Preparing to Trade: The Mental and the Physical

By Dan Gramza

December 2006

As we set off to fulfill our trading destiny, the first steps we take to prepare to trade are basic in nature. We identify the markets we want to trade, such as the S&P 500, crude oil, or gold futures. Then, we determine our trading time frame for those markets. We decide whether we want to take a short-term day-trading approach, or a long-term position-trading approach. The next step would be to select a trading technique, whether it's fundamental or technical, and decide which data, or chart techniques, to focus on.

Once those factors are determined, you'll begin to create your trading strategy. You decide what type of chart setups or parameters will cause you to enter or exit a trade. Then before you begin trading, you'll evaluate your strategy. How much risk will I take? What's my profit objective? You identify the trading process, and then ask yourself, "is my strategy working?"

You also need to pay attention to the mental aspects of the process, and prepare yourself to trade in what I call "the eye of the storm." I'll discuss that concept a bit later. Right now, let's talk more about the trading process, and the steps I've outlined above.

The process we use to initiate a trade involves very specific steps. Is this a trade? Is it a good trade, a quality trade? Is the market screaming at me to do this trade? Once you've determined the trade setup is what you are looking for and then execute the trade, you need to manage the trade profit and loss, and also need to manage yourself.

As you evaluate your trading strategy, you first and foremost need to evaluate yourself, and how your thoughts and actions as a trader may be holding you back. No matter what type of activity people pursue in life, they tend to focus on their strengths--what comes easy for them. But as a trader, we need to focus on our weaknesses, areas we need to improve.

Maybe you do a good job identifying the trade, but you hesitate on the execution. You have trouble getting in or out of a position, or both. If you see a trade set up the way you'd like, you probably get excited. If you see it but don't act, it's probably a problem of confidence. You see the trade, you hesitate, and you miss the trade. It's too late. If you see it, you should be able to react to the market setup and execute the trade without hesitation. If you can't, it could be a result of a lack of confidence in your trading strategy, and in yourself to manage the trade.

Make Trading Intuitive

Once you initiate a trade, what happens next should be intuitive, almost mechanical. Don't concern yourself with the trade after you've found the setup you are looking for and have placed risk management and profit orders. Just execute the trade, and follow your prescribed trading plan. No matter how you trade, having comfort, and confidence, is crucial. Do your homework, and your comfort and confidence levels will improve. Develop and consistently apply a well-researched trading strategy, and be prepared for all trading outcomes.

Remind yourself that the result of one trade is not going to make or break you as a trader. If it does, you are trading way too large. A losing trade doesn't reflect whether you are smart or dumb, or a good or bad person. It's just a business transaction.

One thing we can do to increase our confidence is to become very familiar with our trading method, markets, and technology, so the process becomes so automatic it requires no thought. The first time I traded electronically, I was not confident, and traded very conservatively. I admit I am not the most computer-literate person. When I began to trade on the screen, I kept my size small so I would feel comfortable, get used to the system, and avoid pushing the wrong buttons. When that comfort level came, then I started trading more and more.

Think about the first time you drove a car and what that felt like. You were probably a bit nervous, and you had to think about executing the steps required to operate the vehicle. Now compare that to driving today. I bet you hardly think about it at all. Think about any other process that's become second nature to you, like brushing your teeth, or combing your hair. Executing a properly evaluated trade should feel the same way.

Trading in the Eye of the Storm

Ask yourself: what is my biggest concern or concerns about trading? Those concerns will be there until you deal with them. They may not even be related to trading, they may be personal issues that hold you back.

Once you've identified your biggest concerns, you need to determine what you are going to do to change them, and when and how you will implement those changes. Sometimes even just the realization of what you are doing is enough to reorient yourself to achieve a more positive outcome.

High performance trading occurs in the eye of the storm. What's the storm?

The storm=

Markets
Trading
Others
Yourself

All these things can be the storm. All of us can have a storm floating around us. It could be the markets and trading, it could be other people who influence us, or it could be ourselves. You can't really change some of these factors (such as the market) and you must learn techniques to cope with them. What you can change is your reactions, and you can change yourself. You may not be able to alter the storm, but you can control how you react to it. There's no storm for me if I stay in the eye of the storm. It's still there, but I'm in a calm and peaceful place.

A trader's objective is to stay in the eye of the storm, free from distractions of the storm's movement.

How do you stay in the eye of the storm? You first must recognize and accept that trading requires a synergy of your thoughts and physical response. The two combined should allow you to trade in a relaxed, yet totally aware state.

Create Your Reality

Our thoughts are powerful. They create our reality, and direct our body. How many times have you heard that voice of doubt in your mind, saying: "no, I'm not sure, don't do this." Your body gets tense. But if your mind says everything is ok, your body is relaxed.

Direct the body through your thoughts as you trade so you remain calm and comfortable, and your trading becomes intuitive. The basic elements of the thought process are thought choice and thought energy.

Thought choice involves the decisions we make to create what we live with as a trader. You are responsible for all your thoughts. If someone tells you are stupid, and you make it a part of the script that plays in your brain, you are accepting it, and creating that reality. So, think about whether our first reaction is negative or positive to any situation. As a trader, if you start beating yourself up after a losing trade, you carry forward that negative energy to the next trade. You may start losing confidence, become paralyzed with fear, and make bad trading decisions.

To avoid that situation, it's important to identify the choices you make, as well as the energy behind them. You need to take steps to remove your negative energy or it will become baggage you carry from one trade to another. These negative thoughts that hold us back are what I call "thought demons." How do you get rid of thought-demons? There are many types of thought-management techniques to conquer your thought demons.

One technique you can use is to take out a piece of paper, and make a mark on it each time you have a thought you don't want to have. Don't analyze it, just make a mark. That simple action now increases your awareness of that thought you don't want, and eventually you will take control of it as it begins.

How to Become and Stay Calm and Focused

We know that staying calm and focused is very important when storms surround us as traders. Choose and energize thoughts that support your trading objectives.

Create and maintain a relaxed state and stay in the present moment through: proper breathing, relaxation exercises, and visualization exercises. Relaxation techniques are just tools between the body and mind.

Prepare mentally before and during trading. RELAX. Take three deep, centering breaths. Repeat positive affirmations that hit home for you, for example:

I will stay focused on my trading strategy
I am prepared for all contingencies
I will trade with confidence and without hesitation

Every two hours remind yourself to:

Drop your shoulders to reduce tension
Take centered breaths
Stay focused and relaxed

These concepts are a big deal to longevity as a trader; we all know trading can be an extremely stressful endeavor. Traders who have made their livelihood amid the chaos of an exchange's open-outcry trading floor would not last long, and stay healthy mentally and physically without being able to stay focused, relaxed and ready to respond amid all the bumping, shouting and other distractions. That's true no matter where or how you trade. Even if you are sitting at home in front of your computer, you can be in the midst of a market storm and thinking of trades in the past, or what might happen in the future. You aren't going to be focused on the present, and that will affect your performance.

So stay in the present moment; allow things to happen. Every trade is a brand new trade, a brand new moment. If you had a winning or losing trade before, it's totally irrelevant to the next trade. If it is, that's because of your baggage, which you must work to remove.

Daniel M. Gramza is President of Gramza Capital Management, Inc. and DMG Advisors, LLC. He is a trader, consultant to domestic and international clients and an advisor to the St. Croix hedge funds. He is completing two books titled "Trading in the Eye of the Storm," and "The Handbook of Japanese Candle Trading Strategies" and has appeared on CNN's "Moneyline" program, Reuters TV, Bloomberg TV and WCIU-TV. He can be reached at dmgramza@worldnet.att.net.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2006 Lind-Waldock, a division of Man Financial Inc. All Rights Reserved.