Trader Self-Evaluation

In my work with traders and investors I believe the most significant work that anyone can do to increase market returns is self work. Really understanding yourself and how you think can give you an edge that others in the market don’t have. As part of my training, I give a long questionnaire to each trader to do an evaluation of themselves. Some of the feedback that I get is that taking the test is like doing a Ph.D. program! It’s that involved.

I consider the ten questions that I give my Super Traders to be the essence of this self-evaluation process— a minimum starting point for this type of work.

This week we’ll start this process with just one of the points. My advice to spend at least an hour on each question—a day is even better. These questions are meant for you to really dig deep and come up with responses from your core belief structure.

What are seven key psychological areas that you need to work on or are currently working on?

Don’t say “none” because that answer really suggests that you are totally unaware of what is going on with you.

We basically live in a society in which we are programmed to feel separate and alone from everyone else, programmed to follow the rules of the games that others invent for us to play. The net result is most people do the exact opposite of what is necessary for success. As you become aware of this, you’ll also become aware of all your patterns, beliefs, and emotions that you need to work on or clear out to become more successful as a trader.

Here are some examples that might fit some of you:

• I really have a fear problem that enters into my trading. I want to make trades but I’m afraid to pull the trigger. And that fear seems to come up in other areas too; I guess I’m really afraid of failure.
• I have some internal conflict when it comes to working on myself. On one hand I want to, but on the other hand, I’d rather do other things. Working on myself feels like having a tooth pulled. For some reason, I just don’t want to do it.
• I don’t have any discipline. Sometimes I just decide to trade. I make almost random trades or take recommendations that I’ve been given, but just certain select ones appeal to me. And the net result is that those trades never seem to work out. (Note: this is also an incomplete answer. What is the selection process? What happens to those trades? Do you cut losses and let profits run? Are you compelled by some emotion to trade?)
• My mother continually criticizes me. My mother gave me everything when I was growing up, and I’m very grateful to her. But she’s always telling me what I do wrong. In fact, it upsets me to be around her. Yet at the same time, I feel that I must support her. I need to find out why her criticism bothers me so much and what I can do about it.
• I really don’t like to be alone. When I do all of things that are important to trading success, like psychological work, I have to go inside and search and that really disturbs me. Also when I try to meditate, things come up that cause me to be afraid. (And, of course, if you had this response, I’d want you to at least find out what’s trying to come up that is causing this).

Those five statements are just examples of what might come up for you. But whatever you find…look thoroughly. What’s really going on? What are the emotions you don’t want to feel? What are the hidden beliefs? What is the internal conflict where part of you wants certain things and another part wants something else?

What are your key beliefs about the markets?

It is important for you to remember that you can only trade your beliefs about the market. So what are the key beliefs that are guiding you?

To really understand what’s guiding your trading, you should list at least fifty beliefs. However, at least ten is a good starting point.

To help you get started, I’ve listed twelve of my most important beliefs about the market.

Some of these are core principles that I teach everyone and some of them are just things that fit me. Also I just came up with these twelve off the top of my head. Like I mentioned, you’ll probably need to discover at least fifty beliefs to thoroughly cover the key principles that guide your trading.

1. Cut your losses short and let your profits run!!!!!!!
2. Risk, as it relates to how much you can lose in a trade, is much more important than risk as it related to how much volatility you can have. Both are related though.
3. You must understand the R-multiple distribution of your trading system and the average R it produces (expectancy) and the variability of that distribution (i.e., how volatile it is).
4. You must know the objectives you wish to accomplish. What would you like to accomplish and what can you tolerate in terms of drawdowns? In my case, I’d like to make 10% per month in my trading.
5. To achieve your objectives, you must understand and use position sizing to your advantage.
6. Fill your portfolio with a core position that you might adjust weekly or monthly. However, then find efficient stocks and use leverage with those stocks to achieve peak performance. (Again, remember that these are my beliefs and they might not fit you.)
7. When I have a large down day, thoroughly investigate what happened and how I might have caused it or made any mistakes.
8. Keep a trading diary on every trade.
9. Follow the ten tasks of trading.
10. When I cannot be actively trading, remove all speculative positions.
11. Understand the risk reward of each trade before you enter it. For example, your potential reward should be at least three times your potential risk.
12. Keep stop loss levels with my core positions and actively monitor the market for my speculative positions. (Again, this one is my personal preference.)

I want to caution you again that these 12 beliefs are my personal beliefs. Your beliefs might be different. However, certain beliefs are universal for good trading. These include beliefs 1- 4 (knowing your objectives), and 8-11. These are just ideas to get you going.

So be honest with yourself, and start to look at what you truly believe about the markets. You may surprise yourself.