Keeping a trading journal with all your trades is good but at the end of day numbers are just gonna be numbers and they don’t really tell the whole story. If you’ve already caught yourself thinking that you’re doing “something” wrong over and over again but you don’t know what it is, maybe it’s time you start a psychological journal too!
You know how the market has tendencies? Well, in the same way that it tends to react to market events and environments in certain ways, individual traders also have repetitive reactions and behavioral tendencies. However, we often overlook them and how they may be affecting our trading performance.
See, through our lifetime we’ve developed coping mechanisms to help us deal with distress. For example, the first time you sipped your hot caramel macchiato a bit too quickly, you’ve learned that your tongue will burn and that it will probably happen again the next time you do it, right? To avoid pain, you’ve learned to sip slowly or waited for it to cool before drinking it. Eventually, coping mechanisms like these turn into habits and come off naturally when we are faced with similar situations.
Although we subconsciously develop these these knee-jerk reactions to keep us from feeling pain, they may also lead us to make bad/impulsive trading decisions.
Think about it. How many times have you closed a winning trade early the second the market moved against you by a few points? And you’ve probably beaten yourself up for doing over and over again even though you knew that you could have ended your last trade with a bigger win had you followed your plan.
And this is why you should have a psychological journal. It’s a tool that will help you recognize your character patterns. If you’re wondering how you can get started, here are a few tips:
Describe the current market situation.
Try to describe the current market situation and why your trade setup could work in that specific environment. Ask yourself the following questions: What are the dominant market themes right now? Is risk on or off? Am I about to take a trade that’s in line with these themes and risk sentiment?
How do you feel?
Aside from the market environment, also include your thoughts and emotions while trading. Sure, it may feel funny to write about your feelings at first, but somewhere down the road you’ll recognize some behavioral patterns. It’s important to note down all the possible factors that could have an impact on your decision-making.
Take note of the outcomes.
Finally, jot down the outcomes of your trading decisions to help find out what emotions have a positive or negative influence. To pinpoint possible issues, ask questions like:
• Did you close your trade too early because you were feeling extra impatient that day?
• Was it difficult for you to concentrate and why?
• Did you move your stops farther because you were too hungry for a win?
• Were you feeling confident in your trade idea that you decided to increase your position size?
Bear in mind that the goal is to recognize behavioral patterns and their usual consequences. From this, you can identify those scenarios that negatively impact your decision-making and just decide to refrain from trading if those patterns recur. Soon enough you’ll be able to build enough awareness of these behavioral patterns, clearly identify what causes you distress, and be able to keep those situations from damaging your trading account.