions can't handle it any more.

Most people underestimate the significance of emotion in trading. It is not a bad thing. It is simply a fact that you need to acknowledge, then embrace and find a way to deal with it that is unique to your situation.

Someone once said to me, "It must be nice to be able to trade without emotion."

My answer was: "I wouldn't know!"

I haven't met a single trader who didn't get emotional about their trading. My conclusion is that it's not something you ever do away with, it's only something you learn to manage. And even then, the best traders still have relapses! We're only human after all.

This is one of the reasons it's tough to depend on trading to make a consistent living. Personally I'm so risk averse that I've never been comforable depending on any one source of income. I've always been a big believer in establishing multiple streams of income and I did that even when I had the supposed security of a "job" of working for someone else.

On your path to make trading a successful part of your financial life, and you seek to evolve as a trader, it's critically important that you monitor your own thoughts and feelings to determine:

  1. The best time frame for your trading.
  2. How long you can maintain peak performance.
  3. How your mind deals with fear and greed.
  4. When you need to take breaks from trading.
  5. How much leverage you're comfortable with.

These are just some issues to get you started thinking about your own unique needs as a trader.

- Dr. Barry Burns
(c) 2010




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