Here is what you have to understand.
We are all deeply flawed human beings. We never really change. Our personalities are set in stone from our childhood. Deep down what we were in high school is what we are today. Not only that but all our attempts at self-improvement are destined to fail. That’s not my opinion. That’s the latest scientific view backed by reams of data from cutting-edge brain research.
Our attempts at self-discipline sap so much mental and physical energy from us -- especially as we constantly try to censor ourselves and live up to the “standard” -- that in the end we crumple and revert to our old habits. That’s why losing weight is so hard. That’s why quitting smoking is so hard and that’s why “disciplined” trading is so hard.
Modern science teaches us that the only way we change behavior is if we make it as pleasurable as possible. Punishment and sacrifice, while very nice, proper Calvinist concepts, do not work in real life.
I started thinking about behavior modification after reading a Business Week article in which a professor was able to quit smoking by substituting another pleasurable activity (in his case it was sucking on hard candy) every time he had the urge to smoke. After a long period of time, the urges lessened then disappeared and he dropped the candy habit and was smoke-free.
Nicotine is one of the most addictive substances on earth. Its rate of recidivism is higher than that of heroin, higher than cocaine. In fact, the only substance more addictive than cigarettes is crack cocaine, so to beat the habit with a simple candy trick was quite an achievement and it confirms the latest scientific findings that in the long run, we can only change our behavior through pleasure, not pain.
Which brings me to trading. Forget every bullshit piece of advice ever given by a trading guru. You will never let your profits run and cut your losses short. You will never take only those trades that qualify for your setup. You will occasionally lift your stop and you will sometimes revenge trade.
But despite it all you can still win and prosper as long you don’t let the perfect be the enemy of the good.
First and foremost you need to ask yourself -- are you fearful of greedy? And be brutally honest with your answer. I am the biggest wussy that ever lived. Kathy, on the other hand, is greedy beyond belief. She never met a trade that she did not want to take.
So here is how each of us improved our own trading style without forcing a change in the underlying behavior.
Kathy overtrades horribly. When it comes to day trading she can easily do 20-30 round turns a day in just 3 hours of North American trade. She is excellent at cutting her losses but never lets her profits run. A while back we noticed that her 3 to 4 first ideas of the day were always the best trades of the bunch, and if she simply let those ideas run to target she would have often banked 50-60 pips for morning’s work. Easier said than done. No matter how many times she told herself that she needs to hold to target, she would always fiddle with the positions and collect half as much winnings as possible.
Finally, we hit on the idea of separating her trading. We created an account where she just traded the 4 initial trades to target -- do or die. We also created a separate account where she was able to take discretionary trades to her heart’s content. After that, trading improved markedly and she was able to hold most of her initial trades to target because she found a psychological valve to satisfy her strongest fear-of-missing-out desires.
I had a completely different problem. I was very selective in my entries, but very fearful of losing profits, so the net result was that I would let many good setups pass me by and worse when I did find myself floating a trade I never, ever let it reach the target. Like a 13-year-old boy, I was suffering from “premature profit taking”.
Until I started using a dynamic trailing stop on every one of my MT4 robots.
Trailing stops are for suckers. They are a mathematically inferior strategy. They take you out of the trade too early. Yadda. Yadda. Yadda. All that is true and all of it is immaterial.
Since I’ve instituted a trailing stop strategy with my robots I haven’t interfered with a single trade. Not one. Sure, most of my day trades are 3, 4, 5 pips winners, but at least once every two days or so I hit a 25 pip full target profit and that’s enough. Put 10 of those a month and you are doing 250 pips consistently without any mental stress.
Are K and I trading the best that we possibly can?
Of course not.
Are we trading the best given our individual personalities? Yes, we are. And that is how you really improve your trading.