One of the most important elements of success in trading (and life in
general) is knowing yourself. If you do not understand how you tick, you will
never be truly prepared for the demands of trading, and likely your performance
will suffer as a result.

Let me use myself as an example.

I am what might be considered project oriented. By that I mean I like to move
from one thing to the next - always have something upon which to focus my
attention. As my friends and colleagues can attest, once I complete a project -
and sometimes even before I do - my thoughts shift to the next one. I actually
get antsy if I have nothing lined-up. Predictably, this is reflected in my
trading.

We can actually think of trading as a series of projects. Each position one
takes on is a new project which incorporates analysis of some sort (automated or
otherwise) and trade decision-making. When a position is closed out, it is like
wrapping up a project. It’s over and done - time to move on to the next thing.

There’s a little problem with that, though. This kind of “project” approach, in
the case of someone like me, can lead to overtrading. This isn’t the kind of
overtrading which is referred to when one speaks of taking on positions which
are too large, though. Rather, I am speaking of trading too frequently. In my
case, when I close a trade I find myself immediately eager to open a new one. It
doesn’t matter whether I made or lost money on that first trade. Because of my
“need” to have a project going, my psychological pull is toward finding a new
trade to make. (Note: I do not consider this in my case to be like the “fix”
trading provides as an intermittent feedback mechanism, like gambling.)

This little personality trait of mine is something I figured out a while back
when I realized that I am most comfortable when I have an active position in the
market.. It doesn’t matter how large or small that trade is as long as I can
check on it periodically and feel like I’m involved. Knowing this, I take two
approaches to avoid the overtrading problem.

The first thing I do is trade longer-term. By doing so, I give myself the
opportunity to take on long “projects”. I often have trades with durations of
weeks or even months. These aren’t all my trades, mind you. I do trade
short-term at times, but my schedule is such that longer-term position trading
tends to fit best most of the year.

When trading shorter-term, I use a second approach to combat the “project” itch.
Specifically, I try to step away from the market for a while following the
completion of a trade. It lets me clear out the emotional residue of finishing a
project and come back at it fresh. That can quite often make the difference
between taking impulsive trades and being properly selective based on my
analytic methods.

Of course, this is just one example of the sort of psychological hurdles which
come up in trading. We all have patterns of behavior which are based in our
personal lives that can quite easily carry in to trading, positively or
negatively. Brett Steenbarger’s outstanding book The Psychology of Trading
provides an excellent discussion of how this can happen, and ways we can
overcome the problematic ones. The primary point is that we need to be able to
look at ourselves like an outside observer. In that way we can get to know
ourselves, and that’s at least half the battle

John Forman is author of The Essentials of Trading (Wiley - April 2006), and a near 20 year veteran of trading and analyzing the markets. Visit Anduril Analytics to learn more about his trading, market analysis, and research activities and to find out how you can get a copy of Anduril’s free report on what every trader and investor needs to succeed.