I’ve created yet another perfect trading plan. I’ve back tested it and fine tuned it. I’m ready to trade!
I made a commitment to follow my trading plan, this time. And yes, I know I’ve said this before but this time it’s different. This time I am going to follow my plan.
I put on the trade and….. The plan goes out the window and it all goes to hell.
Why can’t I follow my trading plan?
The reason that many of us have trouble following a trading plan is the same reason we have trouble doing a lot of the things that we know we should do, yet we often don’t. Things like exercising instead of eating chocolate cake when we’re trying to lose weight or getting our work done instead of watching TV.
To explain this I would like you to think of yourself as having two minds.
Your first mind I want you to think of as your “logical” mind, the one that tells you things like I need to lose weight, I need to get my work done or I need to follow my trading plan. This is the mind that you’re thinking with right now to evaluate this little story I made up.
Your second mind I want you to think of as your chimp. A chimp doesn’t think logically, a chimp takes whatever actions are needed to get pleasure or to avoid pain. Your chimp mind is the one who wants the pleasure of eating that chocolate cake instead of the hunger of dieting and the one who wants the pleasure of watching TV instead of the perceived pain of doing your work.
The first thing you have to realize about how your minds work together is this:
1. Your logical mind is very smart but it can only do one thing at a time and therefore it trains the chimp to do most of its work and make most of its decisions.
2. Your chimp mind can do many things and make many decisions at the same time. However, with the lack of logic, the chimp makes decisions based solely on avoiding pain and gaining pleasure.
In essence your logical mind trains your chimp and your chimp controls your actions based on what you trained it to attach pain and pleasure to.
So the reason that you are not following your trading plan is because you’ve trained your chimp that following the plan will create more pain than not following the plan. And this is how you did it.
1. You followed your trading plan and lost, or didn’t do as well as you want to, and you beat yourself up for it. Message to chimp: “following plan equals pain”
2. You didn’t follow your plan; you took on too much risk, had a win and you rewarded yourself. Message to chimp: “not following plan equals pleasure”
3. You didn’t follow your plan, lost and blamed it on your plan anyway. And then proceeded to beat yourself up. Message to chimp: “following plan equals pain”
4. During the trade you focused on the pain of losing money instead of focusing on the pleasure of following your plan. Message to chimp: “forget about the plan and take action avoid pain”
5. And how about this one, you follow your plan; you hit your profit target and then you proceed to punish yourself by thinking you should’ve done better. Message to chimp: “ Doing what you planned equals pain”
And there are probably 100 other examples of things that we do to train our inner chimp that following our trading plan is painful. No wonder we don’t follow our trading plans.
It’s time to retrain your chimp.
1. When you follow your plan, reward yourself whether you win or lose.
2. When you don’t follow your plan, create pain for yourself whether you win or lose.
3. Be honest with yourself on whether you followed your plan or not. If you did follow your plan, give yourself a reward regardless of results.
4. Focus on the long-term success you will achieve by following a well designed trading plan and forget about the short-term pain of taking a loss.
5. Always reward yourself for doing the right things and making the best effort you could with the information you had.
In general, realize that you cannot reliably predict what the market will do nor do you have any control over what the market does. Therefore whether you win or lose does not mean that you did anything right nor does it mean you did anything wrong. Hence you should not punish or reward yourself based on the results. The thing you do have control over is whether or not you followed your plan. If you followed your plan, you did what you said you were going to do and you should be rewarded for that.
Whether or not your plan is any good, well that’s a story for another day.
Live with passion!