Thursday Trader's Tip: The Trading Matrix

Welcome to Thursday Trader's Tip — the free edition of The High-Performing Trader newsletter. Each edition presents to-the-point trading psychology advice in video and text.

Feb 22, 2024

This week, we’ll talk about the trading pyramid and how it helps you define the right priorities in your trading for long-lasting, great performance.

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Written Version:

The 'Trading Pyramid' is a simple visual that defines the priorities for exceptional trading performance and helps traders achieve a set of mindset shifts needed to succeed. By knowing your priorities you’re much more prone to put focus where you should instead of switching them.

Let’s break it down. This pyramid has 3 slices:

The groundwork: It encompasses all the preparatory work, including journaling, trade analysis, backtesting, data collection, chart study, and additional research prompted by insights/realizations gained during execution.
Execution: The real-time execution of your strategy in the market requires sound decision-making.
P/L: Profit and Loss

Let’s break down the three key principles that we take from this pyramid:

Key Principle #1:

The first key principle is that the groundwork forms the base of the pyramid.

The biggest amount of confidence and emotional skills you want to have in your executions doesn’t come from a vacuum; they come from the groundwork. Your executions are a reflection of how well-prepared you are. When you achieve this mindset shift, you start putting way more effort into the process - all the routines, habits, and mental and emotional skills that you need to become a successful trader. So it’s a much deeper approach than solely relying on results to tell you about your abilities - it’s another type of self-confidence.

Key Principle #2:

The second key principle is that the execution is the bridge between the groundwork and the PnL.

It’s where all the preparatory work gets translated into tangible results. When it comes to execution and your trading in general, the only goal should be to make good trading decisions; money comes as a by-product. This is why it’s so important to focus on the process. Now, there are really two sides of how to achieve good decision-making:

With normal conditions
With adverse conditions

For an athlete, the normal conditions would be the daily training, and for a trader, the daily executions.

And then, the adverse market conditions for the athlete would be the competitions. What happens many times is that athletes aren’t able to hold the same level of performance in normal and adverse conditions because the environment changes - they have a whole crowd looking at them, which creates pressure that triggers internal interference. But it actually takes the athlete to go through these rough conditions to be able to develop his/her emotional regulation skills. This is when you achieve a different patamar of mastery in the skill because you know that no matter what the environment around you, you’re able to self-regulate and self-control better. So there’s no interference between your full potential and your reality - what you actually make possible.

The same happens in the market; we not only need to experience the familiar environments and patterns, but we also need to go through adverse periods like drawdowns and losing streaks - both adverse market and emotional conditions. When we get through them, we need to change our perspective of them - these are opportunities for you to develop this mastery. The market is giving you a test/barrier so you can destroy it and move forward. When you can overcome these conditions, then you know you have achieved mastery in your trading.

Key Principle #3:

The final key principle is that trading confidence comes from the groundwork and is transferred into the executions.

Many traders think that the execution is the foundation, and that’s where they gonna get the biggest amount of confidence because it’s when they’re in the field/game. But when you go to the sessions already with this confidence established from the groundwork, from the big picture, you don’t need the short-term results to confirm your abilities; you know that in the long term, you edge gonna favor you and the day by day trading results are short-term focused so they don’t matter much for the validity of your trading - they’re unpredictable.

When you go to the session with this confidence in place already, it becomes so much easier to regulate your emotions. There’s also confidence coming from the executions, but this is the smallest slice of the cake - it’s when you respond in a different way to an old problematic trigger or when you’re able to ride your position for longer than usual by overcoming fear/greed, these are all proof that the decision is in your hands and you don’t have to react to your emotions, nothing will happen if you don’t - and this gives you a boost in confidence in your ability to decide according to your long term vision.

Conclusion

Execution in itself is empty and vulnerable to short-term emotions and results. Groundwork must remain the basis of the pyramid - you must dedicate some of your spare time to solidify it so you start each week fully reset, zero emotions accumulated, and ready to make good trading decisions.

Half of the challenges you face with the execution can be solved by doubling down on the groundwork dose.

Peaceful trading,

Sara