I recently interviewed Norman Hallett of The Disciplined Trader.
You can read it below or listen to the interview here.
Tim - TraderInterviews.com:Hey, everybody. It's Tim Bourquin from Traderinterviews.com. Thanks for joining me for another show this week. We're going to be speaking with Norman Hallett, and Norman is an expert in talking about disciplined trading and his website is in fact "The Disciplined Trader." And we're going to talk to him about ways that you can kind of overcome some of these things that stand in your way in making good trading decisions. So Norman, thanks very much for joining me on the phone today.
Norman Hallett: Thanks for having me, Tim. It's a tough world out here just trying to tell people they are their own problem, so any exposure we can get is good for us and good for them.
Tim - TraderInterviews.com:Good. Well, I know even for myself personally as a trader, I had to overcome some things to get up my own way basically, to making money in the markets. And for early-on traders, I would have kind of covered again from people that are just starting out that maybe have some issues they need to deal with as well as the veteran traders as well, what are some early things that newer traders have to deal with right off the bat if they're going to set themselves off to be successful in this business?
Norman Hallett: Have a solid trading plan. That's the first thing that comes to my head. I will also say that those new traders that are listening to this, you are the rare few in the sense that you're taking an interest at all in the mental and emotional issues of a trader, and don't believe the simple notion that if you have a good trading plan, then it's all downhill from there. Because in working with traders really pretty exclusively for the last ten years just on the mental and emotional issues of trading, it's clear to me that there are many, many, many good trading systems that are then applied and become a trading plan that can work if you can just follow them. So, don't look for the perfect trading plan or the trading system. Look for the one that's right for you. I'm going to get into exactly what I mean by that. But, I would say that the biggest piece of advice I can give new traders is that they pay attention right from the beginning to the mental and emotional issues and learn to train their minds early to be a disciplined trader. And the best thing you can do to do that is to have a solid trading plan, one that takes into account a lot of the right elements of a trading plan. In fact, this may be a good time to talk about the characteristics of a well-constructed trading plan. Would you mind if I did that?
Tim - TraderInterviews.com:No, absolutely. Because if that's the most important thing, we should focus on that right up front.
Norman Hallett: Yeah, I think so. And I think that those experienced traders that are listening to this talk, some of this stuff is going to hit you right in the face because it may be what's missing in your struggle. And really, it's as simple as six basic things for to be the characteristics of a well-constructed trading plan. And the first thing is what I've mentioned already, the right trading style for you. I think you have to look at yourself and say, "Am I somebody that's looking to have an active trading system or am I the kind of person who doesn't have the time or the inclination to be an active trader? Do I need the juice? Am I in it for the excitement?" Of course, we're all in it to make money, but there's a certain trading style that you need to identify. I mean, just because somebody that has a great trading plan, he can hand you that trading plan and somehow, it may or may not work for you. The problem may lie in the mismatch of style. So, you need to have the right style of trading plan for you and that starts with the right market. Some people like to zoom in on trading, only the E-Mini. Some like the quick nature of the futures market or the Forex market, although others like a more laid back kind of approach in the trading, trading what they charge from the stock market. So you need to find out what's right for you. You need to find the right trading style for you. And then, you need to match the trading strategy with your style. That would be the second thing. So "who am I" and then find the trading strategy. Are you using multiple positions? Were you scaling in and out? Somewhere where you can exercise a lot more than money and risk management. Or are you somebody that tends to put on large positions with short risks? And so, you need to match your trading strategy with your trading style that you've learned about yourself through introspecting. And then, the third point would be having the proper trading system, another word is trading rules. Trading plan is all of these things wrapped up into the way you're going to approach the market. That's your trading plan. And within the trading plan, of course, as your trading system, are you going to use Fibonacci to look for turnaround points as I do for instance in my trading system. Trading system really is the same as saying trading rules. Where do I buy? Where do I sell? Where do I put in my stops? Where are my profit targets? How do you quantify what a trailing stop means to you? What is your parameter for a trailing stop? So, I get so many people so many people that we train say, "Well, I'm a discretionary trader. I need to have a little bit of discretion." Well, I've found that 99%, in fact I can't think of the 1% that can't be quantified. The more you can put the discretion into quantifiable rules, the more steady and consistent your trading will be.
Tim - TraderInterviews.com:Somebody once described that to me as if you can describe how you trade in two minutes or less to another person that trades and they understand what you're talking about, you're probably on the right track.
Norman Hallett: Yeah, that's well said. And I think you may not be able to talk about all your rules, but you will talk about, you know, the process. Simple is good. That's another way of saying it, and simple I find is good. And trading myself for about 30 years, the more I developed new systems for myself, new trading plans, the more I find that I'm moving more and more toward the simple way of doing things. Simple on the trading rules, heavy on the risk and money management, which are really points four and five in the six characteristics. The right trading style for you matching that trading style, having trading systems, as the trading system or trading rules would be your third element of a well-constructed trading plan. Risk management would be next. Money management would be next. And I think maybe later, we can get into what the differences there. And trading schedule. I have found and this may sound crazy to some people, but there are certain times of the day that I'm a better trader. I'm more alert. I'm sharper. And when I look back and back tested my own results based on what time of the day I was trading, it was very obvious that I shouldn't be trading after about 3:00 in the afternoon, and I think that a lot of people may discover that about yourself. Years ago when I was in college, I was I had this thing about biorhythms. We naturally move toward being sharp and being a little more fuzzy. It's just a normal even flow of our energies. And if you can identify when your best trading schedule is, I mean, some people can trade at two in the morning, I can't. So, this trading schedule is the sixth characteristic that I always that we always talk in our Disciplined Trader Course when we're giving about when we talk about a well-constructed trading plan. So those are the basic elements, but I would say to a new trader, "Concentrate on having on a solid trading plan." It's the core of what you do. And if you can trust your trading plan and back test your trading plan so that you know that it has worked if you had done it in the past, and now we're going into the future. When things look unsure in the future, if you constructed a solid trading plan and have back tested that trading plan, then you're not going to doubt that if you lost this is in a row, it doesn't mean the world is coming to an end and your trading plan no longer matches the market. The more solid you are on how much homework you've done in your trading plan, the more you're going to be able to move forward with confidence. So that would be the first thing that any trader needs to do. And usually, it's what a struggling trader needs to look back on whether he has all the elements.
Tim - TraderInterviews.com:Now, I have had some people ask me too though, when do I decide that my trading plan needs adjustments? Does a good trading plan need to be adjusted regularly?
Norman Hallett: For some people, yes. I would say that it's a good idea to review your trading plan often, and not only during poor performances but through good performances. And I think if for no other reason to recommit to what you already have, that's what's going to wind up happening most of the time and short-term events are not going to affect them. But that said, you're going to wind up seeing that most if not all trading systems offer seven, eight, nine losing trades in a row at some point. The key is that when you identify what that is, six, seven, eight, that you adjust your risk management per trade so that you can withstand those kinds of streaks if they were happen.
Tim - TraderInterviews.com:Let's talk about that because risk managements gets a lot kind of lip service I guess from a lot of people, but I don't know that a lot of traders truly have a grasp of what it means to have good risk management or money management. Talk about the two of those and what they mean to you.
Norman Hallett: Okay. I'll give you. It's a little hard in a short call like this because you can Google it and get a look at it. But a friend of mine, Paul King, who is a very smart guy and a guy that I use in our classes, I bring him in from the outside to talk about risk and money management. And Paul is a smart guy. If it was him, he would tell you that money management is about how much of your account you're willing to lose in order to have a decent chance of the return you were aiming for. So, if it's about how big your position sizes are in relation to your account value, he would call this position sizing and it's about how to size any particular trait, and it determines what size drawdowns you can expect and what size annual return that you can achieve. So, that's the general idea of money management. Risk management is about how far away your stops are for a particular trade, so it's your exit strategy and how this determines the average or and maximum size of winning and losing trades. So, your exit strategy determines how much profit per unit risk you expect to generate from your trading system. These two things are also both related to how many simultaneous positions you're willing to put on since that determines your worst case simultaneous loss, let's say. If you think about your trading method as your favorite music on a CD player, position sizing would be the volume control. It doesn't change the music, but if it's too low, you won't be able to hear anything or you won't be able to, in the sense of trading, you won't be able to overcome the implementation cost, the commission, the slippage, and so on. If it's too high, if you turn the volume up too high, then you're going to get distortion and blow out your ears or blow out your account. So, you have to look at position sizing as kind of turning up the volume on what's happening overall. So, they bleed into each other. One thing that I like to talk about when I talk about money and risk management is using multiple positions if you can. So many small traders when you're talking about beginners use one position. They trade one position. And, that's not bad for some people, but you have a lot more flexibility in how you can create offsets and risk management techniques, money management techniques in your trading if you use multiple positions, scaling in and scaling out. Again, this is not the call to get into it, but don't think that trading more positions means having more risk because it really doesn't in most cases. What it means is that many times, you have more flexibility. You're better off trading a smaller market and multiple positions than you are a single position of a larger market.
Tim - TraderInterviews.com:There are traders who can get into this very quickly and have that discipline right away, right off the bat, and start to do well. Other have to really work at it. I mean, do you have some kind of exercises, if not, you know, mental exercises or whatnot that people can do to kind of to better that discipline on their trading styles and their strategies to stick to those strategies?
Norman Hallett: Yeah. I think that first of all, just paying attention, just to realize that it should part of your daily regime, that's the first step, and anybody listening to this interview has taken the first step. The simplest thing would be to start to journal, but I like to make it a leather-bound spiral notebook or something, a leather-bound journal, something that really that you can respect, that when you open it up, you're giving what you're about to write in your journal the respect that it deserves. In our Disciplined Trader Intensive, I send everybody the leather journal that I use with our logo embossed on it. The exercise of journaling is probably the most unique and impressive, impressive to your subconscious mind, things that you can do. You can start at the end of your trading day. And it's not only listing your trades and the results of your trades. The more important part I believe is listing how you responded mentally and emotionally to those trades when you took them. Did you feel were you confident when you took the trade? Did you hesitate and get in a couple of points above where you should have gotten in on a buyer, a couple of ticks below where you should have gotten in on to sell? Did that result in you making or losing more money? And if so, what's I mean, if you get in and if you make a mistake, and when I say make a mistake, if you don't follow your trading rules, something that you did, your emotions took you off your trading plan and somehow it worked in your favor, it doesn't mean it's a good thing. What you have to judge is over the long term. So, you need to make a positive first, you need to make an honest statement to yourself. "Today, you know, I made the mistake of hesitating to pull the trigger. I was somehow, when the I was listening to CNBC and somebody said something and it got me a little nervous. And I got in a few seconds later that it cost me a few ticks." Then the last thing that you write in your journal will be something. It's got to be first person and in this particular case, at the end of the day, it would be talking about tomorrow. So, I will the statement would look like, "Tomorrow, I will pull the trigger decisively at the moment my trading plan gives me the signal." The next morning, when you begin your trading plan, you reopen your book to the next day and you make a positive present statement. "Today, I am a wise and disciplined trader and I take my trading signals immediately after my system generates them." We talk about a lot in our training about wise and disciplined I am a wise and disciplined trader. In fact, when we get the testimonies afterwards, everybody usually signs it like that because they know, if you believe that you're a wise and disciplined trader, then you can start doing what a wise and disciplined trader does. And so, that you need to see yourself you need to have the self-worth and the self-confidence of a wise and disciplined trader and then you will naturally do that. If you're an unsure trader which starts with an unsure trading plan, then that's when things start to fall apart. It's easy to get lucky for a while, but the lucky money is always given back every time.
Tim - TraderInterviews.com:Yup, and it starts it sounds like it starts with just being about where you stand at that moment and being honest with yourself then to be able to move beyond that, move over it, move past those obstacles.
Norman Hallett: Yeah. I mean, if you put yourself in front of if you put a mirror in front of yourself twice a day, in the morning when you start trading and you say, "I'm a wise and disciplined trader and I do the things that a wise and disciplined trader does," and then at the end of the day, you assess whether you were able to do that and make a positive statement for tomorrow and then reaffirm that you cleaned up yesterday's mistake today and that "Today, again, I'm a wise and disciplined trader," the more you see your subconscious mind takes in information based on you affirming it. Now, these conscious affirmations that we're talking about here are not quite as powerful as subconscious training. But I'm offering you something simple you can get started on right now. And, subconscious training is very simple but it takes a little bit of relaxation and it takes four, five, or six minutes to do. Journaling is something that you can get started on right now and it's going to have a positive effect for you.
Tim - TraderInterviews.com:Norman, just to finish up here as we're getting close to the end, talk about your trading quiz Because I was fascinated by that. What can somebody learn or expect to learn about themselves when they take your quiz?
Norman Hallett: Well, I think they're going to they're going to do that self-assessment that I talked about. In other words, a trader needs to understand I mean, look. We're human beings with all kinds of personality quirks and things that we bring to the table, and the market doesn't care about that. What the market needs what you need to what you need in your quiver when you come to the market are arrows, are rules that are precise and that are clear that all you need to do is follow. So, the quiz will take you down a little bit of a mental journey to see where you are as far as your relationship to yourself and how you'll apply that to the market. I mean, if you're somebody that, again, that doesn't have a clear picture of yourself as a trader, the answers of which are the reflection of ten major characteristics of the disciplined trader, which are specifically the strength to pull the trigger. You must have the strength to pull the trigger. You must to be able to overcome any thoughts of fear and greed. And we don't have enough time to talk about greed but it's probably the worst thing that a trader can have, believing that they've got it down already and that they can open up their risk parameters. You must stay humble in the market. So, strength to pull the trigger. You must overcome fear thoughts of fear and greed. You've got to look at trading as what you're doing to make money. You've got to always look at the bottom line; and therefore, you must always preserve, preserve, preserve. You've got to visualize your success as a trader, probably the single most important point, because if you see yourself as a disciplined successful trader, then you'll act as one. You have to have strength to take your losses because losing is part of winning. We all know that but you have to know that from the inside. You've got to discover your core values. What really drives you? Yes, you want to make money, but really, if you ask yourself, well, what do I mean by that, you're going to come up with better answers like, "I want to be independent, I want to take care of my family," core values, because your core values will drive you to do the right thing. Sustaining focus. You know, there's a lot of stuff. I leave CNBC on but with the sound off because I want to make sure that I'm concentrating on my trading. And when I look up, it's going to be there for me but it's not taking my attention unless I want it. So you wanted to stay focused. You want to exercise patience, very key, probably the single most important characteristic other than visualizing that if you've got the patience to wait for your setup, then you're going to be taking the A trades. If you can stick to the A trades, the strong risk-reward trades, the strong probability trades to win, then you're going to do much better over time. So patience is important. You have to have sustained discipline. It's a marathon trading. It's not just a you can't be good for a while and then lousy for two days because you'll be a loser then, and a wise and disciplined trader does that. And the tenth characteristic would be paying attention to your stress level, managing your stress, taking care of yourself health-wise, because, you know, a healthy trader is better trader. So, those are the characteristics that you need to have and I'm glad I was able to spit all those out for you.
Tim - TraderInterviews.com:Oh, that's great. I know we've just barely, barely scratched the surface here. You do an intensive class as you've mentioned every quarter, I think. You've got one coming up soon?
Norman Hallett: Yeah. We have one coming up. I believe it starts on the 19th of April, but registration is a couple of weeks before then. That's a one of a kind class. We've trained thousands of traders from I think it's now 27 different countries. So, it's an online course. You take it on your own time. And I think one of the big features of the course that most people don't know is that we allow you to repeat it as many times as you want. And not because you don't get it, it's because trading discipline is a constant endeavor. Outside influences the negativity to get you off your plan and gets you thinking "Maybe I'm doing it wrong" instead of "I know I'm doing it right." It's constantly at those, so it's something that you're going to make part of your trading world. So, we allow you to kind of continue to be with us as long as you want just for the cost of the initial admission. So, we're serious about what we do and hopefully I've given you a few tips. Start journaling. If you're not journaling right now, start journaling. It's a terrific exercise to really help you out.
Tim - TraderInterviews.com:All right, listeners. So, we'll link to Norman's Trading Quiz as well as at TraderInterviews.com. Norman, thanks for your time today. I appreciate it.
Norman Hallett: Thank you, Tim. I appreciate your appreciation for Trading Discipline.
You can find Norm Hallett at his website: The Disciplined Trader
I recently interviewed Norman Hallett of The Disciplined Trader.