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Late last year, RJ set out to earn 131R from his trading this year, even though he’s never come close to that figure before. He titled his effort Project Marathon and has written about his experiences regularly in 2010. He started and stopped trading several times after some breakeven and slight losing periods in the first half of the year.

“Wow! . . . Really? . . . . Really? . . . Wow!” That was my reaction as I was updating the sum of R-multiples in my trading log in late May. Even though the month still had another week to go, my remaining open trades were all profitable and already I was not only having the first profitable month in 2010, but my best month ever—more than 50R. So that got me thinking . . . if I could do this a few more months this year . . . and then I added some real size to my positions . . . hmmmmm . . . a few taps on a calculator . . . hmmmmm . . . I got a little excited.

How Did That Happen?

I was left asking, “How did my trades generate those kinds of results?” Inside, I felt like I was having a really good month but not quite that great. Then I remembered something that I had forgotten: I couldn’t truly count all of those R-multiples. In two “group” trades, I had split a position trade into 4 highly correlated issues. Because I divided my initial 1R risk up equally, the R-multiple for each individual trade was actually only 25% of how I had recorded it initially. After making that adjustment, the closed trades for my month ended with a net +35R. My spirits deflated some with the adjustment. As D.R. has been writing about in his last few articles, the most recent memory (35R) seemed so much less satisfying after my peak pleasure experience (58R).

Still, 35R for me is great! As I looked over my trading log for the month, a few things became obvious. All of the short trades from my volatility breakout system did quite well in early May and one of them did outstanding—a 16R winner. There was also one “group” swing trade that did very well; it generated nearly 7R. There were a few 4-5R winners and about 20 other trades with small R wins and a few small R losses.

In May, I was pretty diligent about tracking all of the daily Top Tasks of Trading. I say tracking because during the month, I purposefully abstained from doing one or more tasks on a frequent basis. That’s different than just not doing one, forgetting about it, or not feeling like doing it (which also did occur occasionally). I made the choice consciously to not complete a particular task given the available time and all of my objectives. This happened more often on the weekends when I typically do much of my business and trading “homework” for the week. The upside of all that conscious choosing, however, was that I had a great month of weekends with my family, and I was still was able to trade well.

In checking my trading journal and mistake log, I acknowledged four mistakes that put my efficiency at 88% and cost me 3.6R in May. I made one mistake of each following type: exiting on emotion, not paying 100% attention to an order entry, transcribing figures in the price on an order, and not adjusting a stop. Without improvement in this area, I’m looking at a mistake every nine trades and an averaged annual 43R loss, which would hinder me greatly from reaching my objectives.

In May, I used something that I hadn’t used since last year: a psychological stop. I exited all of my positions at one point because I couldn’t focus on trading. We had looked at a house for sale over the weekend, which had the closest floor plan we have seen to “perfection” for us. The house, however, was on the high side of our affordability range and was outside of our preferred area. Still, because the house layout plan was such a great fit, we were seriously considering putting an offer on it. On Monday morning, my mind was full of all the possibilities and challenges presented by making an offer on that house. I felt that trying to trade in this state would add unnecessary and potentially significant risk to my positions. Even though I believed exiting my open positions that morning would cost me additional profit, stopping out of them was the right thing to do. As it turns out, those positions would probably have yielded a few more R, but I followed my rules and patted myself on the back.

Also for the first time last month, I had a purely effortless trade. Van would like all of his Super Traders to be able to trade in the “Now.” (We currently have two Super Traders who meet this criterion.) That fascinates me; trading for me requires effort, though not in an unpleasant sense. Anyway, two mornings late last month, I gave the effortless way a try. I meditated rather than watching the open, remained very calm and relaxed, executed the system’s entry, managed my stops, and exited later in the morning (it was an intraday system). I was completely peaceful and even joyful for the length of the trade. On the first day, I netted a 5R win. On the second day, I netted a 1R loss. I’ll be doing some more research on the system rules I used as well as trading from that peaceful state again. It was just too easy.

In spite of my great month in May, I still have over 100R to earn in the remaining months of the year. That’s a big hill. After my experience in May, I believe 100R is doable though still quite challenging.

I’ll let you know how things are going next month. Until then, trade well and take care.

About Van Tharp: R.J. Hixson is a devoted husband and active father. He started trading again almost two years back after completing Van Tharp’s Super Trader program. His previous poor trading symptoms appear to remain in remission. At the Van Tharp Institute, he researches and develops new products and services that will help traders trade better. His favorite home architect is Robert A.M. Stern. He can be contacted at “rj” at “iitm.com”.

Your success as a trader depends upon the amount of work you put into applying the principles of the course to your trading. Start now and take charge of your trading success! At only $795 we hear time and time again how the cost of the course more than covered itself in just a short time due to increased profits and reduced loses.

Looking back on a painful event, often we can discern some obvious reasons that led to poor choices. In some cases, however, the reasons are less obvious for the bad decisions we have made.

To understand what precipitates bad decision loops, we’ve been reviewing the peak-end rule popularized by Nobel laureate Daniel Kahneman.

Kahneman and his colleagues found that people remember and quanlify past experiences (whether pleasant or painful) based on two points: the peak level and the last or end event. People then base their next decision on the emotional recollection of either the extreme experience or the most recent experience, not an average of the two.

As we discussed last week, the influence that a peak emotional event can have should be fairly obvious. A single very painful loss can cause us to change trading strategies instead of making such a dramatic change only after having a statistically significant sample (many trials). Conversely, if we hit one fantastic grand slam (for our international clients, that’s a US baseball term for high scoring hit), we might find ourselves chasing that same stock or that same sector even though it’s no longer really best for our trading.

Understanding how the most recent emotional event affects us can be less obvious.

Kahneman found that our most recent emotional experience secures an unwarranted dominant position in our mental processes—people tend to ascribe too much importance to it. For traders, this consequence shows up in some subtle and troublesome ways.

For traders of any time frame, coming off a loss can be tough. Because the emotional impact of the last trade weighs an inordinate amount in our thinking, our habitual mental processes can lead us into dangerous territory.

Say you have a painful loss. Not the most painful loss of your life but a “medium” one that just happened and now it’s very much on your mind. We have a natural desire to remove from our mind the negativity associated with that loss. This may lead to taking another trade quickly just so we can move the old memory further back in the queue. A quick trade might mean that we bend our rules, look outside of our trading plan or take a low quality trade. Rarely do the results of this breakdown in discipline produce a gain.

For day traders, there’s a more insidious version of this “make the next trade a win” syndrome. Even when traders have reached the point where they should stop trading (like hitting their daily loss limit), there’s a natural tendency to want to end the day on a win—regardless of the size of the loss already accumulated. This kind of thinking is Kahneman’s peak-end rule in full action.

Making one more trade just to end the day with a winner can lead to taking any low-quality trade set-up that comes along, which likely produces a loss. You then put on another trade to try to find one nice win to close the day; again, it’s another loss. Unchecked, this cycle can spiral downward and, in the worst case, could result in an afternoon blow-up.

The first step required for everyone to avoid this “last trade” syndrome is to admit that it really can happen (i.e., say “Yes, it can happen even to me!”). We then need to foster the discipline to stick to our plan (especially our daily, weekly or monthly loss limits) to avoid a potentially disastrous series of trades that can erase days or weeks of profits. The personal commitment to stick to his or her plan has saved many a trader’s financial life.

Now think about your own most recent pleasant or painful trade. Can you tell how it has affected your current thinking and trading? Did the Flash Crash on May 6 affect your trading? I've talked to plenty of traders for whom it has had an effect.

Look more broadly as well and you can find Kahneman’s peak-end rule playing out in other areas of your life. It’s interesting to find this process at work once you know what to look for. Try to remember that it’s our mind’s natural tendency to overweight our most recent emotional experience when it time to make the next decision—or trade.

We hope you’ve enjoyed this series! It was certainly insightful to research this topic and apply it to trading. I’d love to hear your thoughts and comments on any part of the series! Please send your correspondence to drbarton “at” iitm.com.

About D.R. Barton, Jr.: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "iitm.com".

Q: I have just read your wonderful book Super Trader and it helped me tremendously in my trading business. Just wanted to say thank you for this great book, which gives good advice not only for trading but for one’s entire life.

That being said, I have a question regarding 1R in relation to my system. How do I change the value of R when I move my stop-loss to breakeven level or above? It is impossible to set it to zero in to my Excel spreadsheet because a calculation of system quality would be impossible (division by 0!).

A: Generally, I use the term R in two ways. R is the amount that you risk when you open a trade. Once you are in a trade, the initial risk R never changes—it’s set just like the entry price for the trade. In closing a trade, I often shorten the term “R-multiple” to just R, which refers to the trade result in terms of the initial risk (e.g., a 3R winner or a -1R loser).

You can also apply the concept of R to determine the current reward to risk in a trade as you adjust your stop. In that case, R is the open risk (between the current price and your stop) and the reward is the difference between the current price and your potential target. In this case, your initial R does not change, but you adjust your stop to continuously manage your potential reward to open risk ratio. When you close this kind of trade, you will still record the R-multiple in terms of initial R.

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