How to Keep Psychologically Fit as a Trader

I am often ask: How do you keep yourself psychologically fit? Well, for a long time I didn’t. I would say between 2000 and 2005, all that kept me going was sheer determination, or perhaps the belief that there was really little else I could do to make my money grow at better than 4% per year. Taking courses, reading books, and buying “trading systems” did not offer me more than a possible path to making money on favorable market. I had done that in the 90’s using what I believe is the best approach to directional trading: the Elliott wave theory. By the end of the bull market, it became clear to me that trading corrections is a lot more difficult than trading in a raging bull market like that of the 90’s. Yes, I believe that the Bush years has been no more than a long-term bear market. I buy Robert Prechter’s theory that the bull market since 2003 is no more than a “B” wave of a long-term correction. This market is totally unpredictable.

Once the Elliott wave theory was almost invalidated as a good trading approach during this corrective market (2000-present), one could expect anything. A sudden move of any market in any direction (including sideways) could easily ruin any systematic approach to trading, and for me it did. I avoided the markets between 2000-2003, and struggled to keep my head above water between 2003 and 2005. It was frustrating at best. First, I had to convince myself that I had to do it all my way. Convinced that the markets could go down strongly at any time, I had to find an approach that would allow me to hedge my positions against a catastrophic event. I tried several approaches, some actually quite good, such as the CRC, the PRC, the “dragon fly” (see my earliest posts in the blog), but in the end they did not appear consistent enough to aspire to grow my capital and be able to sleep at night. I realized that I had been psychologically impacted by the decline in the markets between 2000 and 2003, and that no system, reliable as it may have appeared would give me peace of mind enough to risk large sums of money. Yeah, I could have risk a $10,000 account but that was not going to make me rich. My system had to be robust enough for me to trade $30,000 or more in one trade, if I was to aspire to making $1,000,000. In fact, you’d need to have a $100,000.00 account if you aspire to make $30,000 a year. That is not a lot of money to make ends meet!!! Fortunately, I have my consulting pathology business at home so I DO have independence, but my dream is to travel around the world while making enough money trading to pay for my adventures.

Trading requires that you learn to handle defeat on a routine basis. That is hard to take for a high achiever that is used to reaching goal after goal, let alone if you are used to lose and went to trading because you could do nothing better. Yet, it is necessary to believe that even if today was a bad day, tomorrow may be great. Even if your system is not working today, you have enough trust in it to carry you through the drawdown days. The question is how do we know that we are not engaged in wishful thinking? After all, I could have stubbornly adhered to my Elliott wave approach through loss after loss. Well, perhaps by now I would have grown extremely pro efficient in trading these corrective markets, who knows! Perhaps out of my own doubts, I learned to trade an approach that appeared better suited for any market. If that is the case, then it is clear that my psychological well being is self-created, and my results reflect that state of mind. Doesn’t it make sense to say to yourself: sooner or later I will succeed!

In a teleseminar I asked famed author and motivational speaker Jack Canfield: I always though that to get what I wanted out of life, I had to work really hard, and that I could only get these things through sacrifice. Am I not creating my own obstacles this way? Some of you may remember that Jack Canfield was mentored by W. Clement Stone, who in turn was an associate of the famous Author of the best seller “Think and Grow Rich”, Napoleon Hill. Jack Canfield is one of the participants of the movie “The Secret” based on the principle that we get what we expect, that our thoughts become reality. In reply to my question, Jack Canfield did not want to minimize the effort that it takes to succeed, but he added that is that much easier to succeed if we enjoy very much what we do, so we may as well choose to do that which we very much like to do.

Along the lines of “The Secret”, which is indubitably based on Napoleon Hills message: We become what we think about! I like to listen routinely to the recorded thoughts of Earl Nightingale. He has been of great inspiration in the last 15-20 years of my life. With a routine examination of our habitual thoughts, we can actually construct our outcome. There are very simple steps we can take to assure us the life we want, sooner or later. Amazingly, how sooner or how later also depends on your beliefs, which you put in your subconscious mind. I encourage you to read the books and listen to the thoughts of these great modern thinkers because, at the very least, they will sustain you through the days of doubt.

Goal setting is important because this is the way you evaluated your progress in your path to success, but also because it helps you visualize where you are going. This is what I have done:

Long-term goals: I have a list of my goals posted in a printed sheet of paper on the wall directly above my computer screen. I have 9 of them, written in large font and phrased as if they had already been accomplished. For example I have written “7. I am making the world a better place by “paying it forward”.

Intermediate tem goals: Knowing that there are protracted, drawdown periods, and accepting them as such requires that we adapt our measurements of success. I have an expectation of 30% increase of my account per year, or 15% every six months, even if I have exceeded these limits by far in the past (last year I increased my account by 70%). The reasonable expectation of 30% / year will keep me in a good psychological state, but I don’t rule out the possibility that I could make 70% again. Keeping my goals realistic will allow me to objectively examine my progress without regrets. Results will vary from month to month, but you should check your performance every 6 month and try to correct course if you fail to meet the 15% target. Otherwise, keep on doing what you were doing with faith and the expectation that you’ll succeed.

Short-term goals: A trader should simply keep doing what he is doing until the 6th month. To help me keep going, I have images of the risk graphs of some of my best trades of the past. This helps me visualize my success as a series of steps, a series of successful trades that return more money than my average loser, and that are more common than my losing trades. This brings me to one of my favorite quotes from Earl Nightingale with which I would like to close this article:

“Happiness is the progressive realization of a worthy goal”
––Earl Nightingale.

Since you are already in the path to what you seek, there is no reason why you should not rejoice in the process. Just make sure that your goals are worthy of you and your intellect.