The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

2.1. MAKING A PLAN

Scientific research illustrates how action plans help people achieve their goals. Dr. Peter Gollwitzer, Professor of Psychology at New York University, has conducted several studies that demonstrate the benefits of making specific plans that outline when, where, and how to perform an action (The Psychology of Action: Linking Cognition and Motivation to Behavior, edited by Peter M. Gollwitzer and John A. Bargh, New York: Guilford Press, 1998). For example, a trader will find it useful to determine beforehand that when Market Condition X happens and Pattern Y appears, then he should enter at a prescribed moment, set a protective stop, and monitor the trade until Z occurs. Knowing when, where, and how helps him perform more gracefully. Specific plans help traders respond quickly and automatically when it is necessary. Without a plan, traders can expect less in the way of results and more hassles.

Take, for example, Benjamin, an execution trader who was running a small pad of his own. Whereas Benjamin obviously wanted to make money and even discussed his desire to make money, he went into a drawdown early in the year and took months to recover. His mistake was to pursue the strategy of buy and hold that had been successful the previous year and not shift to more active trading and taking of profits.

While Benjamin demonstrated an ability to size high-conviction ideas, he failed to set a goal and define a strategy consistent with changing market conditions that would ...