Trading at a peak performance level requires that you know exactly how to react under any circumstances. What happens if you are holding 8,000 shares of IBM and it suddenly drops 3 points? What will you do? What if you are day-trading S&Ps with about five open contracts when suddenly you get a call from the hospital and learn that your spouse has just been in an accident and is in serious condition? What would you do? What will you do if there is a major stock market crash? Will you know what to do and under what circumstances.
The key to peak performance is having a set of rules to guide your behavior and to be able to withstand anything that might cause you to break those rules. You need to set those rules before you trade. You need to rehearse your disaster plan as soon as you have it.
Normally, you have a conscious processing capacity of about seven chunks of information. However, under stress the body releases adrenaline into the bloodstream. Blood is diverted from the brain, which normally gets 50% of the oxygenated blood, to the major muscles of the body. You suddenly have more energy (i.e., to run away), but your thinking capacity is diminished. Typically, under stress, you simply revert to primitive behavior, but with more energy. This might be fine if you must run away from a predator, but it is disastrous if you have to think quickly about some market situation.
The trick to dealing with such a situation is to mentally rehearse it in your mind before it ever happens. When you’ve done so, then your unconscious mind will know exactly what to do and stress won’t even become a factor. You’ll just do it.
I was first introduced to the power of mental rehearsal by an NLP instructor who was a world-class cyclist. In order to maintain his world-class standing, he had to cycle about 100 miles per day on Southern California roads. About once every 5,000 miles, something dangerous would happen. Several such mishaps nearly cost him his life. As a result, he decided that if he was to live a normal life span, he either had to give up cycling or take some sort of precaution. He chose the precaution — mental rehearsal.
He took his cycle to a field, sat on it, and for two hours planned every scenario he could think of that could be disastrous. For each potential disaster, he worked out a course of action and rehearsed it many times in his mind until it seemed like second nature.
Several months later, he was doing his daily cycling, traveling at a high speed in heavy highway traffic. When he happened to look down at his front tire, he noticed that it had a bubble. Within seconds a major blowout was going to happen. Before he could even think about it, he did a flip over his handlebars. He landed on his feet with his cycle on his back. Had he not done that, his tire would have burst (probably within the next second) and sent him flying into ongoing traffic.
When he stopped to think about what happened, he realized that the flip was one of the behaviors he had rehearsed in the field that day. Mental rehearsal had saved his life. It could save your life too — at least your financial life. Do it today.
Go through steps one through three. Use your mind to make certain that you are ready for whatever the markets bring.
- Before you start trading, make sure you have a plan to guide your trading. When do you exit to abort a trade? When will you take profits? What could detract you from your plan?
- Once your plan is developed, brainstorm to determine everything that might go wrong with your plan or your life. This is not an opportunity to get morbid. Instead, consider it a creative challenge to prevent problems.
- Develop a plan of action for everything that could go wrong. Mentally rehearse that plan until it becomes second nature to you.