By Rob Colville on September 26, 2014 in
To where do you devote most of your attention as a trader? Are you supremely focused on finding high-quality set-ups that “follow the rules” and fit your trading plan right down to the letter? Or maybe you’re a stickler for risk/reward ratio and ensuring that each trade is worthy of your hard-earned capital?
Either way, that’s great, but there’s a particular component of every trading plan that far too often goes overlooked. Perhaps it gets lost in the shuffle of our continually trying to improve, but it’s a step that is just as important to your lasting success as analysis, risk management, or execution.
It’s having—and more importantly, enforcing—a reward and punishment system as part of your trading plan.
It’s no secret that trading can be a lonely business, even when you’re successful. It’s just you in front of those screens, afterall. And, while we Lazy Traders fortunately spend only minutes, not hours, analyzing charts and carefully executing trades, boredom and repetition are well-known trading hang-ups that bother even the pros.
So what do you do once a trade is over? Just count your profits or blame the market for your losses and then move on to the next one? If so, you’re skipping the review and follow-up functions that are—or at least should be—integral pieces of your overall trading plan.
Celebrating your successes and learning from your mistakes is a big part of that, and when properly enforced, a good reward and punishment system will help traders:
Engrain Their Trading Plan – Nothing eliminates bad trading habits faster than having to pay a penance for them, and likewise, rewarding yourself for things like discipline and outstanding plan compliance will help make those habits more repeatable.
Overcome Boredom and Solitude – There’s nothing like a reward at the end of a hard-fought trade to make you glad and grateful for having stuck with it. That’ll make the solitude and boring repetition seem a lot more worth it, right?
Add Incentive to Continually Learn & Improve – Whenever trading with real money, you already have “skin in the game,” but don’t let it stop there. Be accountable for the decisions you make by rewarding good ones and penalizing yourself for any variation from your trading plan. This will make every trade a learning experience that you can build on as you advance in your career, hopefully for many years to come.
Traders, especially those with a bit of experience, typically know right away why a given trade was a winner or a loser. Regardless, though, the facts always get written in your trade journal, and because that’s where your goals and trading plan are also written down, you’ll use it often to hand out rewards and punishments.
But what constitutes a reward, and what counts as punishment? Well, that’s up to you, and you can even define both these items right in your trading plan. Because money and the ability to continue trading typically mean the most to us, though, many traders start with those.
To reward yourself for good behaviors and trading plan compliance…well, pay yourself for it! At the end of the week, or month, if you can truly afford it, take some money out of your trading account and treat yourself or your family. This is lifestyle trading, afterall, so use some of your profits to have fun, maybe take a holiday, and enjoy life!
Notice how I didn’t say to “pay yourself” for every profitable trade, though. Why is that? Well, what if you broke a rule, took too much risk, or traded a sub-standard set-up, but got away with it and made money anyway? That happens, too, but you don’t want to reward those behaviors or any others that aren’t contained in your trading plan. That’s grounds for punishment, instead.
In that case, you might forbid yourself from taking money out of your account for that week, or if the offense was serious enough, shut yourself down and suspend your trading for a period of time, be it for one day or several. And if that seems harsh, well, that’s the point!
Many experienced traders and even the pros do just that. Sometimes it’s on the heels of a string of losing trades, or following a missed trade, or at times when they, too, are guilty of violating their trading plan (and yes, they do it, too!).
You can also send yourself to “confessional” and explain your mistake to a colleague, mentor, spouse, or other trusted member of your network. That’s another good way to make yourself accountable, and many traders, who are often left to face the markets and their results all alone, have found immense benefit in enlisting the help of others in this manner.
As we all know, trading success isn’t necessarily measured by winning percentage, or even profit and loss (P&L), but in an industry that one way or another is all about end results, it’s only fitting to have consequences (both good and bad) for those results.
So from now on, every time you think about your trading plan and how closely you stick to it, don’t forget the last step: having a reward and punishment system in place.
It may not make you money quite as directly as the functions that come before it, like analysis, execution, and money management, but it will help keep you engaged, motivated, and continually improving, and in the long run, that’s especially valuable, too.