Last Updated on January 26, 2023 by Mark Ursell
Two traders start their day. They both wake up at 7 am ready to face the markets. They check what the markets have done overnight and read the latest articles on Bloomberg.
Both traders are organised, diligent and have a positive mental attitude. They have both worked hard to learn the skills needed: How to read a chart, how to analyze a trading strategy and how to execute their strategy.
Both of them have a good risk management strategy, and they are both well capitalized.
Trader number 1 is successful. He makes money. Not every day but consistently over time. He usually makes good trading decisions.
Trader number 2 is not successful. He has some wins, but more losses. He often struggles to make good decisions.
The difference between these two is not how… it is when.
These differences are subtle but added together they can make a big difference in your trading.
If you want to explore more about the powerful effect of timing read: When: The Scientific Secrets of Perfect Timing by Daniel Pink.
1. Trade at the right time of day… for you
I’m sure you have noticed that sometimes you make trading decisions instantly. Performing on instinct, everything feels easy and natural. But other times your trading is slow, you spend too long making decisions and don’t trust yourself.
Trader number 1 makes his decisions at his ideal time. He makes his plans and sticks to them. Entering trades when he is confident that the odds are in his favor.
Trader number 2 makes his decisions at a badl time for him. He delays entering a trade and misses his entry points. He spends two hours studying the screen, trying to make up for his earlier mistake.
Morning or Afternoon?
You probably know whether you are a morning or evening person. The majority of people are somewhere in the middle; they peak around the middle of the morning.
Everyone goes through this cycle every day. In your power times you are better at analysis, make quicker decisions, and your memory works faster.
Figure out your ideal times
You can figure out your ideal times based on the midpoint of your sleep. If you go to sleep at 11 pm and wake up at 7 am, your sleep midpoint is 3 am. https://docs.google.com/spreadsheets/d/e/2PACX-1vQyB9UdGStjlN4pKvePRF_1MNaKLWBoYfezY3YALT2-9VwG3vM9STPwac5zX7-Onx01urx2YXQnxosm/pubchart?oid=1586178578&format=image
Source: When, Daniel Pink
- Sleep midpoint is before 3.30 am your optimum time is early morning.
- Sleep midpoint is 3.30 am to 6.00 am your optimum time is early to mid-morning.
- Sleep midpoint is after 6.00 am your optimum time is afternoon to early evening.
This means that:
- If you are a day trader. Trade at your best times. You will execute better and make faster decisions.
- If you are a position trader. Do you analysis at your best times.
If you are trying to solve problems that need insight or lateral thinking, try working in the afternoon. You could use this time to dream up new trading strategies or a new technical indicator.
2. Take the right sort of breaks
If you are sitting an exam, you want to be at your best. Studies on school children have shown that the right kind of break before an exam improve grades by the equivalent of 3 extra weeks of learning.
If you are having surgery you want your surgeon to perform at their best. A project to provide better breaks reduced the mortality rate by 18%.
Trader 1 takes regular screen breaks. He knows that it helps him to focus and gives his brain time to make the right decisions.
Trader 2 sits at his computer for hours. He is desperate not to miss anything.
Are stuck behind your computer for hours on end? Take a micro-break every 20 minutes. Change your position, walk a few steps and get some oxygen into your brain. Every hour have a five-minute walk. Get outside if you can.
If you need to, take a Nap-uccino…
Surely Gordon Gecko never took a nap?
Maybe be should have done.
It would have improved his thinking skills and his mood. A 20-minute nap can improve your thinking for hours afterwards.
The financial markets move 24 hours a day. If you are tired, try taking a coffee nap and see how much better your trading is.
3. Beginnings – start as you mean to go on
It’s probably no surprise to you that Google searches for “diet” are 80% higher than average on New Year’s Day. In fact searches for “diet” are higher at the start of every month.
People like turning over a new leaf. It gives us a burst of energy and helps us to follow through with our goals.
All traders know the importance of beginnings. We are always looking forward, to the next month, and the next quarter.
These landmarks are a time when we can make good decisions. We can use every new week, new month and new quarter to take advantage of the clarity of thinking. To celebrate and reinforce our successes, to deal with our failures positively and plan for the next period.
Starting a new strategy?
The beginning of a new strategy is critical. A run of losses now can ruin months of careful analysis. Emotion takes over, we no longer “trust” the strategy and it is thrown away.
Avoid a false start with a pre-mortem. Before you have entered a trade, imagine you are six months in the future. The strategy has been a failure. What can you learn? How could you have done things differently? Should you have given up earlier?
This can save you months of agony and thousands of dollars of wasted trades.
4. Market timing
Perfect market timing is the holy grail of trading: Buy low and Sell High.
Unfortunately, this is an illusion. We cannot see the future, we can only trade based on probabilities.
But we can still use market timing to our advantage. Explore the mathematical edges that do exist in the markets. The way to do this is to backtest your trading strategy.
Backtest to improve your market timing
Every trader goes through periods of bad market timing. When every stock you buy seems to fall through the floor.
These periods of bad timing cause psychological setbacks. It becomes harder and harder to take the next trade. Sometimes we give up on trading altogether.
Tradinformed Backtest Models let you test your strategies. You can optimize your strategy, find the best parameters and learn how long a drawdown might last for.
In the end, it will help you relax, knowing that your strategy has a positive expectancy.
5. The power of small wins
All traders have drawdowns. These occur naturally as markets go through different cycles. Trader number 1 can ride these out, knowing the will be winning again soon. Trader number 2 gets nervous and starts to doubt himself.
Don’t underestimate the power of small wins. Even when you are going through a negative spell. Small wins can make the difference between continuing to trade and giving up.
Configure your trading strategy to take a little bit of profit. Even if mathematically it may not be optimal. Because we are human, the psychological impact of repeated losses is hard to deal with.
Take the small wins. Bank them, see them as a positive sign. They are the stepping-stones to the next big profitable trade.
Don’t fall into the trap of always taking small profits. Your small wins must still be part of a trading strategy with a positive expectancy.