MENTAL PREPARATION

PART 1 - LEAVING THE OLD SELF

Dear fellow traders,

From one trader to another, I would like to share my mental preparation routine. It is a preparation I
tend to follow ahead of every trading day.

I say “tend to”. Like any human being, I have my moments where I am not as disciplined as I like to
portray myself publicly. I have my moments where that chocolate bar in the fridge just screams “EAT
ME”, and I just give in.

But on most parts, say 90 days out of 100 I am sticking to what I know is good for me, be it in my
diet, in my exercise regime, AND in my preparation for my trading.

I don’t believe there are many traders, if any at all, who does what I do, when it comes to preparing
for the trading day. I think most traders will be somewhat prepared chart wise, and will have an idea
of the prevailing trend and sentiment of their preferred trading products.

I am by no means dissing other traders. My argument for writing piece is not to accentuate my own
achievements (and at times the lack of), but to enhance the understanding of peak performance in
our industry and in our vocation, be it as a full-time trader or a hobby trader.

I may be a home trader, but my approach is not just for those of us trying to eke out a living behind
the walls of our home, but for anyone engaged in trading. Mental preparation is an absolute must
for day traders.

WHY?
Why do I say mental preparation is a must for traders? I have long argued that in a business like
trading, where 90% fail to make a positive return on their trading account, the only way to separate
yourself from the masses is to acknowledge that your mind is either your best friend or your worst
enemy. If you don’t “prep” your mind ahead of the game, and you experience adversity in the game,
your mind will most likely work against your prime objective.

Your prime objective is NOT to make money. Your prime objective is to follow the strategy you have
developed. More importantly, your prime objective is to follow the PROCESS you have designed for
yourself. If you follow the process, your outcome will take care of itself.

Be “process orientated”.

Do not be “goal orientated”.

Of course the goal is to win. But a mind subjected to adversity is a mind in stress. A stressed mind
needs structure and process. Otherwise it will succumb to feelings of fear, feelings of revenge,
feelings of desperation, and the decisions it will make stem from these feelings. Who wants to take
decisions about the well being of your financial health, based on fear or stress.

The mind needs guidance. I one read about an American football coach, who during the halftime
break had specialised “talks” designed to re-awaken the imagination of the players on his team. One
time his team had taken a beating in the first half of the game. During the break in the locker room
the coach put on a special video he had prepared. It showed some of the greatest come-backs in
football history.

The purpose of the video was to give the players a path out of their stressed state. It gave their
minds a mental imagery of what was possible. Coupled with the right kind of motivation,
encouraging the players to focus on the process, staying present in this moment, waiting for the
right opportunity, and trusting the process, their minds had gone from being “stressed” to being
“prepared”.

I want to remind you that the first part of my trading life was spent on a trading floor, observing
traders, thousands of them, go about their daily lives. I am adamant in my claim that those who
were “behind at half time” had no mental tools to help themselves, and as a result of it tended to dig
the hole they were in deeper and deeper.

LEAVING THE OLD SELF

In my article Best Loser Wins, I write about the movie Gladiator, with Russell Crowe. Why does
Maximus Decimus Meridius engage in the ritual of rubbing dirt in his hands before combat?

The answer is that he is mentally preparing. It's a ritual. He must immunise himself before battle, to
feel nothing, to become an instrument of death, indestructible, so that he can survive another day.

Rubbing dirt on his hands is his ritual of leaving his old self behind. I too have to leave my old self
behind. I too have to become someone else for the day. Charlie De Francesca, a legendary bond
trader in the pits in Chicago said that good trading goes against normal human instinct. To succeed
you had to get used to being uncomfortable.

Trading is a battle of the self. Every morning I have to “shed my skin” and become someone else. I
use a simple PowerPoint file to encourage this metamorphosis. The PowerPoint file contains old
trades, mistakes, triumphs, inspirations, and warnings visually arranged to prepare me for the day
ahead.

One of the catalysts for my trading transformation came from tidying up my old office cabinets. I
found old trading diaries, where I meticulously had described my trading day. As I read through the
diaries, which spanned a period of several years, I saw how desperate I was to make trading work for
me.

I saw how I day after day promised myself not to add to losing trades, how I promised myself not to
trade well from Monday to Thursday and then lose it all on the Friday, how I promised myself I
would stick to one setup etc.

As I read page after page of trial and tribulation, but mostly trials, I realised that the Tom whose
words I was reading was in real pain, but he was not transforming. He was repeating the same
mistake day after day. He might be more and more technically competent, as his studies took him
deeper and deeper into expert territory of technical analysis, but he kept making the same mistakes
when his mind became stressed.

I would not say it was an epiphany, but it was certainly a catalyst to a very different trader than the
one I was back then. It was a realisation that all my studies of charts did not move me meaningfully
towards the goals I wanted to accomplish.
Rather they merely distracted me from the real problem, which was my behaviour when things did
not go to plan. Instead of focusing on the process, and having tools to get me to operate from a
stress free mind, I succumbed to foolish trading, intended to make back the lost ground. My mind
desperately wanted to get rid of the pain of having lost money, and its solution was to chase every
movement in the market recklessly.

And all I did was to dig the whole deeper and deeper.

The confrontation with the old trading diaries gave me the impetus to seek a different path. I took
my 100 worst trades. I plotted them on the actual chart with my entry and my exit. It was time
consuming, and it was gut wrenching to be confronted with my own short comings.

It was a bit like being confronted with a part of your body which you were ashamed of. When I lost
my hair in my late twenties, I experienced a real knock to my confidence. If someone pointed out to
me I was losing my hair, I would experience real emotional sadness. Coming face to face with my
reckless trades gave me a similar sense of sadness, but unlike the hair loss I actually had an
opportunity to turn things around and learn from losses.

Coming face to face with my own short comings made me realise what my faults were. Now as part
of my routine for "warming up" for the day, I have plotted my UGLY TRADES into a PowerPoint, and I
will select a handful of them every morning to get me warmed up for the day.

I also started plotting my good trades. I felt it was necessary not just to remind myself of the
behaviour I wanted to avoid. I should also remind myself of the behaviour I wanted to strive
towards.

The charts I use to prepare, to warm up, are my old trades plotted on a chart. That way I can
emotionally relive the trades and reinforce the behaviour that is good for me and remind myself
what my weak points are.

EXAMPLE
Friday the 4th March 2022 was an extremely volatile trading day. I colleague pointed out to me that
Brent Oil was soaring. I looked at the chart, and I thought “wow, it really is.”
I bought the first retracement on this 10min chart. Now there is nothing wrong with this entry, but
as I look back at my trade, I acknowledge that at that precise moment in time I was not trading from
an emotionally stable point of view. I was having an absolute barnstormer of a trading day, my
biggest trading day in weeks, in a period of my trading career where each trading day seemed to get
bigger and bigger.

So I just bought it without much thought to it.

And I had no stop loss!!!!!

I want to remind myself of things like that. I want to remind myself, in the morning, before the
trading starts, that Tom Hougaard trades best when he is calm, and he is not caught up in an
emotional whirlpool of excitement and a brain flush with adrenaline and dopamine.

I looked at my trading monitor and saw my position spiral out of control. I want to remind myself
that although I got caught up in the emotions of another trader, one that I respect, I am not him. I
am me. I closed the trade, annoyed with myself. I was annoyed that I on a day where I had had many
losses, but all was part of a plan, I had made a stupid trade, an emotional trade.

I calmed myself down, and I thoroughly analysed the chart, and I decided upon a better entry point. I
used my PROCESS – the tools that work for me. And then this pattern showed up. It was late in the
day, and I was prepared for restful evening after a long trading week. I bought Brent, and I held it.
I want to remind myself of the things I do well. I want to remind myself of the things I can be prone
to when I am not calm. I want to do that ahead of the open. I accept that I will never be perfect. I will
at times still make stupid Brent Oil trades on a Friday afternoon because a friend of mine is pointing
it out to me, but I like to think that like a missile, I will self-coordinate as new data comes and, and I
like to think that my mental preparation makes my mistakes short lived.

I hope this goes some way to explain how I “warm up”. There is more to come in this department,
but I think this is a good start.

Have a lovely Sunday.

Tom