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The Destruction of Your Trading Soul

Wed, May 16 2007, 10:02 GMT
by Larry Pesavento

The Trading Tutor

Keep a Trading Diary

One of the best things a trader can do for himself is to keep a trading diary. It has all positive benefits and zero drawbacks. A diary will help you identify bad habits such as failure to prepare, over trading and a host of other faults. Trading is a lonely business! You are the “captain of your ship and the master of your soul.” Self-evaluation through a daily log can go a long way toward insuring continued success.

Over the past 40 years of trading, I have found that “rituals” work for me. These rituals are found in neural linguistic programming (NLP). They serve as anchors to begin your day. All great athletes use this anchor to concentrate on their game and block out the crowd. My favorite anchor is to read several pages of Mark Douglas’ great book “Trading in the Zone.” At the end of the year, I’ve read the book several times and it has become engrained in my thinking.

Remember that the goal in trading is to learn to do the right thing. A smart man learns from his mistakes –the wise man learns from the mistakes of others.

Here are some of the things a trading diary should cover:

1. Record of wins and losses

2. Notes on your trading plan

3. Notations on the daily distractions of trading

4. Particularly good or bad trades

5. Notes on your mental frame of mind on both those good days and bad ones – very important!

6. Overall results of your trading (net returns)

Thoughts From A Trading Mentor

Most traders quit the business because of devastating losses. Failure to use a protective stop starts the whole process of destruction. The seeds of this were planted months, even years before the disaster occurred. These seeds are our expectations on trading.

Nothing damages a trader’s ability more than an expectation. When we expect something to occur it is normal to be disappointed when the expectation does not happen. There is nothing destructive about being wrong – the mistake lies in “staying” wrong. When the trade expectation is not met and “wishful thinking” takes over, serious trouble is on the horizon.

The experienced trader has a trading plan to protect themselves from these psychological time bombs - the neophyte trader does not – or lacks the discipline to follow it. How many times has your stockbroker or neighbor told you about a stock that is going to go straight up! They never tell you when to get out. What you want to have is a stockbroker who tells you, “we will only risk 5 points on this stock.” At least with that broker you will have some capital left if the trade bombs.

Big losses do much more damage than just depleting one’s capital. They destroy the trading soul, which is the essence of why trading is so much fun and profitable. The damage can even penetrate beyond the loss of capital to depression! Finally, lack of interest and the relief from stress forces the trader out of the business, usually after numerous margin calls.

All of this can be prevented by the simple use of protective stops. Remember that the operative word is protective. Keep in mind that the stop must be in the market! Desk stops and mental stops are not capable of being executed – not a very friendly word, “executed,” but necessary nonetheless.

Don’t let mistakes that can be corrected become mistakes that damage your trading soul. The risk is far too great for the rare instance where your hopes and prayers are answered. Even if they are answered, you are sowing seeds that will reap your trading soul. Learn to trade from the position where you think in terms of probability on each trade. At that point, one trade will never make or break your trading soul.

Published on  Fri, May 29 2009, 10:02 GMT