Trade by Design; Not by Default

Date: June 23, 2015

Trading is simple, but not easy. The difficulty, as trader upon trader has shared over the years, has to do with errant emotions like fear and greed that often stop the well-meaning trader in their tracks and drive rule violations.

Consider the following scenario:
The look on Max’s face told the story; and it did not have a happy ending. His plan had been based on the price within the Bollinger Bands regressing to the mean after hitting a supply zone which was supported by a 20 period EMA at the bottom of that supply zone. The set-up was actually a high probability trade and all would have been fine if only he had followed through with the plan. After entering the trade Max was watching the price action when it began to inch upward toward his stop. At first he felt some tension in his stomach but told himself that he was OK and continued to follow his plan. Unfortunately, the price action ticked skyward and he felt more tension in addition to a gnawing fear that was mounting. He had violated his rules many times before and he promised himself that this time he would remain calm and allow the markets to prove him right or wrong. Suddenly the price action surged with more speed and so did his emotional discomfort. He became so emotionally worked up that he completely forgot what he had just told himself a few moments ago. His mind raced with an internal dialogue about losing and what that meant; which began to trigger more emotional volatility. His hands trembled, his breathing accelerated and, despite his best efforts, the mental fog that descended upon him seemed to render him out-of-control. He reverted to default behavior as he moved his stop a total of three times before he finally exited the trade with a substantial loss much greater than his original risk calculation. This pattern of seeing an event in the charts, thinking negative thoughts that create errant emotions, which then drive physiological responses and behaviors, is a negative default pattern. Negative default patterns that get triggered are like computer viruses in your body. They take over your system and end up causing results that you don’t want.

Negative default patterns are programs that are connected to beliefs, biases and values and they are often not in your best interests. Programming is created from your earliest days of being with family, teachers, counselors, coaches, clergy, etc. These programs represent all that you have learned and or experienced from zero years up to and including the present moment. It is for these reasons that when they are triggered, default programs keep rolling until the situation is over or until interrupted. Of course, all programming is not negative or bad…thank goodness. It is important to identify and modify negative default patterns that are contrary to getting the results that you want with your trades. Trading is counter-intuitive which greatly adds to the challenges. For example, humans are loss averse. We are much more opposed to giving up something than we are drawn to acquiring it. Losses tend to be twice as powerful, as suggested by research, as gains. This bias can cause you to move a stop when it is threatened by the price action or to be immobile in the face of pulling the trigger to enter a trade.

It is very difficult to modify a negative default pattern if you are not aware of the thoughts, emotions and behaviors that comprise it… especially if it’s deeply entrenched. In most cases you’ve got to become aware of them first. Default patterns are inertial, meaning that whatever your baseline behavior, there is a great internal pressure to maintain that baseline behavior. You can’t change what you can’t face, and you can’t face what you don’t know. Like an iceberg, a greater part of everything that goes on in your brain and mind is out of your awareness. This is especially true when core beliefs, biases and values are involved; and this is where the motivation for the conscious thoughts is generated. Consequently, you must be willing to use introspection and self-reflection by keeping a trade log and thought journal in order to measure, verify and document internal data (thoughts, emotions and behaviors) that greatly impact upon your ability to plan your trade, trade your plan and keep your trading commitments. You must become self-aware; that is, you want to monitor your thinking, feeling and doing. Notice that self-awareness is far from being self-absorbed. To be self-absorbed is an ego function which is driven by defensiveness, insecurity and fear-based behavior. Self-awareness will increase self-knowledge and understanding by finding out those limiting beliefs, biases and values so that you can work on changing them.

One of the ways to increase self-awareness is to take your emotional temperature from time to time; especially when you are in a trade. Feelings, either in your body (as butterflies in your stomach) or emotions like fear are often the first indications that something is not going well. For example, if you are in a trade and notice those butterflies or a mounting fear and a few moments later get the urge to move a stop, the first noticeable signal that something’s amiss would be the feeling/emotion. Simply put, it means that you are checking in with yourself to see whether you are too hot emotionally (angry, excited, greedy or anxious to name a few) which can lead to impulsive behavior; or too emotionally cold (boredom, fear, worry, doubt, etc.) that can prompt you to freeze in a trading situation or act out of exasperation.

When you notice the uncomfortable feeling/emotion there is an opportunity to “interrupt the emerging negative default pattern” that has been initiated by what got your attention; such as the price action drifting toward your stop. When this happens take a deep breath and count to 10 while simultaneously changing your physical position. Then ask yourself this question: What am I telling myself or believing to feel this (fluttering stomach, tension, anxiety, fear, etc.). Once you identify your internal dialogue, you can begin to deal with it by challenging the negative thought or limiting belief. Ask yourself: Is that true, is that absolutely true? Interrupting a negative default pattern as it is being triggered is an enormously effective way to start taking back control. Self-awareness is one of the first steps to self-management and self-discipline. Become deliberate in what you do by becoming aware of and deliberate about what you think. Then you can design your responses rather than operating by default.

Trading is psychological warfare. The difficulty stems from the myriad ways that the trading process challenges your weaknesses, character flaws and blemishes. Trading requires self-limits and personal accountability. Your best trader, your A-Game is the only acceptable position to trade from. Otherwise you are placing yourself under impractical, unacceptable and unsustainable risk. Don’t allow yourself to continue to trade under the influence of negative default patterns. Identify, root-out, neutralize and replace negative default. Protect your capital. This is what we teach in the Online Trading Academy “Mastering the Mental Game” online and on-location courses. Ask your OTA representative for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading

Dr. Woody Johnson

This article is contributed by Online Trading Academy


This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.