Taxed Psychological Resources

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Research studies have shown that when people's psychological resources are taxed to the limit, they have trouble resisting temptation. For example, when they play games of chance, they are likely to take an immediate smaller reward rather than wait for a larger reward.

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Following is excerpted from Van Tharps 10 tasks of trading. He is an expert NLP practitioner and derived the tasks from modeling multiple subjects who were of "market wizards" caliber. Like Kiev, Tharp is an avid advocate of visualization.

The Ten Tasks of Top Trading

1. Daily Self-Analysis

Successful trading is 40% risk control and 60% self-control. The risk control portion is one half money management and one half market analysis. Thus market analysis is only about 20% of successful trading.

Stressors or anything that detracts from your performance such as a cold or illness are going to impact your trading. If your normal performance is breakeven and you have a cold which reduces your performance by 10%?

Process

Daily Self Analysis
Daily Mental Rehearsal
Developing a Low-Risk Idea
Stalking
Action
Monitoring
Take Profits / Abort
Daily Debrief
Periodic Review

How do you know if taking the trades is hard because of the market conditions or because you’re not in top conditions to take trades? You don’t know unless you analyse yourself.

Rate your state of mind based on:

How do I feel today?

1 ….2 …. 3…. 4…. 5…. 6…. 7…. 8…. 9…. 10
Poor Fair Great

At the beginning of each day spend about 30 seconds meditating. Go inside yourself and rate your overall feeling based on the above. Do this for a month or so and compare your trading performance with your morning ratings. Is there a correlation? You may find that trading may not be worthwhile unless your rating is above a certain level.

Pay attention to different parts of your body and life and see if any of them is signaling that they require attention. Capture the signal before it grows into something drastic.

2. Daily Mental Rehearsal

One of the most important activities to improving almost any form of human performance. Mental preparation is practiced by athletes, snipers, golfers and other pros.
The rehearsal task allows you to pre-plan how you will carry out any of the trading tasks so that the actual task is automatic. It allows you to anticipate problems and develop appropriate solutions to them. It helps minimize mistakes.

Anticipate any challenges and and rehearse carrying out your plan and following your rules.

3. Developing a Low-Risk Idea

Know the location of your prey - scan for suspects
The habits of the prey - the patterns it exhibits
Stalk your prey - patience in waiting for it to come to you

The type of analysis (system or edge) you do is not that important as long as it helps to minimize the risk taken.

The methodology per se must not be a critical aspect of your success. May traders training other people in their methodology are unable to transfer their success.

Most traders analyze the market in order to predict prices. Predicting prices has little to do with successful trading. What is important is determining when the risk is overwhelmingly(?!) in your favour and then controlling that risk.

The development of a written game plan for generating low-risk ideas in a critical task in preparing to become a top trader.

The process:
Gathering data
Creative brainstorming
Determining the risk behind those ideas

Most trader gather data and jump to a conclusion at the same time. For example, if you have a bearish bias then most of your trades will tend to be on the short side - even in a major bull market.

Try to be objective and dispassionate while your are doing the analysis. Beware of taking in other people’s ideas - they may be wrong and/or influence your own bias instead of relying on data.

4. Stalking

Stalking is another form of risk control. Trying to find the best possible price.

A mature predator will wait patiently until the prey is near enough and it has a high chance of making a successful kill.

Stalking is difficult for most people because it requires a mental state that is totally different from the mental state required in the next task - the action phase of trading.

Most trader, after analyzing the market are energized and ready to act. By doing so they don’t miss an opportunity but they also increase their risk because they’re rehearsing action rather than responding to actual market conditions.

A certain trader has the habit of stalking through paper trading in the opposite direction of the one he is planning. This helps him develop the sensitivity to the market and at the same time, he knows that the best time to get out of his paper trade is also the best time to open his planned position.

5. Action

The action stage only takes an instant. To perform it correctly you must be aggressive, bold and courageous. You just do it. The trader must have quickness, accuracy and a narrow focus of attention concentrating on getting the trade off accurately and quickly. He must be quick or he will miss the opportunity. And he must be accurate of he might find himself with something other than the prey.

Action involves commitment to entering a market position. If the trader has completed the first three tasks then he knows the consequences of this commitment. He knows he is ready and the maximum loss he is willing to tolerate and the potential profit. He knows the risk is in his favour and as a result making the commitment is easy.

When action is appropriate, reflection and second guessing are in appropriate. When a trader thinks about the consequences of his trade at the time of action he cannot act with resolution.

The action step is a time for prompt, decisive and courageous action.
6. Monitoring

Once a trader has a position in the market he must monitor that position. This is a time when you decide to continue with the kill or abort.

The phase of monitoring differs based on the trader’s time-frame. Day-traders may flip between stalking, action, monitoring, taking profits, scratching trades several times a day simultaneously. The constant need to shift mental states between tasks is one reason that so many people lose money day-trading.

Position trading has a more relaxed monitoring phase, nevertheless complacency can destroy even the longest term trader.

Monitoring consists of two sub-tasks: detailed monitoring and overview monitoring. If you correctly stalked your position then the market should move in your favour soon after you open it. If it does not then you probably do not belong in that position.

Rate your trade every X period (depending on your timeframe) throughout the life of the trade based on a scale:

1 ….2 …. 3…. 4…. 5…. 6…. 7…. 8…. 9…. 10
Easy Neutral Hard

If after 3 self-polls the trade doesn’t feel easy then it probably is a bad trade for you to be holding. On the other hand if it easy to hold then you can probably change to “overview monitoring” and let it ride.

You can switch back to detailed monitoring when there is a material change in conditions and some action may be soon required or at a set periodicity.

Overview monitoring - the trader broadens his focus and steps back from the market. He is looking at the forest instead of the trees. This enables more detached and objective observation.

The worst mistake that one can make during monitoring phase is to rationalize and distort data according to expectations. The purpose of monitoring the market is to pay attention to market signals without imposing expectations on them and instead comparing them against his knowledge of what the various market events mean.

The monitoring is a form of risk control. When the trade is good it should be easy to hold. When the market moves against your position you can choose to tighten the stop to reduce the risk. If nothing happens then you can either sit it or reduce your exposure.

7. Abort

The two actions following the action and monitoring are either: Abort or Take Profits.

Most traders have on or more of the following three beliefs about aborting a position:

1. The market is going against you. This is the most critical time to get out. Minimizing your loss. Some traders open a position with a stop order and wait for it to unfold, other traders open a position and if it doesn’t immediately go in their favour they abort. Analyse your trades, if the best ones go in your favour immediate then consider aborting trades before they hit your stop.

2. When the original reason for the trade no longer exist or when you are uncertain.

What percentage of your trades make money? 40%
When you’re uncertain, what percentage of those trades make money? Very small.
If you’re uncertain then just get out.

Rather than control your uncertainty use it as a signal about what you should do.

3. When time is against you. You have an advantage that you don’t have to be in the market all the time. Use this advantage.

If you have a hard time aborting a position the look at the pro’s and con’s and compare the two scenarios.

8. Taking Profits

You need to plan your take profit exit before you put on the trade. If you’ve calculated your risk properly then you should know two elements ahead of time: 1. Your chances of being right, 2. The size of your potential profit versus your potential loss.

You need to concentrate on maintaining consistency.

4 beliefs leading to profit taking:

1. Original conditions that led to taking the trade no longer exist.

2. The market reached your objective, Waiting for it patiently. VT recommends moving your stop closer to the market prices as the target is reached and waiting for the market to take you out. If the market is moving rapidly in your direction then there’s no need to take profits.

3. When market volatility changes dramatically thus altering the risk parameters of the trade. Volatility typically increases when a market becomes popular and mass hysteria exists. This poses both potential for increased profits but also the risk is much greater.

Bear market moves are often climatic and may go past your target area, however if you wait for the climatic portion of the move to end you might get whipsawed in the opposite direction.

4. When such a climatic move occurs you should take profits immediately.

9. Daily debrief

Most good traders do it formally or informally. The purpose is to determine whether you have made a mistake during the day. A trading mistake as in not following one’s trading rules and plan of action.

Pay attention to mistakes even if money was made on those trades.

What to do if you identified a mistake:

1. Avoid self-recrimination - telling yourself you could have or should have. Instead resolve not to repeat that mistake
2. Replay the trade in your mind. Prior to making that mistake, you reached a choice point. At that choice point you had a number of options.
3. Mentally review the options you have at that choice point.
4. For each possible option determine what the outcome would have been if you had made that choice. Give yourself plenty of choices that may cover future occurrences and not just ‘fighting yesterday’s war”.
5. Once you found 2 or three choices with favourite outcomes, mentally rehearse carrying them out in the future when you encounter similar situations. This will make it easier to select these options when you encounter similar situations in the future.

When you do follow your rules pat yourself on the back at the end of the debrief.

Summarize your debrief in writing in your journal. Write down your mistakes and new choices for future occurrences of this situation.

The debrief should take just 5 or 10 minutes and should be done every day. Once done put the trading day behind you, tomorrow is another day and the market will always be there.

10. Periodic review

This task is about making sure you rules are still appropriate, you are learning from your mistakes. This review may be a precursor for changing rules which shouldn’t happen too often outside of a thorough review.

This is a time to be away from the markets. You can’t review yourself and the markets while your still involved with daily trading.

The frequency of your review depends on your time frame. A day trader should perform the review every 3 to 4 weeks.

Go through your written debriefs, business plan and diary. Determine your strengths and weaknesses. This should take a whole day.

Leading well balanced lives.

An important aspect of being successful in the markets is taking care of other parts of your life outside of trading.
For example if your life is missing excitement then you may find yourself fulfilling this need in the markets. You cannot escape personal issues by trading in the market.

Traders with serious personal problems cannot trade successfully because they will bring those personal problems to the market.

Many traders will take a lot of money at some time in their trading lives and then give it back. Why? Because they don’t keep the overall ecology of the system in mind. They use the markets to prove something to themselves that has nothing to do with trading. What happens to them? They ignore their overall purpose. They increase their trading dramatically or, if they are big enough, they try to corner the market and fail miserably.

Being out of the market means doing something totally different, vacation, exercise, taking breaks etc. When you do those things don’t take the market with you. Don’t be a puppet on a string controlled by the market.<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

fwiw, i am trying to register at http://www.otrader.com.au/stock_and_option_trading_articles/van_tharp.asp, as they apparently have the full article available for download. however, so far i have not been able to register. sent an email to cust serv, so hopefully i'll have the actual article soon.

until then, the above SHOULD suffice. in fact, i use a very condensed version in my Daily Worksheet:

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">
Ten Tasks

1. Daily Self-Analysis
How do I feel today?

1 ….2 …. 3…. 4…. 5…. 6…. 7…. 8…. 9…. 10
Poor Fair Great

2. Daily Mental Rehearsal

3. Developing a Low-Risk Idea

4. Stalking

5. Action

6. Monitoring
1 ….2 …. 3…. 4…. 5…. 6…. 7…. 8…. 9…. 10
Easy Neutral Hard

7. Taking Profits

8. Abort

9. Daily Debrief

10. Periodic Review

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