Quantitative Analysis of Your Mental State: Step by Step
How Dave more than doubled his average daily % return
Just over a month ago, The Trading Resource Hub saw its first guest post: “Journaling Your Mental State: How to do it, and the benefits of it”, by full-time trader Dave (@DMacTrades on X/Twitter).
If you missed it, I recommend reading it before you carry on with today’s stack, which is a direct follow-up to it.
As a first for The Trading Resource Hub, this stack includes a video (by Dave) specifically made for my Substack! It goes over how you can track your own mental data using PivotTables in Excel.
In the write-up, Dave also shares his story on how he came to journal mental states in the way he does.
Plus, I point out the links between his breakthrough and my own, the lessons we’ve learned from our experiences, and how you can apply them to your own benefit.
But first, a quick recap of part 1.
Part 1 recap
Both Dave and myself were delighted to see so many of you find part 1 useful! As a quick recap, it covered:
Prioritising the mechanical side of trading before turning to psychology;
The importance of taking extreme ownership;
The benefits of journaling mental state; and
How Dave tracks his mental state.
Making sense of my data
[Written by Dave; I only copy-edited. Not that he needed it much.]
When speaking with other traders about tracking mental state data, I’m frequently asked what prompted me to start doing it.
Here’s the story.
I’ve always been a numbers guy, and have journaled my trades pretty much since day one. As an intraday trader, I collected a fair-sized, and ever-growing, data set.
However, even though I had an apparently comprehensive analysis of my trading performance, in reality, I didn’t have much insight into what was driving the data.
Whenever I’d review my journal, I’d see frequent comments like:
Traded my P&L
Trading scared
Early entry
Early exit
Put differently, I could see the broad outcome of my actions: via my P&L. And I could see that some of my actions were negatively impacting my performance — repeatedly selling far too early, for example.
But I didn’t know why I kept making that error. Or, for that matter, how to change my behaviour.
My notes were just too abstract. What exactly was I supposed to do with the knowledge that I was ‘trading my P&L’?
Yeah, I know: stop trading my P&L. Sounds easy enough, but I wasn’t able to action it. Not without more specific insight.
In late 2021, while thinking about how insightful MAE and MFE (maximum favourable excursion) are, I thought to myself: why not turn the soft data such as ‘trading scared’ into hard data — i.e. numbers?
Behind this question lay a real pain point for me. One of my biggest challenges as a trader was consistently exiting trades way too early.
I even had an initialism for it: LMOT. Left Money On Table.
My early exiting was costing me a lot of money. I was all too aware of how every positive incremental improvement in daily % outcome has a significant impact on my total P&L (which I also touch in the video below), so was desperate to find a solution.
That solution didn’t come all at once. It was a process that required a lot of work and played out over the course of a year:
My first task was to codify the tracking of my mental states. I did this by defining categories and tags that:
Captured my mental states as objectively as possible; and
By design, could be correlated so as to provide insight into corrective action.
I learned how to consistently and objectively use them. This took some practice.
I set up Excel to turn the ‘soft’ into ‘hard’ data. This was a time-consuming and somewhat frustrating experience — until I discovered PivotTables.
In this video, I show you how to do this for yourself:
The video description contains timestamps for easy navigation.
Note from Kyna
In part 1, Dave shared some screenshots of his spreadsheet. Subsequently, several readers asked me for a copy of that spreadsheet.
By making the above video for you, Dave went one better than that. He’s showing you how to build it yourself, so you can get the satisfaction of developing your own tools and customising them to meet your specific needs.
This fits the philosophy of my Substack. I’m all for sharing selflessly — The Trading Resource Hub will never be paywalled. I made that decision from day one.
But I do believe that, in trading, it’s better to not give the impression that someone else can do the work for you. I’ve previously written about journaling and some of the specific techniques I’ve personally found helpful. My intention was always to give traders the tools they need to be able to do the work themselves.
If that philosophy resonates with you, and you’d like to receive future posts straight to your inbox, please do subscribe:
Back to Dave.
What was the outcome of these efforts?
In a word: huge.
They have removed virtually 100% of the guesswork when analysing my trades, because:
By tracking and correlating multiple mental state categories, such as ‘entry process’ and ‘entry error’, not only can I identify the outcome of problematic behaviour — I can also identify possible corrective action. As well as track those corrective actions to determine efficacy.
I’ve given myself a graphical representation of my performance over time for each of my mental states on a per-category basis. As the saying goes: a picture is worth a thousand words.
Put differently, the beauty of this process goes beyond tracking existing mental states around trade execution.
I’m giving myself a quantitative tool to determine whether or not my corrective actions are working, so I am:
Less stressed;
More focused;
More confident; and
Able to assess my trade executions with clarity.
It frees up headspace, allowing me to be almost entirely focused on finding solutions to problems, rather than on the problems themselves.
This may seem like a minor point. But it has a huge impact on performance.
Speaking of which, I’ve more than doubled my average daily % return since this breakthrough. And I have no doubt that there’s still plenty of room for continued improvement.
Delving deeper: why does this work?
[Kyna again.]
In a call with Dave, I got some more specifics.
What struck me the most is how similar our breakthroughs were (I’ve discussed mine here).
For both of us, the hard data is what gave us conviction.
For Dave, knowing for a fact — based on his own numbers — that he was repeatedly getting out too early and ‘LMOT’ enabled him to fight through the urge to sell. Because he knew that fighting it was the right thing to do. There was no need for any internal debate on whether or not to sell.
As he described it, he “came from a place of knowledge and strength”.
The fact that he knew what was going on in his own mind — thanks to his quantified analysis — meant that he knew what problem he was addressing. Which means, as he said earlier, that you can concentrate on finding the solution.
In my case, among other things, I learned that I was trading with far too wide stops: at that time, zero winners had moved more than 2% against me before turning into winners. And most moved against me a great deal less than that. After that discovery, I immediately tightened my stop losses to 2% or less.
I’ve slightly loosened my stops since, as I’ve added EPs to my repertoire. So yes, as you evolve as a trader, it stands to reason your trading will evolve too. Or else the market environment changes, to which you must adapt.
But that’s not really the point.
So, what is?
Lesson #1: You have to categorically know what’s the right thing to do
Or, more simply, you can’t trade well if you lack conviction.
There are different ways of building conviction. Deep dives are an essential one.
But I think that crunching the numbers in your journal is the quickest win for this. And a highly effective one, too.
In my case, I learned that trading with wide stops — and, for that matter, trading stocks that required placing a wide stop to make technical sense — cost me money. Partly through stock selection, and partly by sizing too small on my winners. (If you take the same % account risk, a tighter stop means a bigger position.)
For Dave, when he realised that trading his P&L or trading scared was causing him to repeatedly sell far too early, he was able to fight through that fear and let his stops work.
When you’re utterly confident in your knowledge about yourself, discipline becomes infinitely easier.
Lesson #2: Fixing your execution is the low-hanging fruit
Many traders strategy hop when their trades stop working.
At a minimum, they start looking at other setups. When they should actually be looking at their execution — particularly if, like Dave, you’re a day trader, so market conditions affect you less.
Knowing what you’re doing wrong — e.g. exiting early — is a good start. The first step is to identify the problem.
But fixing the problem is the final step.
The middle step is what most people skip over: figuring out root cause.
As Dave puts it: you want to know what’s going on in your head at the time that you’re making a significant decision as a trader, such as entering or exiting a trade. And you want to know it over a large sample size, without recency or other bias.
Chances are that, if you have a setup or playbook, in theory, that setup works. It’s what the successful traders are using, so it stands to reason that it’ll work for you too.
If you then find that you’re losing money, the problem may well be your execution.
Using Dave’s methods, suppose you find that you get out early on 80% of your trades. And 60% of them, you logged your mental state at the time of exit as ‘trading scared’.
There’s your problem. But what’s the cause?
Probably a lack of confidence in your setup or method.
Here’s how Tom Dante put it:
“Getting out early is just one of those potential problems where people always seek the easy way out: to blame their psychology, and they start saying s**t like ‘oh, I’m so psychologically sc**wed up, I keep coming out my trades so early ‘cause I get scared, I get impatient’, ‘oh f**k, I better read Trading in the Zone again’.
“The reason you came out early is ‘cause you do not categorically know, over a large sample size, that holding is the right thing to do, right?
“If you know that, and you’re getting out too early, you don’t need a f**king psychologist — it’s quite simple: you’re an idiot.”
Pretty clear language that also brings us back to lesson #1.
The above quote hit me hard when I first heard it. Especially “you do not categorically know, over a large sample size, that holding is the right thing to do”.
You could have substituted “holding” for anything, and it’d have remained true for me at that time.
The only thing I knew was trading ‘best practice’. I hadn’t a clue what was right for me.
And as cliché as this might sound, everyone really does trade differently. For example, for some people, active trade management is the right thing to do. Others would make more money by walking away.
As to the ‘sold too early’ example, this will differ per person too. Some sell too early. Others too late.
You need to figure out in what way(s) your execution is suboptimal. Then, figure out why that is — though chances are that it comes down to a lack of confidence.
In turn, that comes down to having done insufficient work ‘off the field’. More on that below.
Then, you’ll know how to design your training programme.
Getting ready to perform
At the end of the day, trading is like a sport.
Most of the work is done ‘off the field’:
Studying
Journaling
Making a daily plan
Looking after yourself physically
Sure, the ‘score’ is determined during the ‘match’ alone — in the case of a trader, the active trading session.
With that in mind, it’s vital you’re performing at your best during ‘match time’.
And yes, something unforeseeable may throw you off your game. But that’s no excuse to not train hard. To not concentrate on the things that are fully within your control.
So that you’ve done all you can to be able to deliver on the day.
Designing your training programme
How should that preparation look?
The above list gives you the broad outline. But the details will vary per person. To identify your specific issues, again, consult your journal. This is your gateway into identifying your weaknesses.
Every successful trader is ruthless when it comes to identifying and solving problems. They know that not doing this — or even delaying it — is a very expensive mistake. This is a trait you will have to adopt to become successful.
It’s not just about putting in the hours — it’s also about doing the right type of training.
10,000 hours of practice to reach mastery
Speaking of the hours, you can’t achieve excellence without spending at least 10,000 hours practising. That’s widely touted as the ‘magic number’ for genuine expertise — talent or not.
But putting in the hours isn’t, in itself, a guarantee for success.
A trader who spends 10,000 hours reading trading books, for example, simply won’t make it.
For one, you must develop procedural memory: learned intuitions, or implicit memories, which allow us to, in Stockbee’s words, “lower cognitive load”.
“If you read about trading or buy trading manual, you will not develop procedural memory. You develop trading-related procedural memory by doing actual trading. If you do a process thousands of times, you develop procedural memory.”
The big goal, however, is to develop self-efficacy (a term coined by Albert Bandura and frequently used by Stockbee) — another trait you’ll find in every successful trader, no matter their style.
Self-efficacy is really what Dave and I were driving at earlier. You have to believe in your ability to perform, and be utterly confident that your strategy works, particularly over time.
Remember: on its own, a setup can never be an edge. The edge lies in its execution.
Concluding thoughts from Kyna
Mental state matters — it’s hard to disagree with that.
But the real question is determining the best way of going about improving it.
This is where I point to the old adage: what gets measured gets improved.
Dave’s method is clever, because it takes something fairly ‘slippery’ — mindset — and turns it into quantifiable data. In turn, that data is easy to analyse and draw useful conclusions from.
In my case, seeing my own black-and-white numbers in my journal — albeit for different data points — marked my first big breakthrough as a trader.
And yes, doing this stuff is hard.
It has to be.
Achieving excellence is difficult by design. In trading, the only way to be successful is to reach the top. I like how Jeff Sun expressed it in this tweet:
If you want to start more simply, try Tom’s demon finder. It involves less friction than Dave’s methods.
But at some stage, you have to do the difficult stuff. The stuff most people aren’t prepared to do because, quite frankly, it’s not fun.
As a basic example, most people find number crunching or studying charts — especially for thousands of hours — a lot less fun than reading books. But that’s what you’ll need to do to achieve trading success.
So, as I’ve said before:
Learn to alchemise the intense discomfort of difficult training into fulfilment.
Hopefully, this stack has given you some inspiration around the tools you can use to identify what training you need.
And Dave, a huge thank you for making the video and sharing your story with us. To my mind, your methods are unusual — possibly even unique — but have the potential to help many. I feel very honoured that you chose to share them on my Substack. Thank you again!
More content like this
All my stacks about journaling are available here.
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Hello @birsha. In my opinion, there is no better environment in which to bring out our anxious tendencies than trading. Why? Because monetary loss and being wrong are both common triggers. When combined they can be quite potent.
Being self-aware is the first step towards finding the path forward. You clearly have that one under control so kudos to you. To add to what Kay has shared above, I would suggest the following:
1. Know your data well. There is power and strength in knowledge. Anxiety stems from not knowing. Journaling removes the guesswork from trading so that you can make decisions around risk from a place of confidence.
2. Become well acquainted with MAE (read Kay’s stack on it) and MFE. If I had to choose only two numerical metrics to track as a trader it would be these two.
3. Get the reps in by placing trades. There is no better way to condition the mind and body than the execution of a task.
4. Increase your risk slowly. Move your risk up in 10% increments, for example, rather than by 50% or in multiples. If you are presently placing trades with $100 risk, for example, your next level up should be $110, rather than $150 or $200. Gradual exposure to increasing levels of risk gives your mind the opportunity to normalize each level.
I have anxiety when committing more. I only play with small dollars. I need to follow this advice