The Trading Psychology Plan

D

id you ever see the movie       to trade, that is they are not
The Italian Job, and if so      prepared to accept financial risk
do you remember when John       for something of which they have
Bridger asked: “you see those         no control over the outcome.
pillars over there, that’s where      Trading is much more of a
they used to string up thieves        psychological problem then a
who felt fine.” Make the              methodological one, only the
transition from paper trading to      traders who have first accepted
real money trading and you will       this have a chance of being
feel FINE too – Freaked-out           consistently successful traders.
Insecure Neurotic and Emotional.      Without an understanding of
And what a great analogy ‘string      trading psychology and the
up’ is, because after all those       various issues that circumvent
months of paper trading winners       method, there will be virtually
are replaced with real money          no chance to overcome the fear,
losses, that is exactly what you      confusion, and despair that can
will feel like doing to yourself.     be inherent in trading.
                                      Ultimately, after a series of
                                      consecutive losses, method
The Trading Psychology Viewpoint      becomes replaced with a feeling
                                      that it is impossible to do
No discussion about trading, or       anything right; if for no other
the consideration to begin            reason than this situation,
trading, can be done without a        trading psychology is more
harsh realization - the vast          critical than trading method.
majority of all traders lose.
                                      New Trader Scenario
It is said that the reason that
most traders lose is because they     Consider a scenario where a
are not psychologically prepared      trader develops a method for day

trading an index future. The          trade, the trigger is anticipated
method gives 15 trades per day,       so the trade can be entered
and the trader has gotten to the      earlier - the losses get worse.
point where they are able to
paper trade with the following        With the continued losses the
results: 9 wining trades              emotions take over: “What is
averaging $85 each, and 6 losing      wrong, why am I such a pathetic
trades averaging -$65 each – thus     loser? Maybe it’s not my fault,
giving $375 average daily gains.      maybe the method just doesn’t
The trader has achieved these         really work.”
results for three consecutive
months; their paper trading goals     The problems get worse with each
have been met and it is time to       trade, more emotions and more
start trading real money.             loses - the trader quits trading.
                                      The trader now decides that their
Real money trading begins, but        paper trading results weren’t
things quickly change. Instead of     really adequate to begin real
trading their method like they        money trading. They will go back
did when paper trading, the           to paper trading and studying
trader starts ‘skipping’ trades       again.
trying to pick the winners
instead of accepting the 40%          Thoughts that are going through
losers; of course, they               the trader’s mind now: “Maybe I
invariably pick more losers than      should try different trading
winners. Trying to then correct       methods until I can eliminate
this problem, the trader decides      those losing trades – then I will
that maybe they are entering          be ready to trade real money
their trades too late. So now         again. Really, maybe I should
instead of letting the setup          just quit trading altogether –
complete and then doing the           maybe I am just a loser, and

that’s why I can’t trade.”            transition from fear and emotion
                                      directed trading to actually
The Trading Psychology Plan           trading the method as designed.
                                      They did not have a plan to
What should be very apparent from     objectively access and understand
this scenario is that the trader      their given non-method actions,
never traded their paper trading      and then define a 'setup' for
method plan after transitioning       replacing them.
to real money trading.
Unfortunately, the trader is          The trading psychology plan must
unable to realize what they have      begin with an honest assessment
done, instead their emotions          and acceptance for what really
first place blame on the method       happened: the trader never traded
thinking that it really doesn’t       their method plan; there is no
work, and then on themselves for      other blame to be placed, or
being “such a pathetic loser”.        excuses to be made. There is
The final result being that the       nothing wrong with the trading
trader quits trading, and if the      plan, and regardless, the trader
real underlying reasons for what      has not traded it in order to be
has happened aren’t accepted and      able to make that evaluation. As
changed, this trader will never       well, traders cannot internalize
be able to trade real money even      trade loses where they lead to
if their paper trading results        their viewpoint of themselves –
become 100% winners, which of         you are not a loser because your
course is not going to happen.        trade is a loser.

The trader had a trading method       Trading Psychology Plan
plan, but they did not have a         Components
trading psychology plan. They did
not have a way to make the            • Accept that losing will be a

normal part of trading. Not only      wrong.
is it impossible to be perfect,
it is not an objective or             • Eliminating your emotions is
necessary to be a profitable          not the objective; I actually do
trader.                               not think this is possible.
                                      Emotions are always going to
• Replace the focus of winning        enter into trading – learn to
and losing with the objective of      control the emotions, instead of
following your plan. This was not     having them control you.
done while paper trading, as the
trader had a specific                 • Accept that emotions are a part
profitability goal that they used     of life; they aren’t by
to tell them when they were           definition good or bad, and
prepared to trade real money.         actually if you can shift the
They did not understand that the      focus of what the emotion
reason they achieved this goal        represents, they can be very
was because of how they followed      beneficial for the trader. For
their plan.                           instance, if I am feeling
                                      confused and that causes an
• Remain neutral and                  emotional response or hesitation,
non-judgmental towards yourself.      I want to feel that emotion. This
If profitable trading is ever         emotion becomes a warning to me
going to be possible, this is         that I should wait and try to
mandatory. There is no way that       find more chart-market clarity
you are going to be able to trust     before taking a trade, something
yourself to manage risk while you     that can be very typical when
are also telling yourself that        markets are in congestion.
you are ‘stupid’ or a ‘pathetic
loser’ each time you lose or feel     • Start slowly – this may be the
that you have done something          most important component of your

plan. For instance, begin trading     considerably faster. By doing
real money for an hour at a time,     this you will ‘build-up’ to
and then assess what you have         trading your full plan at a pace
done, always asking yourself the      that won’t cause you to become so
question: did I follow my plan,       overwhelmed by the process, and
or did I take non-method trades.      immediately cause you to avoid
                                      what you had intended to do as
Granted, you will not be able to      fear and emotion becomes too
approximate your paper trading        strong.
results as the expectancy of that
plan was achieved by averaging 15     You have a great trading method
trades per day. However, not only     and trading plan. You have
will this help further to shift       profitably paper traded, and you
the focus from how much money did     ARE now ready to start trading
I make to did I follow my plan,       real money – just be sure that
it will also allow you to             you have a trading psychology
acclimate to the logistics of         plan that is as good as your
real time-real money execution,       trading method plan, and that you
and the related initial emotions,     realize that neither will be of
where all of a sudden the market      any use to you without the other.
feels like it is moving

About the Author:

Barry Lutz has been trading, as well as teaching others to trade since 1997, through his firm Tactical Trading, LLC., http://www.tactrade.com. He also writes a daily trading teaching lesson called the Trade Journal, which can be found, at The Tactical Trader, http://www.tactrading.com.