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59 Part III Assessing the Market and Yourself Trading in the real world can be very stressful. One big loss may be so unnerving that you will be tempted to begin overriding your trading systems recommendations. Further losses ensue, followed by more stress and overrides. Once that spiral starts, it is downhill all the way. To avoid this emotional trap, Chapter 10 presents important tasks that you, not your system, should perform. You will discover how to enter a trading session with a clear mind, why you should create a financial objective large enough to be uncomfortable, and how to separate trading events from your emotional reactions. After you learn how to create and apply basic indicators, the next step is to create trading zones that quantify market behavior. This may facilitate your selecting one type of trade over another. Chapter 11 presents two new methods for quantifying market behavior: zone analysis and subsequent performance analysis. The author also briefly covers basic issues regarding system testing and evaluation. One of the more exciting ideas to come along this past few years is trading on sliding time scales. That is, you start your trade using 5-minute charts and gradually scale up to daily charts. Chapter 12 shows how you can control risk with a few basic rules and formulas for assessing the best bar length and trading interval that corresponds to a predetermined level of risk exposure.
Part II One of the best known ways to lower risk is to diversify. Chapter 13 goes beyond discussing market diversification and carries the philosophy to time frame and system diversification as well. The advantages and shortcomings of modern portfolio theory are also reviewed. Lastly, the author presents a method for safely increasing the complexity of your trading system.
Trading to Win: The Psychology of Trading Ari Kiev, M.D. For the past 30 years, I have been involved in developing stress management and personal empowerment programs for individuals experiencing stresses or challenges in their lives. In the past 6 years, I have developed a training program for traders designed to reduce stress and maximize trading performance. This program is a proactive approach based on the application of certain fundamental principles of goal directness, self-monitoring, and a willingness to manage emotional responses. To tap the traders potential for creativity and flexibility, the program centers around a conscious commitment to specific financial objectives, development of a flexible trading strategy, and adherence to money management and risk control rules. At weekly seminars, I help groups of traders identify habitual trading patterns and the underlying thoughts associated with them so that they can implement practical steps necessary for trading in line with their goals. The critical distinction is in teaching traders to separate trading events from their own interpretations and emotional reactivity so that they can see the repetitiveness of their behavior, which causes them to repeat the past and remain in performance plateaus year after year. However motivated, it takes considerable time and effort for traders to get past their resistance to self-examination and personal change and to become conscious of their own decision-making processes and habitual actions. However, they must do this to recognize when they are trading compulsively and to act more consistent with their trading objectives. The principles of my proactive approach teach traders to see how their trading is colored by their perceptions and their past experiences. They encourage traders to refine their awareness of their own perceptions so as to get closer to appreciating reality as it is. Successful traders remember past trades, good and bad, and are careful to differentiate between what happened and what they think happened. They continually seek to tell the truth about their trades, to mark their days results to the market so that they can see what they did and differentiate that from what they felt. They do this so that in the future they are governed by the facts and their relationship to what they did. In this way, they correct their daily experiences so that their memories are clear, and they move forward with corrected perceptions about the market.
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