Improve Your Mental Game

[dc]I[/dc] had an interesting conversation a month ago with Ian, a trader who I mentored a few years back who has continued to work on his trading skills and now trades on a professional level in the Philippines. He shared some thoughts about how developing patience and avoiding randomness had helped his trading game, and I asked his permission to share those thoughts with you. First, here are his comments on the stock:

Here’s the local stock I was telling you.  It’s SM Investments (PH:SM in

 First, here’s the 3-year weekly view to give you an overall view …

Here’s the 1-year daily view …

The downtrend ended sometime in Dec 2013.  But that’s easy to say in hindsight.  At that time, it was hard to see that.  So I stayed hands-off even though, at one point in the past, I would have been trading it actively.  Why did I avoid it?  Because there’s a good chance it will be random.  I learned that from you when you said stocks are mostly random as there could be a balance of buyers and sellers. 


Come to think of it, my trading improved when I accepted the randomness of stocks.  It would be difficult for most traders to swallow that idea.  But that realization and thought helped me stay away when there’s no good setup.  It also helped me be more patient knowing I’d just be wasting mental and emotional capital if I enter a stock that’s in equilibrium.


And thanks to your lessons on natural gas [from my research reports] where you reminded us that a downtrend may have ended, but it doesn’t necessarily mean that the market will start trending up.  It’s possible an asset can spend a lot of time moving sideways in random fashion.  And SM did that. 


 I initiated a position when SM broke above the yellow area, consolidated (white area), and then broke above the white area.  Old me, the guy who would have been trading while it chopped around, would have been already selling under the white area, but now I could say “Why are you selling?  Don’t you see the buyers are now overpowering the sellers?  This breakout from the yellow area and holding above it is the clue.  So now I’m still holding on to it “alone” as a lot of my trading friends no longer have the stock.  I don’t mind being alone.  In fact, I love being alone because it’s an indication I stood apart from the crowd.

I think there are many good points here, and I don’t need to add much to what Ian has already said. Let me just sum a few things up: Stocks (the price movements of any asset, actually) are mostly random. This is why I think it is counterproductive to analyze each little detail of each trading bar—you’re analyzing noise. The game is largely about waiting until the market tips its hand and shows you that you might have an edge, and that edge is created by an imbalance of buying and selling pressure. This shift in the balance is visible in price movements, which is why charts are useful trading tools. Ian also makes a very good point about the limitations of mental and emotional capital: no one has an unlimited supply of these, and we need to shepherd them as carefully as we do our financial capital. For many traders, simply avoiding more random price areas can have a dramatic impact on their mental state, as the number of decisions that need to be made to manage positions shrinks. In other words, trading gets a lot easier.

Ian sent me this note about a month ago. (I guess it took me a while to write this blog.) Since then, stocks have generally languished a bit, and if you pull up the chart of this stock you will see that the trade has not been a big winner. That’s ok, and this reveals one of the problems we face evaluating our trading performance: we can’t attach too much importance to the results of any one trade. (That’s a function of the highly random nature of the market.) You can do something dumb and make a lot of money, or, as in this case, do the right thing and have a mediocre outcome or lose money. What is important is doing that right thing, and doing it over and over again, and results will follow naturally. Ian is doing a lot of those “right things” in his trading. Are you?



Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 2 Comments

  1. Markus Fernandez-Kennedy

    Accepting the degree of randomness in the market has been so cathartic for me. I have started to let market noise, compulsions to over analyse and my desire to predict the course of trades ‘wash’ over me while I wait for the right (buying or selling pressure induced) wave. Again my humble and sincere thanks to you Adam.

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