A surprising number of traders I hear from and work with experience what might be called a performance roller-coaster. They make money for a while, then become sloppy and overly aggressive in their trading. This leads to harrowing and frustrating losses, which in turn force them to focus their efforts and resume trading well. Not infrequently, these traders experience several boom-and-bust cycles before they reach out to seek help.
The culprit in this scenario is overconfidence. Trading gains lead to heightened expectations, which in turn facilitate overtrading. These changed expectations, ironically, lead traders to change how they're trading right at the time they're trading at their best! Instead of being satisfied with their gains, they press to achieve more. This leads to crippling drawdowns, because they're trading most aggressively even as they've strayed from their best trading.
My recent post focused on the importance of self-management in trading. A very perceptive reader who had experienced some of these trading ups and downs wrote to me recently and described a scoring system that he implemented for his trading. The system gave him points each day based upon his preparation for the day, the quality of his trading ideas; his execution of those ideas; and his management of the trades. Instead of focusing on his P/L each day, he has been emphasizing keeping his trading score high. This has aided his consistency, and that has paid off in profitability.
Another savvy trader wrote to me and described how he used visualization techniques each day to convince himself that he was coming back from a drawdown--regardless where his actual equity curve stood. By mentally rehearsing this "coming back from drawdown" mode, he also kept the focus on the *process* of trading, resulting in his best and most consistent profitability to date.
That is the paradox at the heart of trading and many other performance activities. The goal is profitability, but the best practice is to not focus on the goal. By staying connected to the processes that lead to the goal, we maintain consistency in our expectations, mood, and outlook--and that pays off in consistent performance.
Overconfidence in Trading
Top Reasons Traders Lose Their Discipline