Great Expectations – Part 2 of 4

Great Expectations Part 2 – The Big Surprise

“It wasn’t that things were harder than you thought they were going to be, it was that they were hard in ways that you didn’t expect.” Lev Grossman

I call it the “Big Surprise.” We’ve all experienced it. It is the cathartic moment after placing a trade when the market, for no apparent reason, goes wild and/or against your position in a Nano second and you sit frozen, confused and bewildered. You feel a level of helplessness that is rarely rivaled. You begin to think about what happened, why you didn’t see it coming, what you did wrong, and that this was just some kind of freakish anomaly. The Big Surprise is simply the realization that trading is not as easy as it looks and certainly not as easy as you believed. It is the realization that predicting whether the market will move up or down is actually impossible and there are no answers, only probabilities. It is humility and embarrassment punching you in the gut, telling you that you are small, insignificant and unprepared . . . at least that’s how I felt.

After many years of success as a business man and entrepreneur, trading brought me back to square one. In all of my professional life, I could not remember feeling so self-conscious and uncomfortable in any business or market environment. I felt disillusioned and defeated. I had taken classes (to the tune of $15K), purchased the best charting package, opened an account at the best brokerage firm and was ready to take on the market . . . or at least I thought I was. In fact, I was naive and arrogant because I thought trading would be easy. I did not realize it at the time, but the classes only exposed me to the basics. I say exposed because there was no emphasis placed on the importance of really commiting and learning the skill before entering the market. There was a class outline, but no real structure, no learning progression and no formulation of any kind of a trading plan. Even if I’d had these tools, the Big Surprise would still have come. Why?

The reason the Big Surprise is inevitable is because there is nothing that can prepare you psychologically for what happens in the market. We have all had emotional challenges, but nothing has previously tested us like participating in an environment completely outside our sphere of influence. Throughout our lives we have expectations about things and events we feel we can influence, control, and/or manipulate, or at the very least, we believe things within our sphere have an acceptable level of predictability. In other words, we perceive there are boundaries. We naturally create boundaries to keep us safe from the unexpected and protect us from pain. The same principles do not readily overlay onto the markets. We are not prepared for the markets because it is a world without boundaries. The security we derive from our predictable and routine surroundings does not exist in the market. Nothing we know previously exposes us to the anxiety of a drawdown, requires the absolute discipline needed to follow a set of rules (rules are meant to be broken, right?), demands the unconditional belief required to totally trust a plan, and entails the inflexible patience to hold a position open until targets are attained. The market forces us to relinquish control of traditional paradigms that we use to protect ourselves and punishes us for not doing so. We are programmed to act on emotion, but when we do so in the markets, we suffer. The market requries that we abandon emotion for indifference, and for this we are unprepared.

Not only was I unprepared, I had no reasonable expectations of what was really required. Once I determined that trading was going to be just like learning any other skill, I began to make some headway. I developed a study guide, found some reliable resources and set some goals for when I would begin trading again. I understood this would take some time and I had no reason to be in a hurry. Even though I was anxious to learn, I was not anxious to lose more money, so accepting the fact that significant time would be involved helped my focus and relaxed my attitude.

Along the way, one aspect I overlooked was my own trading psychology. I did not ignore it on purpose; I was simply unaware of how important it was. I attributed my Big Surprise to my lack of commitment in learning market basics – things like support and resistance, Fibonacci, candle patterns, etc. Even after I had mastered these concepts and began trading again, I was never at peace. I still lacked confidence. I was an emotional wreck when I had open positions and reacted haphazardly – closing trades too soon, fat fingering platform commands and riding a spastic emotional roller coaster while staring at every tick. At best I was at break-even trader. At worst I was having emotional convulsions. I was determined, but clueless. I clearly knew something was missing, but wasn’t exactly sure what it was or where to find it. I would soon discover that my trading psychology would be the most important and challenging part of my trading to master.

Like most of you, I was trying every system, indicator, robot, and attended every free webinar I could – all to no avail. One afternoon I received an email with an upcoming webinar titled “Why Most Traders Fail.” This intrigued me as I could relate to the title – so I registered. For the first time in all of my exposure to trading, this presenter described my challenges to a T. It was as if he’d been sitting next to me throughout my trading career and had made note of every emotion, mistake and frustration I had experienced. Never had I heard anyone explain so thoroughly and eloquently why I was failing. For the first time I had found someone that had formally identified, organized and explained succinctly a learning progression for trading that was logical, insightful and all encompassing. I was blown away – I’d finally found it!

My thinking completely changed within moments of the conclusion of the presentation. I finally recognized that I had to get out of my own way – that a set of rules and trading plan were only one part of consistency and success. I had to take complete responsibility for my actions and commit to a system, test it to prove its viability, and then develop a plan based on the testing stats to attack the market. I had to believe. This all made perfect sense! I had to develop a “trading mindset.” I didn’t sleep that night. I worked diligently on looking back at the trading system I was using and testing it, gathering the statistics to prove it would work. It wasn’t long after I began trading again and started off with great results. I’d previously had a rough plan with some rules and was following them, but not religiously. I had been reacting too emotionally. It wasn’t long after this re-start that I was giving money back and had a long string of losers. Something wasn’t working. I was still anxious, nervous and edgy. It was clear I wasn’t out of the woods yet. I knew that I’d need to emulate success rather than try to achieve it on my own and my poor results were the constant reminder.

I had always known I was capable, but I was missing a complete blueprint to eliminate the emotion from my trading. The webinar was only the intoduction, but the subsequent course material provided really cleaned up my mental mess. The emphasis and instruction on mastering psychology was transformational. It elevated my trading beyond anything I could have imagined. This may sound obvious, but the ability to control and actually surpress my emotions was the key to my eventual success. I had not realized this at the outset. I did not expect it nor was I prepared for it. The psychological challenges that had been the most troublesome and demanding had evolved into relaxed intensity – a confident focus. Once I completed this work, everything else seemed to fall into place.

Were it not for exposure to the tools for conquering this psychological aspect, I have no doubt I would have continued to flounder. This information connected the dots for me and for the first time I completely understood all the elements of successful trading and the formula for systematic trade plan development. The foundation for my transformation was a process that started with back testing to accumulate empirical data on my trading model’s performance, using this data as proof the system was profitable, using this proof to build belief and confidence in the plan, and hours of practice to visually imprint in my mind’s eye a valid signal based on my rules to act without hesitation or emotion when a signal was received. That is the process in a nutshell.

It was then up to me to put the process into action; to simply follow directions.

In Great Expectations Part 3, I will discuss how I came to understand what my own expectations revealed about my trading personality and risk appetite to achieve a trading mindset

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