©Trading Research - www.trading-research.com - january 2015 - Author: Roberto Ambrogi
All trading methodologies that cannot be automated, which means that cannot be run entirely by machines, contain a more or less great level of discretion.
Discretion, in our opinion, is an added value that computers don't have and will probably never have, however, if not well managed, exposes us at many risks, that can make consistency very difficult.
It's vocabulary definition is "the freedom to act, judge and decide on one's own within the overall limits set by the law"; adapting it to the trading context we could define it as:
the freedom to act, judge and decide on one's own within the overall limits set by a detailed trading plan.
A methodical-discretionary approach like ours, tries to read the markets using tools that gives us a pretty complete view of what is happening (price action, volume profile, order flow); this allows us to formulate hypothesis that, according our trading plan let us to decide if and when enter an order in the market, however the final green light before the click is discretionary.
The discretional aspect is made by two components:
a) the rational one: when MGI (Market Generated Informations) show me a setup according to the trading plan I can still decide not to take it for example if:
- a news is coming out in few minutes
- the volatility is inexplicably and suddenly increased
- the footprint chart is showing me something strange
- I have almost reached the daily target
- I'm approaching to the maximum intraday drawdown and I'm almost at the end of the day
- I've almost reached the weekly target and it's friday afternoon
b) the subconscious one: It's the feeling, not easy to explain, that every trader with enough market knowledge, usually experience just before entering an order in the market and that gives him the confidence to make the click. It is on this second component that I would like to focus for a moment.
Subconscious mind has a big role in all our lives and determine many of our daily actions, much much more than we believe; we often give it a little importance believing that we are controlling everithing with our rational mind, or even when we reconize his influence on our daily life, we consider it as a part of us on where we can do very little or nothing at all.
Actually, working on our subconscious mind is crucial for success and happiness in every aspect of our life, (we will widely cover this subject in a dedicated course), for now I would like to emphasize only some practical aspect to work on, to improve the positive influence of our subconscious mind to the discretional part of our trading.
We have to take care and train our subconscious mind with the same commitment of a sport athlete with his body and the athletic gesture of his discipline.
They train countless hours their athletic gesture in a quiet environment (daily training) with care of the more little details eg. the swimmer in his style will care of the hand positions, the arm, the feet, he will practice different types of training to develop explosivity and/ or resistance etc...
all of this because the competition day everything becomes automatic, he will only "play the game" and his subconscious mind will help him to do the right thing at the right time.
We too, in our athletic gesture (putting on a trade) will have to train meticulously, in order to make our subconscious mind work in our favor when under pressure (when markets are open), helping us to do most of the time the right thing at the right time; we can do this through:
1) repetition: demo simulation is useful both for beginners and also for experienced traders. The latter will use the the demo when they change the trading platform, the trading metodology, or the trading instrument, all of this to ensure that the "gesture" of putting on a trade and managing it becomes second nature and without any possibility of error.
2) strict respect of trading plan rules: we have designed those rules in such a way that they will maximixe our methodology chance of success, taking in to accout also our personal attitudes; its strict respect, a "religious" respect, is therefore crucial, because it trains the unconscious mind to do the right thing, that's why it's important to avoid, even in simulation, to put on "gambling trades", it should not be done either for fun; our subconscious mind keeps track of our behaviours an fixes them through the emotion that they produce, so please avoid negative and subottimal behaviors, in favor instead of the virtuous ones, that the more will be repeted the more will be internalized.
3) menthal reharsal: it's good to practice mental rehearsal of the right athletic gestuere (optimal trade entry) respecting all the rules waiting for the best setup and seeing as real as possible the positive results that come from this behaviour, this will reinforce the good habits; Moreover menthal reharsal makes it possible to "train" even when the markets are closed and especially for new traders helps to fill up the lack real experience; even for the experienced trader it is very useful in creating new habits and strengthening the virtuous behaviors and finally to prepare for the trading session.
4) meditation: a short daily meditation session, helps to create that peace of mind that makes everything work better; with continued practice it will make also possible to access to additional resources and capabilities that will make us more and more often act and react at best.
In conclusion I can say that, especially until you don't have a long time positive track record , it is important to have a trading plan that could limit the discretionary part to a very limited and well-defined space, but in this part, that can not be totally eliminated, it is crucial to have the best care of your subconscious mind, in order to prevent that its negative influence could affect an even valid technical approach.