Here’s a Quick Way to Build Confidence in Your Trading

When was the last time you had a “light bulb” moment?ABC 123 Homework

Most of my discoveries and “light bulb” moments don’t happen during the trading day, they happen after-hours, when the market is closed and I am doing my market homework.

I find that it is important to get into a trading routine. This helps create structure around the spontaneity of the market. In another post I talk about My Trading Routine.

In this post I’d like to share my nightly “homework” routine which lasts about an hour. Often times when I’m exploring a new idea or digging deeper into something in particular this analysis can last much longer.

My nightly routine goes something like this…

Get Away from the ScreenOutdoors

Once the U.S. market closes at 3:00 pm CST I step away from the screen for a few hours. This is the time I like to go outside and get in a training ride.

If you trade full time I suggest using this time for exercise or doing something active away from the trading screen. After I get a ride in and have dinner I feel very relaxed. I will then come back to the charts and go through my market homework for the evening.

Review the Broader Market

I start by reviewing the larger picture, flipping through the indices (SPY, DIA, QQQ, and IWM) one by one. I use the ETFs for my analysis because they show volume.

Things I am looking for…
  • Relationship between today’s price action and the days prior
  • Where we are compared to last week’s highs and lows
  • Which indices are showing strength or weakness compared to one another

I will record the market internals closing data for the day in an excel spreadsheet and some other figures such as the close in Oil and Gold, and which sectors were strongest and weakest on the day.

I also look at the Euro Futures (6E) and E-mini S&P (ES) starting on the daily time frame and drilling down to the smaller time frame. This leads into my trade recap and analysis.

The Key to Improvement: Trade Recap and Analysis

StockTickr Performance AnalysisHere is the meat of my nightly homework. I go through and review the intraday price action including all my individual trades for the day.

I use StockTickr for this analysis it is absolutely fantastic and helps you find your statistical edge, know your probabilities, and build confidence. R-Multiple, Expectancy, Profit Factor calculations among a host of other data is available at the click of a button. It also makes the analysis game very simple. I still do some work on excel and Greg Thurman’s Trading Journal Spreadsheets are a great tool for that.

Once I upload my trades into StockTickr I will bump out the charts below and make them full screen and go through the day’s trades.

ES Chart Review Nightly HomeworkCharts I use for reviewing ES trades:
  • 15-min candlestick chart
  • NYSE Tick chart with 1 period moving average
  • 5-min Heikin Ashi candlestick chart
  • ES Heikin Ashi chart, 512 tick time frame

For the ES I like to go through and find every high and low tick and see where the corresponded with price action. I also go through the 5-min Heikin Ashi chart and find the trend changes. The biggest thing to keep in mind is that hindsight is 20/20 and often times you will only see the setups that worked. Force yourself to review the day’s price action slowly and look for failed setups as well.

6E Chart Review Nightly HomeworkCharts I use for reviewing 6E trades:
  • 15-min candlestick chart
  • 5-min Heikin Ashi chart
  • 6E Heikin Ashi chart, 233 tick time frame

Being meticulous and reviewing all the trade setups for the day will help build confidence in your trading system.

Create Watch Lists:
This is geared towards my options and swing trading positions. I won’t go into great depth here, but to give you an idea of the process that I use, it includes running through some stock screeners which I have setup in FinViz. I sift through the tickers that meet my criteria as possible entry’s the following day and record them in an excel file.

Read & Listen

I really enjoy reading on a broad range of topics including human psychology, architecture, and trading. Some of my favorite periodicals are Forbes Magazine, Architectural Digest, and Entrepreneur Magazine. I also really enjoy podcasts. EconTalk with Russ Roberts, Entrepreneurial Thought Leaders, and Trader Interviews are my three favorites.

Eliminating the Emotional Risk

The purpose of doing this nightly homework is to help eliminate the emotional risk by building confidence in your trading system. The following is from Trading in the Zone by Mark Douglas.

Dice

To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation. The market is always communicating in probabilities.

To think in probabilities, you have to create a mental framework or mind-set that is consistent with the underlying principles of a probabilistic environment. A probabilistic mind-set pertaining to trading consists of five fundamental truths.

The Five Fundamental Truths:

1. Anything can happen.

2. You don’t need to know what is going to happen next in order to make money.

3. There is a random distribution between wins and losses for any given set of variables that defines an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

5. Every moment in the market is unique.

When you adopt these five truths, your expectations will always be in line with the psychological realities of the market environment.

The idea is to create a carefree state of mind that completely accepts the fact that there are always unknown forces operating in the market.

It Takes 10,000 Hours to Master Trading

ClockThat is the argument put forth by author Malcolm Gladwell in the book Outliers. In the book, Gladwell describes the 10,000-Hour Rule, claiming that the key to success in any cognitively complex field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours.

10,000 hours equates to around 4-hrs a day for 10 years. Or put another way, 8 hours of screen time Monday through Friday for 5 years. Doing your market homework each night contributes to this screen time.

Think of mastering the game of trading as a doctor would master the art of heart surgery. It takes time, and is composed of years of studying, practicing, and real live experience to develop and hone the skill set.

Make an effort to discipline yourself and put in the time each night to review your trades.

There’s Good News!

The good news is that the lessons learned in trading will carry with you in all aspects of your life. If you trade part-time develop a routine to help merge trading with your lifestyle. Good trading, as all great achievements, is a result of doing all the little things.

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About Tim Racette

Tim is a full-time trader in the futures and stock markets and founder of EminiMind.com. He is also a Chicago-land native, competitive mountain biker, adventurer, and ASU Sun Devil.

4 Responses to “Here’s a Quick Way to Build Confidence in Your Trading”

  1. Really nice insights into the world of trading futures. Good luck and continued success.

    • Thanks RAE, the other thing I do (not mentioned above) is to think in terms of sample sizes so I keep a running total of my last 20 trades and use that sum # as a barometer for how well my trading is going.

  2. Ditto to RAE the Trader … Excellent insights and laid out in a nice way that one can learn from.

  3. great article Tim! i always maintain that trading is an athletic endeavor and that you always have to be in peak condition. i can tell you that more than half of my time away from the screen is spent drilling via emotional control/market observation exercises. it’s boring but all the little things are what add up to the big results when faced with – not only critical, PnL defining moments – but life defining moments as well. Hope your trading day is going well.

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