“The really best traders don’t think twice about how many hours they’re working or whether they come in on a weekend. There is no substitute for that level of commitment.” – Bill Lipschitz, Market Wizard
Becoming a top trader is a journey.
There are years of struggle and hard work ahead for most aspiring traders. You will get your butt kicked by the market again and again (most likely just after you thought you had finally “got it”), and it’s only though dogged determination and sheer willpower that you will eventually get to your goal.
But the good news is it’s a battle you can win. And when you do, the carrot is a big one.
In this lesson we review a daily trading routine defined by Dr Van K. Tharp as in the 12 Top Tasks of Trading. As military philosopher Sun Tzu said, most battles are won before they are started, in the preparation phase. Trading is no different.
Here you will learn how to combine and condense what you have learned throughout this course into action steps that you can follow each day to lead you to trading success.
(Note: I have shamelessly borrowed the topic for this article (with permission) from Van Tharp and applied it specifically to Forex trading. I view the subject matter as essential to effective trading. Any mistakes or omissions are of course my own.)
How the daily tasks were developed
“The daily tasks fit the metaphor of a hunter, a predator a warrior.” – Van Tharp, Market Wizard
Van Tharp is considered an expert modeller. Throughout his career he has isolated the common denominators of success across a broad range of trading styles.
This has led him to develop a mental map of the daily activities of the master traders. Often these traders would not consciously realise what they were doing to be successful. They would get up, eat, trade, eat, sleep, etc. as far as they were concerned. But through careful prodding and observation, he would eventually learn the things they did differently from other traders that lost in the market.
Here they are here:
The Top Tasks of Trading
- Daily Self Analysis
- Daily Mental Rehearsal
- Focus and Intention
- Developing a Low-Risk Idea
- Take Profits
- Daily Debriefing
- Be Grateful for What Went Right
- Periodic Review
These tasks should form a daily routine that applies to all traders, no matter the currency pair or timeframe. Long-term traders are not excused, though it does not necessarily need to be a daily affair for you. Those who monitor trades once a week might conduct this process once a week.
Top Task #1: Self analysis
Your performance as a trader is a direct reflection of your level of self-mastery. The more aware you are, the greater your ability to perform in a challenging market environment.
Overly emotional or arrogant traders struggle with their consistency in the markets. They tend to make mistakes and miss opportunities that may come their way. In contrast, a self-aware trader exists in the present moment; free from fear and greed. An aware trader is able to make decisions with an open mind.
The trading day should start with an assessment of your trading state. This could be a period of introspection or meditation where you focus inwardly, and notice what is going on internally. It could also be a self-rating process, in which you rank yourself out of 7. If you are either too low or too high, you want to meditate (or center yourself) until you are in a more level state. Ideally, you want to be around a 5.
You may also find that certain “parts” within you will be active on a certain day, and interfere with your trading. If you can learn to notice the “thoughts and feelings” of these parts, you can provide the part with what it needs, outside of trading.
Spend 15-30 minutes a day meditating, or sitting quietly in introspection. Conduct a self-rating assessment.
Top Task #2: Mental rehearsal
As the market throws a wide variety of circumstances at you, it can be very helpful to mentally rehearse yourself performing perfectly when you trade. This rehearsal could be conducted immediately prior to commencing trading, or the night before.
The concept of mental rehearsal is borrowed from high performance sports, where it was discovered that elite athletes – the very best in their field – would visualize their events in full beforehand. They would conduct perfect practice in their mind’s eye, which would result in increased performance during the actual event. This rehearsal allowed them to pre-plan their response to scenarios that would arise, in order to anticipate problems and develop solutions so that the correct reaction became automatic.
Traders should visualize themselves following their rules, coolly and calmly. It can be helpful to take into consideration any upcoming news for the following day. If there is important upcoming news like Non-Farm Payrolls, then you should consider rehearsing your plan around this. Rehearse for both the best and worst case scenarios, and you’ll be miles ahead of the crowd if anything unexpected happens.
It is beneficial to rehearse your contingency plans (from lesson 14), and how you would take advantage of “black swan” market events.
Rehearse the day’s trading 5-10 times – either the night before, or immediately prior to trading on the day. If you are a day trader, you might find it worthwhile rehearsing every trade that you plan to take.
Top Task #3: Focus and intention
Top traders have a razor sharp focus on those activities that lead to the achievement of their goals. For peak performance, it’s critical that traders take a moment to re-orientate themselves toward their goals, and set a positive intention for what they want to achieve from the day’s trading.
It’s often when traders lose sight of their objectives that mistakes creep in, and they tend to cut their winners short, or let their losses run based on market noise. In addition, a positive intention clears out negativity, and aligns the subconscious mind with what you plan to achieve. You may also find it advantageous to review the summary of your trading philosophy, to keep your trading principles fresh in your mind.
Once you have reviewed the goal, you should not focus on it. Instead, you should relax. Detach from the goal, and direct your attention to the activities you have defined in your trading plan that lead to the achievement of your goal. When you start trading, you want to be in this “zone” type state.
Review your long-term and short-term goals, and your trading philosophy (manifesto). Then, set a positive intention for the day’s trading. After doing this, take a moment to detach from the goal, and focus on the execution of your plan. When you start to review the market, you will be more apt to retain this “in the zone” state.
Top Task #4: Developing a low risk idea
Many traders confuse market analysis with developing a low risk idea. They spend lots of time and energy analysing the market, then try to “fit” the market into their preconceived notions. Dr. Tharp calls it “building a straw house” that gives the trader comfort, but avoids the important issues. Remember your fairy tales – how sturdy is a straw house really?
The concept of developing a low risk idea provides a lens, or a framework, around market analysis that is more useful to the trader. Your time analysing the market has one sole purpose: to find low risk opportunities to make money. It’s not about being right, nor is it about some pretty lines on a chart. As one Market Wizard said, trading is not a bullshit fantasy world.
When you develop a low risk idea, you are looking for opportunities to place a trade congruent with your position-sizing model. You are looking for a desirable risk/reward. Preferably it will be 3:1 or greater, though this will depend on your trading timeframe.
These ideas will usually be relatively simple, but this doesn’t mean they’re easy to generate. Coming up with a simple and profitable trade idea can require a variant perception, which in turns takes time and a finely tuned intuition to develop.
Dr. Tharp divides this task into three main sub-tasks:
- Gathering data
- Creative brainstorming
- Determining risk/reward
Gathering data involves getting information from charts, fundamental, or other sources (such as sentiment). Creative brainstorm is about looking for a variant perception from the data. Determining risk/reward is firstly about understanding the opportunity that exists, and secondly about working out if a plan can be implemented to capitalize upon the idea in a favourable manner.
Gather relevant data, brainstorm any ideas, determine the risk/reward behind those ideas and come up with an implementation plan.
Top Task #5: Stalking
Once you develop a low risk idea, you want to act like a hunter stalking your prey. Good traders don’t jump right in. Instead, they wait for the optimal time to enter: when the odds are the most in their favour.
One market wizard describes himself like a cheetah. Even though Cheetahs are one of the fastest animals on earth, they wait patiently for an easy kill before expending their energy.
Stalking is essentially going to a lower timeframe chart or, as Van puts it, “becoming a day trader” in order to find an entry point that improves the risk/reward, while still allowing you to put your stop-loss in a “hard-to-hit” place. Ideally you would wait for a catalyst, if it has not occurred already.
The correct mindset for staking is calm, detached, and objective. It is highly important that you are in flow with the market and sensitive to meaningful inputs or cues.
Examine lower time-frames for opportunities to improve the risk/reward on your trade, while still maintaining a hard to hit stop-loss. Check for fundamental catalysts.
Top Task #6: Action
Once your conditions for entry have been met, it is time to enter into the trade. Traders who have trouble “pulling the trigger” will be experiencing difficulty with this step.
The stalking state of mind is very different from the state of mind needed to take action, and this transition can be difficult for some traders. Taking action requires decisiveness and commitment, and any sort of second-guessing or reflection is inappropriate.
One of the preconditions of the action phase is to feel good about the trade you are going to take. If you don’t feel good, then it is difficult to trade. Whether the trade feels hard (against consensus) or easy (with the flock) is almost irrelevant. There is no one-size-fits-all formula. What’s important is simply that you feel good about it. A key aspect of this phase is identifying what a high conviction trade “feels like”, so use your trading journal to note your feelings as you trade, until you learn what you are feeling on the successful trades.
Once you feel good, then you need to check that you are not making any mistakes on the trading terminal to avoid any losses due to fat fingers. Double check that your position size is accurate, and quickly fix any mistakes if you have made an error.
Feel good about your trade. Check your terminal. Execute your trade. Double check your position. Quickly fix any mistakes.
Top task #7: Monitoring
I have noticed that the monitoring phase is one that many Forex traders struggle with. They lack a clear plan that includes enough options to handle changing market conditions. This leads them to either wait for their position to hit their stop-loss or profit target, or they exit out of the trade based on an emotional response to market noise.
Instead, the master trader carefully monitors their position as it moves toward the objective. Van suggests that monitoring is broken down into two types:
- Overview monitoring; and
- Detailed monitoring
During overview monitoring the trader steps back, and takes a big picture view of his position. As Van says “She is looking at the forest instead of a detailed view of the trees”. She is sitting back and comparing market events with her plan, looking for insights that indicate a change in the reasons she is in the trade. This could include the market not responding to news how it should, or it could be a change in the price action.
In addition, overview monitoring is a method of risk control. If a trade is going for you, it should be easy to hold onto as it moves in your favour. If it’s requiring a lot of detailed monitoring, or the market is not behaving how it should, it is a sign you might want to reduce your position size or get out.
At times, you should zero in your focus on the position. When you first get in, you want to make sure that the trade does what you expect, and you may quickly choose to get out if the market reverses after your entry.
You may want to conduct detailed monitoring when there is an opportunity to add to the position, or if the price approaches a pre-planned exit point. You may decide to hold on to the position, tighten the stop-loss, exit part or all of the position, or a combination of the above.
There are also certain risk events that you might want to pay particular attention to. If there is a major news event that has the potential to move your position, you might want to plan what to do if it goes against you (or for you). For example, you might want to tighten the stop on part of your position, in case you get news that moves the market rapidly against your trade.
Broaden your focus and conduct overview monitoring, and where appropriate zoom in and conduct detailed monitoring.
Top Task #8 Aborting
The abort task is where you either exit out of a position that is moving against you, or where circumstances have changed. Similar to Task 6, this is an “action” phase where decisiveness is required.
Your decision about where to exit will be either pre-planned, or arise from the monitoring phase. It’s where you execute your risk control by cutting losses.
According to Van, traders have three beliefs about where to exit:
- If the market is going against the trader beyond a threshold as determined by the risk management plan, then the trader should act and get out.
- When the reason for the trade no longer exists, then get out. Additionally, if you feel uncertain about the position, then you might want to take this as a sign to get out. You want to feel conviction in your positions.
- If the trade has not moved how you expect within a specified time period, then get out. Van suggests that one of the advantages that retail traders have is that you don’t have to be in the market if you don’t want to be. Only stay with a position when things are stacked up in your favour. Otherwise, get out.
Once you determine, through monitoring, the appropriate time to abort, you then need to change your mental state to one of focus and action, and commit to your decision to close the trade. Of course, you will want to use stop-loss orders and trailing stops as much as possible.
Assess if the position should be aborted, and switch to the right mental state for action… then take action.
For more information visit lesson 11.
Top Task #9 Take profits
Many traders spend most of their focus on their entry, and not when to exit. This means they end up with not as much profit as they should from their winning positions. In addition, many traders over-emphasize being right, and make taking profits an all or nothing decision, rather than scaling out of positions once the trade enters a target area.
Before you enter into a trade, you should know your profit potential (ideally in-terms of risk). With this in mind, you should have a number of rules in place that give you the best opportunity to achieve or exceed that profit potential, while managing risk and adapting to changes in market conditions.
Van believes top traders have four primary beliefs about taking profits:
- Top traders avoid being greedy, and simply react to the signals provided by the market.
- Top traders are patient and allow the market to move towards the objective, though they will get out if things change along the way.
- If market volatility or risk conditions change dramatically, they will get out.
- In a climatic market phase such as a bull or bear volatile market types profits should be taken quickly.
I would also add that top traders don’t get overly worried if a move goes much further than their profit objective. Once they are out, they don’t chase the market if it continues to trend.
Similar to the action and abort tasks, profit-taking requires a focussed action-orientated state of mind. This will mean a mental shift from the state of mind you use for monitoring your position once you are ready to take profits.
Wait for one of your profit taking conditions to come into play and switch to an action state of mind in order to execute.
For more information visit lesson 12.
Top task #10 Daily debriefing
Daily debriefings facilitate two things.
- They allow the trader to note any mistakes they may have made, and avoid making them again.
- They allow the trader to create a record of what works for them in the market, which they can review to develop their trading systems and processes.
A daily debriefing does not need to be a time consuming process. It might be as simple as spending 5-10 minutes writing in your trading journal, or it could involve more in-depth retrospection.
Van suggests that, when conducting a daily debriefing, it is important to avoid any type of self-recrimination about mistakes that have been made. That is not helpful behaviour. Instead, review the situation, and then develop and rehearse more productive options that might have been available to you.
I use Tradingvue for this as I can keep a journal, as well as do all my trade analysis at the same time.
Debrief your trading each day. Keep notes in your trading journal.
For more information visit lesson 14.
Top task #11 Be grateful for what went right
The practice of giving thanks is a later addition to Van’s top tasks of trading.
Van spent a lot of time keeping a journal of the issues he faced every day in order to “clear them”. While this can be useful to do, after some time he realized that he was spending much of his energy finding problems so they could be cleared.
Instead, he started to look for the blessings in his life. What gradually happened was a lightening of his spirit. He started to ask traders to apply this practice each day when they traded – to dramatic effect.
Whether it is the law of attraction in action, or simply an excellent method of staying humble, it is a good way to shift the trader’s state of mind to the positive (much better for trading than being negative). Whichever way it works, it is an important part of the top traders’ routine.
Spend a moment each day writing down what you are grateful for.
For more information visit lesson 16.
Top task #12 Periodic review
As the markets change, so do you.
By conducting an objective review of both the appropriateness of your trading rules and yourself, you ensure that you adapt to an ever-changing market environment.
While the periodic review is not conducted daily, it is listed by Van as one of the core tasks of top traders. You should establish a routine that allows you sit back and take an objective look at what you do, depending on how frequently you trade. The more you trade, the more often you need to complete the review process.
The review process should include:
- Going through your writings from your debriefings
- Reviewing your trading plan, business plan and manifesto
- Reviewing your individual performance, and what you have learned
Van suggests that you should spend at least a day on the periodic review.
Depending on how often you trade, conduct a review of both your trading plan and yourself.
For more information visit lesson 14.
The pointy end
As we come to the pointy end of this course, you will be starting to integrate everything you have learned into cohesive action steps for you to take every day that you trade.
My hope is that now you can see how each lesson fits together, and how they all work together in the daily tasks to generate wealth from the market.
By following the twelve top tasks, you are applying the daily practices of master traders.
Master traders don’t just know the markets, they know themselves. They know precisely how each and every part of their personality comes together to produce results. They know when they’re in the zone and, more importantly, they know how to get there when they’re not.
They know how to hold themselves under a microscope. They know how to take profits, cut losses, and preserve capital. On the whole, top traders know how to stick around until their best ideas can come to fruition. As one top trader said, “you only have to get rich once”.
My hope is that you now have a good foothold – a safe place, from which you can observe the markets knowledgeably, while carving out some profits from your good ideas. As time goes by, you will overcome adversity in the market, and start to develop a real variant perception of your own.
By rigorously applying the daily tasks of top traders, you are taking proven steps that will get you from where you are to where you want to be. These are exciting times. By learning about the markets, and yourself, you can start to become an entirely new trader. Are you ready to trade with the discipline that will allow you draw wealth from the markets that could change your life?
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Until next week,