So what does Van Tharp mean when he talks about trading mistakes?

According to the great psychologist “when you don’t follow your rules, you make a mistake. It’s that simple. And making the same mistake repeatedly is called self-sabotage.” This is a very important distinction to make because without a trader evaluating his performance objectively and instead purely relying on monetary results, he will not learn from his mistakes and progress toward becoming a master trader. In accordance with studies by the Van Tharp institute, Trader Efficiency is a measure of how effective a trader is in making mistake-free trades. So, an individual who makes five mistakes in 100 trades is 95% efficient. In the last five years the Van Tharp institute has documented the mistakes of their traders so that they can look at their efficiency levels. They have found that 95% is actually a very good trading efficiency level. However, the majority of traders who do not spend time learning from their mistakes by reviewing their accuracy trade at only 75% efficiency – a very poor metric. “That’s one mistake in about every four trades!” (Van Tharp)

So what is the best way for a trader to evaluate their performance?

There is no easy answer to this question and the answer can be unique to each individual trader. One common way people evaluate their performance is to scribble a quick note of problems as they occur during the day (not wasting too much time) and to perform a thorough review of their performance at the end of the trading day. Not only does this review enable traders to learn from mistakes but it gives them tangible lessons to incorporate into the following day’s trading goals that they should set for themselves. This type of personal reflection and analysis is essential for any trader. The repeated review process will help to instil the gut feel for right or wrong trading that is so evident in master traders.

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“The Ultimate Futures Trading Education” ]]> http://www.futex.co.uk/inbox-education/trader-efficiency/feed/ 0 http://www.futex.co.uk/inbox-education/the-psychology-behind-gut-feel/ http://www.futex.co.uk/inbox-education/the-psychology-behind-gut-feel/#comments Fri, 24 Sep 2010 07:42:49 +0000 John http://www.futex.co.uk/?p=2945     Following our recent trading-tip entitled ‘Practice Makes Profitable’ we thought we would elaborate further on the psychology behind trading instincts and the concept of gut feel.

Paolo Rossi, the Futex Chairman and one of LIFFE’s leading participants in the bond futures market by the end of the 90s, is a firm believer that successful traders have highly tuned trading instincts. A frequent message he delivers to clients at the beginning of their Trading Floor Training is that instinct is not something you are born with, but the culmination of many hours of trading experience.

One such trader that relies on his highly developed gut-feel is George Soros. “I rely a great deal on animal instincts. When I was actively running the fund, I suffered from backache. I used the onset of acute pain as a signal that there was something wrong with my portfolio. The backache did not tell me what was wrong but it did prompt me to look for something amiss.” Curtis Faith’s new book Trading Instincts discusses how traders like Soros have developed a sixth sense for the markets. He suggests that your left and right brain serve different functions when it comes to decision making. The left brain is designed for linear thinking and is used to “categorise, theorise, rank and file or put another way; you think consciously.” The right brain, in contrast, is much more powerful. It is concerned with the “spacial relationships between each of its parts. If you have ever felt uncomfortable or unsafe but couldn’t pin down the reasons, this was your right brain’s sense of intuition generating that feeling.” The reason for feelings such as Soros’ back ache is that while the right side of the brain can compute a huge amount of data at a much faster rate, it cannot generally explain the reasons why it has arrived at its conclusion.

So, how can a new trader acquire a trading sixth sense and what are some common reactions traders will have?

Unfortunately, like most facets of trading, there is no shortcut to acquiring experience. Guided, extended, effective time on the screens is the only real teacher. However, as discussed last week, the more trading you do during this steep learning phase, the more you will experience and the faster your gut instinct development will be. With regards to reactions like Soros’ back aches, some common physical reactions in Futex’s office include sweaty palms, elevated heart rates and increased anxiety. More unusual reactions include clicking the left mouse button with increased aggression when entering or exiting positions and dreaming overnight of market moves!

The key for any aspiring trader is to establish exactly what sixth sense-type reactions they experience, to learn to listen to them when they occur and react effectively, without hesitation, in the market.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education” ]]> http://www.futex.co.uk/inbox-education/the-psychology-behind-gut-feel/feed/ 1 http://www.futex.co.uk/inbox-education/performance-cues/ http://www.futex.co.uk/inbox-education/performance-cues/#comments Tue, 31 Aug 2010 08:46:52 +0000 John http://www.futex.co.uk/?p=2606  

Following last week’s theme of the use of sports psychology in trading, this week we will discuss the use of performance cues. In professional sports, like trading, there is a huge amount of information that must be processed at any one time. Some of this information is essential, some of it distracting. While most people will spend a lot of their time trying to ignore the distractions and concentrate on what’s important, sports psychologists have actually found this to be counterproductive. Instead of trying to block out noise such as the crowd, elite athletes will simply accept these distractions for what they are and instead focus their attention on a few key aspects of their performance. These points of focus are known as performance cues. For a tennis player it may be paying attention to the upper body of his opponent before a serve or for a skier it might be making a strong edge on their outside ski and keeping their hands forward. The key for a trader is to establish what the important performance cues are in their own trading environment.

So as a trader, how and where exactly do we find these performance cues?

Dr K. Van Tharp, famed trading psychologist, is quoted as saying that “people don’t trade a market. They trade their beliefs about a market”. If we believe this to be true, then performance cues in trading must be a very individual thing and something that can only be established through a process of self-discovery.

In Shane Murphy and Doug Hirschhorn’s book The Trading Athlete they have created three simple steps to establish your cues:

Keep your performance cues simple

It is easy to confuse yourself with information overload. Start with the basics, keep the cues simple and allow your experience to guide you almost unconsciously.

Make your performance cues positive

Negative thoughts can cripple a trader. They lead you to second-guess great opportunities, hesitate and then revenge trade out of frustration.

Focus on your strengths

Elite athletes will work on weaknesses in training then only on strengths in the lead up to an event and during the event itself. Unfortunately for traders, the only time we have to review our performance and consider our weaknesses is once the market is closed. Therefore, from the time we wake up, until the time we turn off our screens, we should only be thinking about our strengths.

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 There are many lessons a trader can draw from sports psychology to improve their performance in the market. One such tip is to understand how the level of our heart rate can greatly improve, or severely hinder, our performance. According to Dave Grossman, the former army lieutenant colonel and the author of On Killing, “the optimal state of arousal—the range in which stress improves performance—is when our heart rate is between 115 and 145 beats per minute.” Grossman interviewed basketball superstar Larry Bird who said that at critical moments in the game, the court would go quiet and the players would seem to be moving in slow motion. He clearly played basketball in that same optimal range of arousal.

In trading, as in sport, this level of arousal is commonly known as being in the zone. Unfortunately for most traders and athletes alike, performance for the majority of the day takes place with a heart rate either below or above this level leading to substandard performance. A heart rate below this level does not give our brain the stimulus required to function with this heightened sense which can lead to us missing important signals in the market or to even misread a situation. More importantly, with a heart rate above this level, our bodies start to shut down to many sources of information and we become useless. “After 145,” Grossman says, “bad things begin to happen. Complex motor skills start to break down. Doing something with one hand and not the other becomes very difficult. . . . At 175, we begin to see an absolute breakdown of cognitive processing. The forebrain shuts down, and the mid-brain—the part of your brain that is the same as your dog’s (all mammals have that part of the brain)—reaches up and hijacks the forebrain. Have you ever tried to have a discussion with an angry or frightened human being? You can’t do it. . . . You might as well try to argue with your dog.” Sound familiar? This is the precise reason why losing your temper in the market can be so dangerous. As the anger and emotion explodes in an individual, the heart rate spikes and their cognitive processing disappears leading to overtrading and/or revenge trading.

Moral of the story: trading is one of the toughest money-making pursuits, even when you have your wits about you. So next time you feel yourself entering one of these unwanted heightened states of anxiety and stress, use your brain while you still can to turn off the screens and take a breather!

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*Information for this article was gathered from Blink by Malcolm Gladwell. ]]> http://www.futex.co.uk/inbox-education/the-optimal-state-of-arousal/feed/ 0 http://www.futex.co.uk/inbox-education/perfectionism/ http://www.futex.co.uk/inbox-education/perfectionism/#comments Fri, 30 Jul 2010 09:44:27 +0000 John http://www.futex.co.uk/?p=2258 To be a perfect trader or to trade perfectly, that is the question... and it is not an insignificant question.

 A concept that many traders - who by definition are driven, ambitious and determined – are confronted with at some point in their careers, perfectionism, and its relentless pursuit, needs understanding if it is not to be a barrier to success. The financial markets are a living, breathing and constantly evolving manifestation of participant opinions, requirements, hopes, fears and desires. They are, as a result, imperfect in as much as their behaviour cannot be wholly explained or rationalised, even after the event (much to the chagrin of the financial media!). Their behaviour is certainly not consistent and trying to impose highly systemised approaches is fraught with difficulty. Those that seek to trade perfectly, and use their P&L results as their barometer of perfectionism, are on a very slippery slope which all too often leads competent individuals to a premature exit from the industry. So, what is the aspiring Proprietary Trader or Investor to do? For those amongst you that have a strong tendency to seek perfectionism in all that they do, don’t enter the industry! Now, that’s perhaps not the answer you may have been expecting but this is not a flippant suggestion. Whether to embark on this career is not solely a question of desire; it is also a question of whether trading suits you and your makeup, and that requires a long hard look in the mirror. However, for those that are prepared to understand and confront their inherent tendency to seek perfectionism, there is hope. To define perfectionism in terms of external factors, such as your trading results, is a mistake. The only enduring measure of perfectionism is something that is within and within your control i.e. YOU. You have the potential to be perfect in your approach to trading and life if your focus is on the process and not the result. Your ability to channel drive, ambition and determination into the daily pursuit of deeper trading and investing knowledge and skill is what should be your measure of satisfaction and ultimately peace of mind. This is the behaviour of the perfect trader.

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But it needn’t be this way. New and experienced traders alike can benefit from an approach to emotion management that has its roots in Cognitive Behavioural Therapy (CBT). Developed by American psychotherapist Dr. Aaron Beck, CBT is a short-term psychological treatment that suggests that problems are often created by an individual. The situation with which you are faced is not the cause of your problems, how you think about and subsequently react to a situation is the cause. If you can interrupt and adjust your “normal” thought process that occurs in the face of a negative situation, you will, with repeated practice, replace ineffective emotions and behaviour with effective ones. By making CBT-type techniques an integral part of the routine of novice traders and coaching them to implement such techniques in the heat of the moment when bombarded with stimuli, it is possible to instil effective thought processes as the norm from the early stages, thus allowing them to avoid the rollercoaster and instead enjoy the sweet candyfloss of consistent profitability.

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As strange as it may sound, one of the key ingredients in becoming a professional trader is learning how to lose money. As with so much in trading, taking losses does not come naturally to the human psyche, and so mastering it requires both teaching and experience. Students of our Trading Floor Training programme develop the necessary discipline early on, and quickly come to realise its importance; after all, wouldn’t you rather exit a losing trade on your own terms and not the market’s?

Every time we enter a trade we should be clear in advance about what we expect to get out of it, and about what we will do when confronted with a range of possible scenarios. It is fine to run the position, but there should always be an area where we are looking to take profits on at least some of it. Given this, we should also be clear about where we will exit the trade if our original reasons for entry are not confirmed. Any trader who is not absolutely clear about these two things before taking a position is trading blind, and ultimately the law of averages will catch up with him or her.

As discretionary traders, we often trade at high frequency and in extremely volatile markets. Being able to take a loss professionally and without emotion is key to being profitable in such markets. As with so many areas of the Trading Floor Training programme, mental discipline and self confidence are essential. The first thing we must come to understand is that losses are an essential part of trading- no one ever has been able to, or ever will be able to, predict with 100% accuracy where the market is about to go. We think and trade in probabilities, which necessitates an understanding that anything can happen. It is no reflection on the trader whether a trade is ‘right’ or ‘wrong’, and as the professional trader has the confidence to know that his edge will mean he reads the market correctly more often than not, he has no hang-ups about a trade that loses money. There is after all no place for an ego when half the battle comes from within the trader.

Perfecting careful and disciplined risk management keeps us in the game when we’re ‘wrong’, and enables us to take maximum profits when we’re ‘right’. A lucrative career as a Futex professional trader awaits readers who can rise to the challenge.

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Trading can seem like a lonely pursuit at times, particularly when you are suffering from a series of poorly executed or losing trades. It is often at this point that the winning mindset is put under threat and the risk of a fast downward spiral in performance is at its greatest. With this potential outcome firmly in the conscious mind it becomes easy for a trader to panic. Trading is deadly in giving you a lot of time to think, often too much and this can increase the severity of the downward spiral if not managed correctly.

However, in addition to managing these episodes as and when they occur (the subject of future Inbox Education newsletters), traders must take ownership of their state of mind before the trading day begins. Successful trading careers are built upon a foundation of consistent performance. To perform consistently you must think consistently. Individuals must make a daily commitment to themselves to implement their winning mindset. This commitment must then be reinforced every time the mouse button is clicked, irrespective of the outcome of any individual trade.

There is no direct link between the outcomes of any individual trades other than the emotional one that is constructed by the trader. A trained trader has the experience to know that losing trades are part of the process and should be regarded as, to paraphrase Jesse Livermore, paying for information. They also know that their trading skills are such that a winning sequence is just around the corner and they have complete faith in their ability i.e. they have a winning mindset. By taking each and every trade as an individual interaction with the market, traders learn to avoid irrecoverable downward spirals. It takes discipline, commitment and repeated, deliberate practice but is essential to perform at an elite level – the objective of all of our traders.

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One of the key traits of a novice trader who performs consistently well is an ability to participate in the market when he has an edge; to pick those fights that he thinks he can win. Our trainees spend countless hours observing and interacting with the markets with a view to identifying times of day, price areas and market behaviour (including order flow and volume) that they confidently believe will provide profit opportunities. This is what we refer to as their edge. We compete in global financial markets against other participants who have the financial muscle to move markets significantly, with no concern for our open positions. If we can align ourselves with these larger players, rather than challenge them head-on, then our chances of achieving exceptional consistency are dramatically improved. It would not be unusual for a consistent trader, within Futex, to be profitable every day for months at a stretch; this is our unequivocal objective. The ability of novice traders to trade effectively on the basis of their edge is dramatically reduced at times of exceptional volatility. Such market volatility is most apparent in and around economic data releases with the U.S. Employment Situation report one of the prime examples. It may come as a surprise to some that our approach to this particular release is to make money in advance of its release, where we have an edge, and to avoid trading at the time of the release itself.

At the heart of the success of this highly effective approach to trading is an individual’s discipline in the face of seemingly high profit opportunities. Usually there is an inherent tendency for inexperienced traders to jump into the market at the first sign of volatility, what we refer to as the flashing light syndrome. Only with the repeated practice of self-enforced discipline does this tendency dissipate; for those that are not prepared to address this issue, the tendency never disappears and the sought after consistency remains elusive.

Futex Academy is the leading futures training company in the U.K.; a sister company of Futex, one of the industry’s most successful Proprietary Trading Houses. Our joint, enduring success is based on the development of long-term, mutually beneficial partnerships with our traders. This in turn is founded upon a trading approach that is consistently profitable.

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For both new and experienced traders a very strong sense of self-belief is required to compete at an elite level in a challenging, performance-based environment. As the behaviour of the financial markets we participate in on a daily basis is constantly changing, traders rely on self-belief to flourish in the face of high levels of uncertainty. However, in order to generate consistent profits traders must understand exactly what self-belief is and how to nurture it.

Self-belief is having the inner confidence that you will perform effectively even when the outcome or result is uncertain. It is a leap of faith in yourself allowing you step out of your comfort zone into something new, unfamiliar and uncomfortable. By definition the outcome of any trade is unknown at the point of entry. Successful traders embrace this fact, without fear, and use the belief in their trading ability to execute their trade ideas consistently. The result of this process is enduring, consistent profitability. One of the biggest challenges faced by novice traders is operating effectively in an environment of uncertainty. For many it is the first time that such a challenge has been faced. At Futex Academy we have significant experience in guiding aspiring traders through this challenge and nurturing inherent self-belief.

New traders at Futex Academy hone their trading skills, along with their inner confidence and self-belief, on a professional trading simulator before venturing onto the live market. They are coached to immerse themselves in the financial markets and to trade actively as only with experience does self-belief grow. They are encouraged, mentored and supported, from day one, with the aim of building self-belief and they enjoy the benefits of being surrounded by many experienced, live traders whose attitudes to trading they can model.

With over 10 years experience of training individuals to trade futures consistently profitably, Futex Academy knows how to maximise the chances of success for any aspiring trader. By nurturing self-belief as a key element of our training programmes, we will continue to enjoy successful debuts such as those that we have experienced this week.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education”