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Obviously the strength of human beings lies in our ability to achieve anything that we focus on with single-mindedness. Nevertheless, our sense of peace and wellness are indisputably enhanced by fitness of body and
MECHANICAL TRADING SYSTEMS
mind. If your goal is the achievement of greater flexibility in mind, practice various physical activities to ensure flexibility of the body (and vice versa).
Trading offers us a tremendous opportunity to learn about ourselves. This is why I strongly encourage traders to keep a journal. It serves as an objective record of our emotions and prejudices regarding market behavior. Once we can make an accurate assessment of these biases and emotional pitfalls, we can work on changing our intellectual attitudes and emotional responses to the market.
For many, trading is an endless cycle of manias and depressions. Because the market is an ever-changing objective truth, emotions such as euphoria after gains or despair following losses merely drain us of our ability to perform effectively in the future. Instead, utilization of mechanical trading systems trains us to practice even-mindedness and nonattachment to the results of our actions. Eventually, consistent adherence to the entry and exit signals generated by our trading models frees us from the emotional roller-coaster of undisciplined trading and replaces it with feelings of satisfaction after achieving a profit and (assuming we correctly executed our system) acceptance and emotional resiliency following a loss.
One concept that I personally find useful in assisting me to remain even-minded following a loss is to remember that I am in the market for the long haul and that the result of a single trade is virtually inconsequential when compared with the next 300 trades. Instead of profit or loss on a particular trade, success as a systems trader should be measured by how well we adhere to the rules of the strategy. If we followed the rules, even though the outcome on a particular trade was a loss, we were successful. As long as the system works in the long run, and as long as traders continue to adhere to principles of solid price risk management, their survival will be ensured beyond the occurrence of a loss or even a string of losses. The laws of probability and the immutable nature of human behavior (on which virtually all successful trading strategies are based) suggest a high probability of the account’s return to profitability.
If, on the other hand, we did not follow the rules, we must recognize our failure and look at what would have been the outcome had we remained disciplined. Then we must forgive ourselves, let go, and resolve to be more disciplined at the occurrence of the system’s next trading signal.
In both cases—whether we adhered to our system and suffered a loss or if we failed to follow the rules—the key was an honest assessment of our actions in the market and an embracing of our emotional response to the loss or our failure. Then, after we honor the emotion, we can release the ex-
Psychology of Mechanical Trading
perience either by acknowledging that successful system traders suffer losses or by telling ourselves that it is okay to fail (while simultaneously resolving to implement the system on its next signal).
Many traders hope that adoption of mechanical trading systems will somehow eliminate emotions. Even-mindedness is not the elimination of emotions; it is the tempering of emotionalism. We are not automatons, nor should we strive to become so. Emotions are an integral aspect of our humanity. We need to honor and accept our emotional responses to events by embracing the emotions as we feel them. Then, once we have accepted, embraced, and integrated the emotion, we can practice nonattachment to the result of our actions by releasing the emotion.
This concept of embracing and releasing is in stark contrast to our usual responses of wallowing in the emotion until it eventually results in the disempowerment of our future effectiveness or denying our emotions and having them fester and subvert the confidence and single-minded pursuit of success within our conscious and subconscious minds.
SINGLE-MINDEDNESS: UNRAVELING THE ONION LAYERS
My grandfather used to tell a story about the cow that would kick over its pail after each milking. Such stories reveal much about human nature and trader psychology. Successful trading has as its prerequisite that traders are single-minded in their pursuit of success. The only obstacle to success in trading is the trader. Like my grandfather’s cow, conflicted traders often are able to enjoy profits and even achieve a limited level of success, but because of various unresolved psychological conflicts, they either surrender these profits or create an artificial ceiling to their successes.
The reasons for these internal conflicts can be as varied as life itself. One trader I know kept sabotaging his successes because he was in a bad marriage and felt his success would have enriched an undeserving spouse. In such instances, it is almost impossible to trade effectively. We must believe that everyone benefiting from our success (including us) deserves it or we will continue to kick over the pail of milk. Single-mindedness sounds like an easy accomplishment; instead, it is a continuous process of self-assessment and refinement.