Trade By Design Not Default

“What’s going on here?” Sheila all but shouted silently in her head. Her plan was to use the Keltner Channel to signal a price break-out on the NQ E-mini, in tandem with the price action hitting the Demand Zone at the lower end of the channel. The set-up actually was a high probability trade as she had calculated it using her odds enhancers; and all would have been fine if only she had followed through with the plan. There she was, after having entered the trade and was now watching the price action when it began to inch downward toward her stop, which was placed 3 ticks below the distal line of the DZ. At first she felt her stomach knot, but she reassured herself that it was OK and that she would continue to follow her plan. 

Regrettably, the price action continued to fall and the lower it fell, the more knotted her stomach became; not to mention the gnawing fear that was mounting as well. Was this Déjà vu she thought; because she had seen this situation before where she violated her rules, many times, and she had promised herself that this time she would remain calm and allow the markets to prove her right or wrong? Then, suddenly the price action plummeted with more speed, and so did her emotional angst. She became so emotionally worked up that she completely forgot what she had just told herself a few moments ago. Her mind began to scurry with an unconscious conversation about losing and what that meant; which began to trigger even more emotional volatility. Her hands trembled, her breathing accelerated and despite her best efforts the mental fog that had descended seemed to render her out-of-control. She reverted to default behavior (an unconscious pattern of behavior) as she moved her stop a total of three times before she finally exited the trade with a substantial loss. 

This pattern of seeing an event in the charts, thinking negative thoughts that create errant emotions, which then drive physiological and behavioral responses, is a negative default pattern. Negative default patterns that get triggered are like computer viruses … in your body. They take over your system and end up causing results that you don’t want.

Default patterns are programs that are connected to beliefs, biases and values and they are often not in your best interests. Programming is created from your earliest days of being with family, teachers, counselors, coaches, clergy etc. These programs represent all that you have learned and/or experienced from zero years up to and including the present moment. It is for these reasons that when they are triggered, default programs keep rolling until the situation is over. 

Of course, all programming is not negative or bad…thank goodness. It is important to identify and modify negative default patterns that are contrary to getting the results that you want with your trades. Trading is counter-intuitive which greatly adds to the challenges. For example, humans are loss averse. We are much more opposed to giving up something than we are drawn to obtaining it. Losses tend to be twice as powerful as gains, as suggested by research. This bias can cause you to move a stop when it is threatened by the price action or to exit a trade prematurely. Another example is that humans are prone to conform and go with the herd when clearly this type of trading can quickly cause you to chase trades and jump in after extended rallies or sell-offs triggering more losses. 

You cannot modify a negative default pattern if you are not aware of the thoughts, emotions and behaviors that comprise it. You’ve got to become aware of them first. Default patterns are inertial meaning that whatever your baseline behavior there is a great internal pressure to maintain that baseline behavior. You can’t change what you can’t face, and you can’t face what you don’t know. Like an iceberg, a greater part of everything that goes on in your brain and mind is out of your awareness. This is especially true when core beliefs, biases and values are involved; and this is where the motivation for the conscious thoughts is generated. Consequently, you must be willing to use introspection and self-reflection by keeping a trade log and thought journal in order to measure, verify and document internal data (thoughts, emotions and behaviors) that greatly impact upon your ability to plan your trade, trade your plan and keep your trading commitments. You must become self-aware; that is, you want to monitor your thinking, feeling and doing. Notice that self-awareness is far from being self-absorbed. To be self-absorbed is an ego function, which is driven by defensiveness, insecurity and fear-based behavior. 

Self-awareness will increase self-knowledge and understanding by finding out those limiting beliefs, biases and values so that you can work on changing them. 

One of the ways to increase self-awareness is to take your emotional temperature from time to time; especially when you are in a trade. Feelings, either in your body (as butterflies in your stomach) or emotions like fear are often the first indications that something is not going well. For example, if you are in a trade and notice those butterflies or a mounting fear and a few moments later get the urge to move a stop, the first noticeable signal that something’s amiss would be the feeling/emotion. Simply put, it means that you are checking in with yourself to see whether you are too hot emotionally (angry, excited, greedy or anxious to name a few), which can lead to impulsive behavior; or too emotionally cold (boredom, fear, worry, doubt, etc.) that can prompt you to freeze in a trading situation or act out of exasperation. 

When you notice the uncomfortable feeling/emotion there is an opportunity to “interrupt the emerging negative default pattern” that has been initiated by what got your attention; such as the price action drifting toward your stop. When this happens take a deep breath and count to 10 while simultaneously changing your physical position. Then ask yourself this question: What am I telling myself or believing to feel this (fluttering stomach, tension, anxiety, fear, etc.). Once you identify your unconscious conversation, you can begin to deal with it by challenging the negative thought or limiting belief. Ask yourself: Is that true, is that absolutely true? Interrupting a negative default pattern as it is being triggered is an enormously effective way to start taking back control. Self-awareness is one of the first steps to self-management and self-discipline. Become deliberate in what you do by becoming aware of and deliberate about what you think. Then you can design your responses rather than operating by default. 

Trading is psychological warfare. The difficulty stems from the myriad ways that the trading process challenges your weaknesses, character flaws and blemishes. Trading requires self-limits and personal accountability. Your best trader, your A-Game is the only acceptable position to trade from. Otherwise you are placing yourself under impractical, unacceptable and unsustainable risk. Don’t allow yourself to continue to trade under the influence of negative default patterns. Identify, root-out, neutralize and replace negative default patterns by becoming deliberate and trading by design. Protect your capital. This is what is taught in the “Mastering the Mental Game” Online and On-location courses.

Dr Johnson is author of “From Pain to Profit: Secrets of the Peak Performance Trader.” and can be contacted on this link: Dr Woody Johnson

Dr. M. Woodruff Johnson (known as "Woody") is the author of "From Pain to Profit: Secrets of the Peak Performance Trader". He has actively and successfully traded stock options, forex and futures for around 10 years. He was a former Executive Director of the Kaiser Permanente, Watts Counseling and Learning Center and holds certificates in Accelerated Learning, Neurosensory Development and hypnotherapy as well as others. He is dedicated to helping others achieve their goals and get the results in trading and life that they desire.

Dr. M. Woodruff Johnson (known as "Woody") is the author of "From Pain to Profit: Secrets of the Peak Performance Trader". He has actively and success...