My early struggle with trading
When I reflect on my own continuous development as an options trader, I can see what clearly helped me make the final step to consistent profitability and it is something that a majority of traders (particularly new traders) totally overlook.
In today’s society where the average attention span is rapidly decreasing, we easily lose the connection to ourselves. The term “self-awareness” has a spiritual feel to it and most people (particularly traders) are going to lose interest in the conversation the moment you bring it up. However, I have never interacted with a successful trader who is not highly self-aware.
In essence, self-awareness simply means that you are aware of what you are doing and how you are doing it. This may sound trivial, and you probably think that you know what you are doing at all times. However, that is likely false. After all, most traders can remember asking themselves “What was I thinking?!” at one point or another after closing out a losing trade.
A trader who lacks self-awareness goes through their trading day without fully having a sense of what they are doing. I was guilty of this myself. I would research for random trade setups to take, execute and manage orders to the best of my ability (or so I thought), and try to squeeze out some gains where I could. Later that same evening, I would wonder what went wrong, why I didn’t make any money, and simply hope things would turn out better the next trading day.
During that stage of my trading career, I did not fully understand that my lack of consistency (and thus lack of trading success) had something to do with my overall approach to trading, and not with my actual methodology. I considered myself a well educated trader, as I was strong with technical analysis, and decent with risk management - I had assumed it was only matter of time before things clicked and I discovered what worked!
A study completed on day traders found that “Very few rated themselves as below average. They attributed their losses to difficult market conditions and situational mistakes. Surprisingly, they rationalized losses as part of their learning curves--even when those losses extended for many months and even years!” This point thoroughly demonstrates that an absence of self-awareness hinders traders from reaching their full potential.
As most new traders do, I was losing money for an uncomfortably long time - Of course, this approach is not sustainable and can only go on for so long. I knew I needed a change. This moment of forced self-awareness was an important and very humbling step in my journey as a trader. When I reflect on this period, I recall a handful of principles that became essential to my continued success and profitability - I still use these concepts daily.
“Opportunity is missed by most people because it is dressed in overalls and looks like work.”
improving your self-awareness
Confronting your flaws
A large part of wisdom is understanding how much you don’t know, and being self-aware with respect to your flaws.
In my experience working with options traders to help them achieve higher levels, I have noticed something rather interesting. Though I urge all traders to utilize a trading journal (and regularly review), it is apparent that some think this exercise carries no value in helping them achieve and sustain success. I don’t mean that as a criticism either - At one point, I too shrugged off the idea of keeping a trade log. I did not want to face the reality of my losses and poor performance, which I knew a trade log might show me! I hear similar sentiment from many new traders I come in contact with as well.
However, when I began journaling my trades, I almost immediately realized the many opportunities for improvement that I was previously missing. Additionally, what I have noticed in clients and mentees is that those that keep a detailed trading journal and regularly review are among the top performers. In most cases, struggling traders do not commit to keeping a routine journal.
“Those who cannot remember the past are condemned to repeat it.”
Why is this? Perhaps the best traders - or at least those with a very strong desire to succeed - are practicing continuous self-awareness. They know they have flaws, and they want to be aware of those flaws so they can minimize them. They are also aware of their strengths and strive to stay grounded in areas where they are performing well. On the contrary, traders lacking self-awareness are incapable of being aware of their flaws, and so they unintentionally keep repeating them. They struggle to maintain confidence in their own ability by neglecting their trading weaknesses, rather than staying aware of them.
A day trader with self-awareness can describe their trading process in detail. In addition, they have a process for review and improvement. Awareness of trading weaknesses can then become strengths when they are linked to a desire for improvement.
keeping a detailed trade journal
Journaling trades can seem tedious and boring, however there really is no alternative to it. One of the most important components of journaling trades is recalling what you were thinking and feeling during that particular trade. In the recent article I wrote about moving past big losses (You Made A huge Trading Mistake: Now What?), I mention that traders often ask themselves “What was I thinking?” after an outlier big loss event - This happens more frequently to struggling traders who do not yet have strong self-awareness. Taking the time to objectively journal about the particular thought process and feeling around the time a trade was taken, managed, and closed will help you recognize it in the future, and thus improve self-awareness. If relevant, note outside influences that could have affected your decision-making process - Were you sick? Mad at the dog? On mind/mood altering medication? Or, were you too busy to really analyze the stock in depth so you shortcut the whole trading plan? Whatever is/was affecting you; write it down.
Having strong self-awareness enables you to recognize and avoid the potentially damaging thoughts and emotions that can wreak havoc on day trading portfolios. After all, a study published in 2016 suggested that “The interoceptive ability of traders predicted their relative profitability.” Moreover, the trader’s physical self-awareness correlated with how long they survived in the markets!
This might seem overwhelming, as every individual comes from a wide range of interoception (defined as how an individual feels physiological changes within their body as it relates to emotion). However, there is an easy way to improve your interoceptive ability and thus your self-awareness. Next time you find yourself managing a live trade, or waiting for a setup, take a few notes: Physical sensations - heart rate, posture, muscle tension, breath (i.e. holding your breath) and so forth. Mental and emotional states - greed, anxiety, excitement, nervousness, fear and anything else you might be feeling at that moment. You can then use this newfound data to bring your self-awareness to new heights. Look for repetitive patterns of success or failure in your trades (via the trade log) and link it to your interoception. For example- If you’re trading while tired, you may find that the data in your trade journal shows you take trades with an unnecessary level of risk.These nuggets of information are essential to a trader’s long term success.
learning from your trades
Although a trade may end when you exit the position, this is usually when the learning begins. Whether your trade was good or bad, profitable or unprofitable, you can learn from it. Your trade journal allows you to answer the questions, “Now that I can see what happened clearly, what might I have done differently to achieve a different result? What did I do correctly? Was my emotional state negatively impacting my performance? Did I follow my trading plan?”
When you review your trades after they’re completed, it becomes clear how much of the information you can use to your advantage on a future trade. This point is especially true if you are keeping a highly-detailed trade log. With that being said, it is not enough to only journal your trades as a mundane requirement - You must use this exercise as a tool to improve yourself as a trader. It will help strengthen your self-awareness, and thus, your overall skill as a trader. Moreover, the difference between progress and stagnation is our ability to continuously learn from our experiences.
“The definition of insanity is doing the same thing over and over again, but expecting different results.”
Keeping a trade journal is not too challenging - However, it takes time, effort, and consistency to make it worthwhile. When done correctly, it can be the difference between being an average trader and a remarkable trader.