The Daily Trading Coach

by Brett N Steenbarger

  “What are the three things you have found most helpful in mentoring /coaching yourself as a trader?”

  I think you’ll find their outlooks worthwhile, and I know you’ll benefit from checking into the resources these traders provide. To coach yourself, you don’t need to reinvent wheels. The guidance of those who have come before you can be invaluable. Think of this chapter as lessons in the best practices of self-coaching. Look for the themes emphasized by a majority of the contributors; these themes include the best of the best practices.

  LESSON 81: LEVERAGE CORE COMPETENCIES AND CULTIVATE CREATIVITY

  We encountered Henry Carstens when we took a look at profits and losses as a function of one’s trading metrics. Henry’s web site (www.verticalsolutions.com) is filled with valuable information for discretionary traders, but his distinct specialty is the design of trading systems. Henry eats his own cooking: he builds and trades his own systems, manages money for clients with his systems, and develops trading systems for other traders and trading firms. When I posed the question to him of what he has found most helpful in coaching himself, he quickly offered three responses:1. Leveraging core competencies and interests

  2. Learning about learning

  3. Collaboration and work ethic

  Let’s take a look at each.

  From childhood, Henry learned about building and the use of machinery from his grandfather, Floyd Grahm. “I am, and have always been, a heavy equipment operator,” Henry observes. Out of his fascination with machines and moving things around, Henry tried his hand at a different kind of building: he built a machine that traded. After building several such machines, he figured out a way to quantify rates of change in market behavior. When he tossed aside all but one of his machines, Henry developed others, so that his machines would never rust and become obsolete. His core competence and interest is building: markets just happen to be the earth he is currently moving. Henry leveraged what he knows and loves and found success and fulfillment.

  Success is found by leveraging distinctive interests, talents, and skills: doing what you love, and doing what you do well.

  Note, however, that the flip side of building is destroying. Sometimes you have to take down a structure to erect a new one; you have to remove a mound of earth to lay a foundation for something new. It was Henry’s willingness to put aside his old machines and develop new ones that provided him with his edge. It’s not about finding a perfect system and taking cash from it like an ATM. It’s about having the integrity to acknowledge when ideas are no longer working and having the desire to be the best machine operator possible.

  With respect to learning about learning, Henry credits his chess lessons with grandmaster Nigel Davies for helping him become sensitive to patterns and their nuances. “What I learned from those lessons was the power of nuance—the cascading insights brought by experience and the continuous pursuit of a single objective,” he explains. Henry has learned to scan markets like he scans a chessboard for moves. “I continually search for the next insight now, the nuance that means just a bit of an edge for just a little while longer.”

  I’ve observed this interdisciplinary cross-fertilization among many successful traders. Those traders with mathematical backgrounds learn to quantify value and divergences from value. Those with athletic training use their experience to guide their training and direct their competitive drive. My own work in psychology has sensitized me to the ways in which human behavior is patterned. This work has been a tremendous aid in recognizing similar patterns in markets. Coaching yourself begins with knowing yourself, and especially knowing your distinctive strengths: how you best process information, how you think, what you love. It is difficult to imagine being successful at trading if your market activity does not tap into these core competencies and values.

  Finally, Henry identifies collaboration and a strong work ethic as key to his self-development. “A diverse network of people with broad and similar interests in trading both pushed and supported me,” Henry explains. “The very strong work ethic I got from my grandfather always makes me do just a little bit more.” The keys here are that the network is diverse—providing input from many angles to aid creativity—and the network is both challenging and supportive. I’ve often been asked why I don’t charge money for my blog content. The answer is that, in developing a community of readers, I also cultivate the diverse network described by Henry. Readers push me to think more deeply about markets, and they support my efforts at learning more. All of us tend to fall into the trap of operating within our comfort zones. We benefit when those who care about us also push us to move beyond those self-imposed boundaries.

  Like many successful creative individuals, Henry exemplifies what I call an open source approach to networking. When others share ideas and research with him, he freely passes his work on to them. This approach is very common among professional portfolio managers, particularly the successful ones. A surprising number of traders, however, are convinced that they must keep their work secret. The result is that they become isolated and stagnant. “When a colleague sends me something that I build upon or that sets me off on a new and interesting direction, I always try to reciprocate with a relevant finding or study as way of thanks,” Henry points out. “What I give up in secrecy comes back many-fold in strong relationships and flow of ideas that are the lifeblood of the creator.”

  The trader must be a creator if his business is to avoid stagnation.

  I cannot emphasize this latter point strongly enough: as a trader, you are only as strong as your flow of ideas. Those ideas are your lifeblood: the novel mutations that will enable you to evolve and adapt to changing market conditions. Success in trading is a kind of evolution; without creativity and the ongoing flow of ideas, extinction is a real threat—as it is for any business that fails to keep up with the marketplace.

  Your assignment for this lesson is to set a goal and plan for becoming just a bit more creative in your approach to markets. You don’t have to be a system developer to learn about learning, build upon your distinctive strengths, and fertilize your creativity within a network of colleagues. For your assignment, I encourage you to add just one source of new ideas that will add to and challenge your own. This source can be a web site, a newsletter, or a peer trader—but it should be a source that you can consult as a regular part of your generation of trading ideas. Henry freely shares his experience on his site, including a framework for testing trading ideas; making use of the fruits of his self-coaching will be invaluable for your own.

  COACHING CUE

  When we’re successful, our work expresses who we are. Henry emphasizes that he is a builder and creator. How does your trading express who you are: your greatest talents and interests? Identify the recent times in the markets when you have been your happiest and most fulfilled. What made those times special? How can you bring those special elements into your trading more regularly?

  LESSON 82: I ALONE AM RESPONSIBLE

  Chris Czirnich, author of the Globetrader blog (www.globetrader.blogspot.com), was one of the first contributors I considered for this chapter. Uniquely among market writers, Chris is sensitive to the psychology of trading. His blog consistently combines market insights and psychological ones; it’s a useful resource.

  I posed the three-pronged question to Chris, asking him what has been most helpful for his self-coaching as a trader. The floodgates opened and Chris came up with 10 ideas, not three. His response was so well considered that I decided to summarize all 10 of his insights and their implications for self-coaching:1. Being able to observe myself.

  2. Discipline.

  3. Having an edge.

  4. Accepting that I alone am responsible.

  5. There is no holy grail.

  6. Having trust in myself.

  7. Being able to stand up again, after being beaten down.

  8. Being lucky from time to time.

  9. Keeping a trading journal and writing a blog.

  10. Do
n’t panic.

  Building the External Observer

  “The external observer is a concept I came across after reading your first book,” Chris explains. “It allows me to see myself trading, to observe and interact in case I’m in a position from a teacher’s perspective. It allows me to argue about my trade, to see the pros and cons, to notice price behavior I might miss otherwise. It’s an invaluable resource in a trade because it is not affected by emotions and will guide me, even in a fast-moving market. I rely on it to always know what I should do. I might override it, but it is the clear voice in a turbulent market, where I can always turn to find the safe way out.”

  Maintaining Discipline

  “Discipline is so elusive, so difficult to maintain, and yet it is something without which you won’t succeed at trading,” Chris explains. “Am I a disciplined trader? Alas no, unfortunately not, but after all these years I have learned that I have to follow certain rules or I will do a lot of damage to my account. Let’s look at a concept that every trading book tells you is wrong and will lead to disaster: adding to a losing position. Admit it, you have done it at times, because you were certain that you were right and the market was wrong. My biggest loss came from adding to a losing position; still on a range day, adding to a losing position is the way to trade, because otherwise, you will die the death of a thousand stops. Yes I add to losing positions, but now I have the discipline to stick to the twice wrong and I’m out rule. Meaning, if the add-on does not work, I’m out. Of course you can be wrong and a trade signal might go against you, but if you have two signals in a row that go against you, then you have to take a step back and see why your signals aren’t working properly.”

  Rules promote discipline.

  Having an Edge

  “Without an edge you are doomed,” Chris asserts. “Very simple. Of course you might throw a coin and trade a 50:50 chance system. But only a professional will have the discipline to stick to the necessary money management rules to trade a 50:50 system successfully. Having an edge means you can statistically prove that your trading system works, that it would have paid your commissions and costs of doing business and made you profits in the long run. You might be a mechanical trader, you might trade fundamentals, you might trade price action or some arcane indicator or a combination of all of them. It all comes down to one thing only: You must be able to prove to yourself that your trading system works and will make you profits in the long run. If you can’t prove that to yourself, if you don’t understand the mechanics behind your trading system, then you won’t trust your trading system and you will not be able to trade it. The best trading system will produce losses in the hands of a trader who does not believe that that trading system works.”

  I Alone Am Responsible

  “I came to trading because I came into real financial difficulties after some clients of mine went bankrupt and did not pay their bills” Chris recounts. “Trading seemed the solution to me, because only trading gave me the promise of instant payment, of knowing that when I did it right I would get paid. But that promise came with a responsibility I did not fully understand: I alone am responsible for any action taken. There is no one but me to blame, if I have a red day, a red week, a red month or year. Each and every day I can look back and tell you where I was wrong, what trade I should have taken, where I missed the opportunity to make it back. It’s only me who is responsible. And if I alone am responsible, then there can’t be any guru to whom I can turn to tell me what to do. I trade my system. I can tell you what I do, but whether you will be able to use that knowledge depends on you alone.”

  The need for a guru confesses an absence of self-guidance.

  There Is No Holy Grail

  “The charts of the best traders have price bars only or they trade without charts at all, like many forex traders,” Chris explains. “They are not magicians, but they follow the price of the instruments they trade for such a long time, they no longer need indicators or charts. But if you ask them, they will tell you that there is divergence on price and that a bottom or top might be near, that right now will be a great buying or selling opportunity. All these traders have looked at charts, they have used all the common and not so common indicators or oscillators or volume analysis and after a while they removed them from their charts until they were back at the beginning looking at a bare chart, but now knowing that there is no holy grail among these indicators. Nothing will give you 100 percent winning trades, so it’s futile to search for it. You need to focus your efforts somewhere else to succeed.”

  Having Trust in Yourself

  “I’m a discretionary trader,” Chris points out. “This means that I have certain trade rules, which provide me with a trade setup, but I decide on a, let’s call it gut feeling whether I take the trade or not. I have tried a few times already to build a successful mechanical trading system, but I was never able to boil my trade rules down to a mechanical system that I could trust enough to trade. On the other hand I have accepted that my subconscious mind is a better computer than my mechanical skills will ever be. Maybe if I tried my hands at neural nets, I could come up with a working mechanical trade system, but then I would not understand the rules any longer and that means I would not trust it enough to trade it. The subconscious mind will not give clear instructions; it communicates through feelings. You need to learn to listen to them, if you want to use its power. But if you do, it can be a nearly unlimited resource you shouldn’t ignore. To teach or program your subconscious mind to do its job, you need to invest a lot of screen time. You need to expose it to as many situations as possible . . . to develop that trust in yourself, the trust that you will always do what’s right for you.”

  If you don’t trust yourself or your methods, you will not find the emotional resilience to weather periods of loss.

  Standing Up after Being Beaten Down

  “Being bankrupt, having a real bad day: yes it happens,” Chris explains. “Many traders trading for their own account will have gone through such a slump not once but multiple times before they manage to develop their account. When I started trading, I had lost a huge amount of money in funds. I had trusted the fund managers to do a good job; instead they did a lousy job and I decided I could do better! It wasn’t easy. Somewhere I read that if you can’t trade 1 futures contract successfully, why do you think you can trade 10 contracts successfully? That was a statement I could accept and actually still follow to this day. So I gave myself a $3,000 account and started trading futures. (I never encountered the problems I had in my trading when trading in demo mode, so I traded real most of the time). I went bankrupt (actually below $2,000, which was the limit I had to maintain to continue trading) at least five times. I funded my account with about $20,000 over the last seven years and made it all back within three months, when I finally got it right. I’m not out of the woods today, but I have started taking out money for my living from my account. I still have days where I screw up big time and need to build myself up again; where I need to question my plan, myself, and my approach to the markets. But I know today that I can trade and that I have an edge. I trust myself to do what is necessary to do, even when I screw up. I know I will stand up again and make it back.”

  Mastering great challenges yields great confidence.

  Luck

  “There is no room for luck in trading? Don’t believe that for one second,” Chris asserts. “How many trades did you do and looking back you know you were just lucky to get out breakeven or make a huge windfall profit? I always think I’m entitled to two or three lucky trades per month. But make sure you know you got away lucky. Don’t bask in the glory of that wonderful trade, when all you did was violate your rules, add to that lousy entry, and then have the luck to ride a spike against the prevailing trend right to the tip.”

  Keep a Detailed Trade Journal and Write a Blog

  “You need to be totally honest with yourself,” Chris advises. “There is no rock to hide under if you screw up. It shows in your acco
unt and you need to document it. Otherwise you will do the same mistakes over and over. Believe me, you will still do the same mistakes over and over again, even when you write a journal, but at least now you know you made the same mistake again. A trading journal can provide you with the statistics necessary to develop trust in yourself. It will tell you if you have an edge. It can tell you which approach to the markets works and which was a big failure. The trading journal I use today goes back more than four years now, and I made about 5,500 trades in that time. It is an invaluable source of information about myself and the ways I handle certain types of markets. If I encounter a rough patch in the markets I can look back and see if I had a similar experience in the past. I can see how I handled the situation then, whether my solution was successful, or whether I should better try a different approach today. Usually before I screw up big time, I have a few days with smaller and smaller profits. Looking back I see that I felt insecure in the markets: something was changing and I was not changing with the market. So I struggled to keep the green until something snapped and suddenly I was totally and absolutely wrong. The next day or two, I often make it back before I have a second deep red down day. After that I usually get back on track with smaller profits. The account starts to consolidate before I manage the next trend move.

  “Writing the Globetrader blog I maintain to this day has made me accountable. I started the blog because I hoped that by sharing my approach to the markets, older, wiser traders would read it and question me or point me in a different direction by commenting on my ideas. Fortunately for me some of the comments I received proved invaluable and are now an integral part of my trading system. You don’t need to write a public blog, but writing about your thoughts in a trade, how you see the markets, or what constitutes a trade setup structures your approach to the markets. Right now I’m at a point in my development as a trader where I try to dissect that gut feeling I wrote about earlier, so I can consciously see why my subconscious mind just gave me a clear Go ahead and take that trade signal. Or why it just questioned an otherwise wonderful looking signal and is proven right a minute later. By writing about these trade setups, I can relive the feelings I had when the trade opportunity presented itself in real time. Eventually I can see why the trade setup actually was not an opportunity. The blog is also the place to deal with all the demons and obstructions you will encounter in your trading. Writing about the problems is the first step to solving them. As long as you have no mechanical automated trade system, you have to accept that you are human and will make mistakes. You need to deal with them and you will have to find ways to avoid or integrate them or you will not make it in trading. But the first step is always to bring them in the open, so they can no longer hide.”