Sunday, April 22, 2018

A Deeper Look at Emotions and Trading

On Wednesday morning, 8 AM EST, I'll be doing a webinar with the good folks at Two Blokes Trading.  Brandon sent me very good trading psychology questions that we'll be addressing during the session.  (By the way, check out the excellent podcasts on their site.)

One question I particularly liked asked, "As a retail trader, what is the most effective way to emotionally detach yourself from a trade? Is this even a good thing to try and do?"

Here is my answer--it's a little tricky:

To be successful, you *have* to be emotionally detached from your trade.  To be successful, you *have* to be emotionally connected to the market.

Let's explore:

To the degree you are attached to something, that thing owns you.  That is why we have to be so very careful with our attachments.  Two people are attached in a good marriage and, yes, they own each other.  Something is lost of me if I do not have my partner.

Any trade, however, is merely a probabilistic bet.  Would I attach myself to a relationship if my wife was faithful 75% of the time?  Of course not.  I have to stay detached from my trades and their outcomes because I know that there will always be occasions when the odds fail to play out.  I own my trades--I take ownership for them--but I cannot allow them to own me.

That is very different from staying emotionally attached to the market itself.  That emotional attachment is similar to empathy:  you're not just observing market activity, but *feeling* it.  As a psychologist, I have to be fully attuned to the person I'm working with.  I can't be distracted with thoughts about myself, how much money I'm making from my sessions, etc.  In that emotionally attuned state, I can pick up on subtle shifts in tone of voice and shifts of topic that tell me what's going on with the other person.

Similarly, when we are emotionally open to markets and focused on them, we can identify subtle shifts of buying and selling that alert us to opportunities.  That attachment to the market is vital to pattern recognition.  When we lack that degree of emotional connection, we become tone-deaf to the market's communications.  Later, we look back on poor trading decisions and wonder what we were thinking.

Emotionally detached from our trades and emotionally focused on the market--that is not an easy balance.  The common element is that we remove our egos from trading.  To the degree that you're wedded to an outcome, you can't be fully immersed in the process.

Further Reading:


Wednesday, April 18, 2018

Creating Your Own Trading Culture

Interesting research that I summarized in a recent article finds that the single most powerful factors determining the success of romantic relationships are acts of kindness and giving.  Conversely, relationships that end poorly are characterized by sarcasm, contempt, and negativity.  When we give, we encourage gratitude in others, and that gratitude leads others to then also engage in acts of generosity.  

What is less appreciated is that this same dynamic plays itself out in the trading world.

Within the trading teams I've worked with at SMB, for example, results are dramatically better when team leaders coach junior traders and when those developing traders support the trading of their mentors.  "Each one teach one" is a virtual mantra for successful teams:  everyone provides value to one another.  Conversely, the poorest results I've seen at trading firms are achieved when developing traders are left to their own devices to "figure it out".  No giving and no receiving means a slower turning of idea wheels and a more tortured learning curve.

I see this dynamic among individual traders as well.  The successful ones cultivate networks of peers to share ideas and encourage one another.  It is not by coincidence, for example, that the Investors Underground live chatroom is also instrumental in Traders4ACause, a group that uses trading education as an opportunity to "give back".  When traders operate in a culture of giving, they are inspired to also be givers.  Everyone wins.

Here's a great metric for your trading:  Who are you making better and how well are you doing it?  In giving value, you attract the right people and that, in turn, provides you with more and better resources.  Some of the best ways of working on our trading is to contribute to the trading of others.  Some of the best ways of working on ourselves--enhancing our health, well-being, and success--is contributing to others.

Further Reading:


Sunday, April 15, 2018

Trading Noisy Markets With A Quiet Mind

In a recent video, Don Miller talks about the perils of information overload--something traders weary of headline-driven moves can appreciate.  The single most common theme I'm hearing from traders is getting "chopped up" by irregular market behavior.  Consider this:  if we add up the average true ranges for the past 14 trading sessions, SPY has moved 29%--even as it has closed flat over that period.  Lots of movement, little direction.

What I find during these periods is that many traders, frustrated by the lack of good moves in what they look at, start looking at more and more things, trying to find the next catalyst, the next trades.  They create their own information overload by failing to filter information.  To put it succinctly, as markets get noisier, their thought processes also get noisier.  More frantic looking for ideas, more frantic stopping out of trades, more frustrated self-talk.  

Here's a psychological principle you can count on:  As conditions become more challenging and dangerous, peak performers respond with increasing mental quiet and focus.  That is what happens in the emergency room; that is what happens in the fourth quarter of a playoff game; that's what happens on the 18th hole of a close golf tournament.

As a psychologist, if I meet with someone who talks seriously about suicide, I become laser focused on the conversation.  I'm processing every word carefully, filtering my internal noise, because every word matters.  When I was a rookie, learning therapy in grad school, the mention of suicide would make me frantic, searching for the right things to say and do.  

The key difference is that, under stress, experienced performers double down on observing and listening.  They become more quiet, more focused.  Just like the sniper.  Just like the surgeon.

The rookie performer never enters "the zone" because attention and thought are frantically jumbled, flitting from market to market, from self to market to P/L and back to self.  This past week, I noticed a great trade in which the market (ES futures) was stretched to the upside and could not sustain further buying at the NY open.  I was focused on the market's behavior second by second, seeing buyers and sellers interact and watching the price behavior of the market's sectors.  It soon struck me that the buying was exhausted and that selling was taking over.  That led to a great trade.

We like to talk about "idea generation", but the reality is that the idea came to me; the only thing I generated was an open minded state of enhanced focus.  How different that is from when I enter the day with a fixed opinion about the market's direction and completely miss how the market is actually trading!

The problem is not a noisy market; it's making the market's noise our own.  It's amazing what can come to us when we focus and filter...all performance training is a training of the capacity to act decisively when we are in the zone.

Further Reading:


Thursday, April 12, 2018

Preventing Trading Stress From Becoming Trading Distress

All true performance activities bring stress.  That is because true performers care about winning.  There may be external pressures to win, but for the best, there are always internal pressures.  Elite performance demands that we push the envelope and attempt to perform at our best.  That demand--that stress--can be a great motivator.  

Stress in itself is not a negative.  It is an inherent part of any activity in which near-term outcomes truly matter.  

Sometimes it is important in life to minimize stress, particularly in areas that aren't central our most important life activities and goals.  For example, when I fly for work or vacations, I select the flights that have the best on-time percentage to their destinations.  That greatly minimizes the probability of delayed or canceled flights.  Margie and I recently found a two-year certificate of deposit with a yield very close to the yield on 10-year Treasuries.  For our savings, that's good enough.  We don't want to have to be concerned with price movement for that portion of our money.

Reducing sources of stress in more peripheral areas of life helps us stay focused on the most central areas of life.

It is in the central areas that we experience the need to do well and the demands of performance.  That is why it can be stressful to be a parent, a trader, or an entrepreneur.  Many retired people lose those central areas of life and experience few performance demands.  That is not necessarily a blissful life.  Happiness--doing fun things--is not enough for many people.  We also need fulfillment, and challenge is one important source of fulfillment.

How we handle stress determines whether it will be a motivator or a source of dis-stress.  

A great way to turn stress into distress is to make performance activities our only or main source of fulfillment.  Then we have much more than PnL on the line.  Our entire sense of self can feel jeopardized.  Often, it's not the trading that is stressing us out.  It's our investing our sense of worth in our trading results.  If you can experience yourself as a successful, fulfilled person even when your PnL is not moving higher, you know you are well diversified emotionally.  If you can't experience yourself positively during times of drawdown or flat performance, no tweaking of your trading will address that underlying vulnerability.

We can perform well when trading is important to us and when that importance pushes us to continually learn, adapt, and improve.  We can perform quite poorly when trading is all-important and outcomes control our sense of self.  A great way of reducing trading stress is to improve fulfillment outside of trading.

Further Readings:


Sunday, April 08, 2018

Making the Most of Your Internal Dialogue

A recent post suggested that our trading success is highly dependent upon our ability to leverage our information processing strengths.  One of our most basic modes of processing information is our internal dialogue:  the self-talk that we engage in throughout our waking hours.  It turns out that the quality of our internal dialogue is a critical element of our information processing.  It's only rarely, however, that we work on improving our self-talk.

Now, on the surface, it makes little sense that we talk with ourselves.  Why write ourselves memos and calendar reminders?  Why review plans in our heads or comment to ourselves, "Good job!" or "What were you thinking?"  How is it that we interact with ourselves as we would interact with others?

The answer is that we possess at least two information processing systems.  One is a fast, reactive system that helps us respond to situations in real time; the other is a slower, deliberate system that enables us to see larger pictures and plan for those.  Both are necessary for dealing with the real world.  We want to be able to plan a strategy for a football game, but we want to react quickly to changing conditions on the field.  Coordinating our two "brains" is a key element in performance success.

Imagine being in a self-driving vehicle.  It reacts to obstacles and traffic changes faster than we could.  There's only one problem.  It doesn't know where to go.  We have to program the destination information.  We have to align the fast, reactive mode with a bigger picture.  When we talk to ourselves, we program our GPS; our slower, deliberate, rational mind communicates with our quicker, reactive, pattern-recognizing mind.

Trading journals are a form of internal dialogue.  Our overt self-talk during the trading days is a form of internal dialogue.  Step back for a moment and think about you talk to yourself during the trading day.  How well are you programming your GPS?

A key piece of progress for many traders is turning their pre-market preparation into active, effective internal dialogue.  That is a major factor in transforming good intentions into concrete, actionable plans.  Imagine planning for the day by reviewing recent market behavior, dominant market themes, news events: out of those you generate a view that you will trade if you see it playing out.

That is well and good, but now imagine going an extra step and generating *multiple* scenarios and laying out plans for each.  Then, as you walk through the new day, you update each scenario and flexibly move to the ones that are displaying higher odds of playing out.  That gives you more ways to win.

But now take it a further step and imagine not just writing out the multiple scenarios, but actively talking them aloud with a peer trader, responding to feedback about the scenarios, and listening to your subsequent dialogue.  Still further, imagine taking your scenarios and actively *talking to yourself aloud* about those, saying to yourself, "Brett, if you see X occur, you need to be doing Y.  If you see A occur, you need to shift your thinking to B...etc".  Imagine talking to yourself with real feeling about those plans, the way a coach on the sidelines would talk to you.  

We retain information better when we encounter it multiple times.  We retain information better when we encounter it in multiple, different ways.  We think it, write it, discuss it, talk it to ourselves with feeling--all of these help the programming of our GPS.  

The speed and quality of self-talk is something I see among successful traders:  they are very good at programming themselves and quickly changing their programs.  This is something I'll be discussing in detail during Wednesday's free webinar.

Further Reading:


Thursday, April 05, 2018

How You Learn Determines How Much You'll Earn

So now the secret of my working with traders gets's the Brooklyn Brown Ale after the market close!

Mike Bellafiore at SMB recently released a video about our upcoming free webinar on maximizing your learning process as a trader.  The webinar is hosted by Wealth365 and will be held this coming Wednesday (April 11th) at 5:00 PM Eastern time.  Mike's video captures a number of the topics we'll be covering; here is the link to register for the event.

What I find in working with traders is that their progress--and, specifically, their ability to adapt to changing market conditions--are highly dependent upon the quality of their learning processes.  In a nutshell, traders often do not process market-relevant information in a manner that is consistent with their cognitive strengths.  This holds back their learning, and that holds back their profitability.

I first encountered this dynamic when I ran a counseling service for medical students in Syracuse.  Many students sought the service because of "academic stress":  they were not doing well in their courses and were worried about failing courses, not getting a good residency, etc.

The traditional approach to helping these students was to provide "stress management" techniques.  These were helpful in managing the symptoms, I found, but did not address the cause of the problems.  The medical students were good students--they got into med school for a reason--but they had very distinctive and different learning strengths.  

Some students were great at taking notes and learning from those.  Others learned best in groups, discussing the material.  Still others had to rework the lectures and readings and create their own charts and diagrams to assimilate the information.

And the students who performed best had multiple ways of processing the information from lectures and clinical rounds.  Encountering the information in many modalities--hearing it, writing it, discussing it, visualizing it--helped the students retain the information.  Just as important, processing the information in multiple ways allowed them to better access the information when it was tested in different ways:  through multiple choice questions, essay questions, clinical presentations, etc.

This is key; please pay attention:  Because each market day is different, it tests us in different ways.  Sometimes it asks a multiple choice question; sometimes it asks for a lengthy essay.  If we only process information in one way, we will only be prepared if markets pull for information in that particular way.  We lose flexibility.  It is in active, varied processing that we learn faster, deeper, and more flexibly.

This idea, which we don't typically encounter in the trading psychology world, is a total game changer.  It's not just about trading your plan, listening to your emotions, staying focused, etc.  Those are all necessary for success, but not sufficient.  If you're not immersing yourself in market information in ways that are aligned with your cognitive processing strengths, you will always be underprepared relative to your potential.  

In my segment of the webinar, I will discuss specific strategies for improving our processing of market information and supercharging our learning.  Look forward to seeing you there!



Tuesday, April 03, 2018

Winning and Losing Mindsets in Trading

What I've found is that there are major mindset differences among developing traders that play an important role in their eventual success or failure.  Here are several of the mindsets that I see among those who find success in markets:

1)  They are market-focused, not self-focused - The successful traders focus on markets, opportunities, and ways of exploiting those opportunities.  They dig for ideas and they love the digging.  The less successful traders focus on themselves, their P/L, what they did right and wrong, etc.  In their self-focus, they are not fully immersed in markets and learning.  They are all about outcomes and not the processes needed to generate those outcomes.

2)  They are positively focused, not negatively focused - The successful traders learn from winning trades and learn from trades they missed.  When they're losing money, they're still actively learning and taking away positive lessons.  The less successful traders talk a great deal about how markets aren't giving them opportunity, are choppy, are difficult, etc.  We tend to pour ourselves into what we enjoy.  Part of what makes developing traders successful is having fun at what they're doing and thereby immersing themselves in the growth process.

3)  They are open-minded and flexible, not rigid - There is no single formula for trading success, but there is a formula for trading failure.  The failed traders are fixed in their views and their approaches.  They never adapt.  They are perma-bears or perma-bulls.  They look at things the same way regardless of market conditions.  The successful traders are quick to shift from one area of opportunity to others as conditions change.  They actively process the information that would tell them their view is wrong and can promptly exit or even flip their positions.  

You know the kind of people who go online and argue and shout and spew venom at whatever political figure, cause, TV show, sports team, or person they don't like?  *That* is who makes a shitty trader.  A drama mindset cannot be a disciplined, focused mindset, and it's ultimately not a constructive mindset.  A winning mindset is all about generating light, not heat.

Further Reading:


Sunday, April 01, 2018

Three Ways to Succeed When Markets Change

It's been very interesting since February.  Some traders have picked up performance dramatically; others have been struggling to adapt.  Here are a few observations regarding those who have found their stride in the somewhat volatile and/or rangy environment:

*  Preparation - What a differentiator.  Some traders send me their journal entries every day.  Others more occasionally or not at all.  Some journals are detailed with extensive reviews of individual trades and lessons learned.  Other journals are general and purely self-focused.  Some journals contain concrete goals and plans for the next day's or week's trading.  Other journals are entirely backward looking.  One successful trader routinely takes breaks during the trading day and creates multiple periods of preparation, which create multiple opportunities to learn from mistakes and adapt trading accordingly.  The investment in preparation--before the market open and after the close--is highly correlated with success.

*  Flexibility - The successful traders have moved to different opportunity sets since the market volatility.  The less successful traders spend considerable time bemoaning "choppy" markets.  The adaptive group sees plenty of opportunity in markets.  The less successful traders want the market to fit their style of trading.  Higher idea velocity combined with sound risk management means that traders who sees more opportunity will have better odds of participating in larger trades.  It is often a handful of bigger winners that account for a meaningful proportion of overall profits.  The best way to have few big winners is to generate few worthwhile ideas.  The best tool for generating ideas is open-mindedness:  looking at more new things and looking at old things in new ways.  Bouncing ideas off others is a great tool for fresh perception.

*  Offense and Defense - The traders who have had the hardest time lately have had the least staying power in their ideas.  They want their positions to move significantly in their favor and very little against them.  That is a formula for stopping out on noise.  I recently spoke with a successful trader who spends considerable time and effort hedging his positions and making sure he has multiple independent positions at all times.  The balance allows him the freedom to let his ideas play out.  Another successful trader has been careful about sizing trades initially and aggressive about adding to them as market behavior confirms the trade thesis.  The winning traders are able to play offense because they emphasize defense.

In short, the traders who have performed best in the recent market environment have been those most energized.  They have used the altered environment to find new opportunities and change what they're doing.  They embrace change--in themselves and in the markets.  

Further Reading:


Friday, March 30, 2018

Spirituality and Trading: Finding Meaning and Purpose in Markets

Is there, perhaps, a greater reason and purpose for your pursuit of financial markets?  Something more than PnL?

  *Are markets your path for learning self-awareness and self-control?

  *Are markets your path for learning to appreciate and detect the complex order in the world?

  *Are markets your path for understanding the world deeply and creatively?

  *Are markets your path for overcoming ego and self-absorption?

This is the paradox of trading:  It is a supremely materialistic pursuit that requires the greatest of spiritual virtues.

Pursued properly, trading refines the heart, brain, and soul.

I recently published one of the only full articles on the spirituality of trading.  It's a topic some of us may be uncomfortable with, even as it addresses the issues we're all familiar with.

What if it's not just about controlling and learning from your emotions and becoming a better analyzer of market patterns and themes?  What if trading is about developing ourselves--all of our selves?

Achieving in the material world by refining ourselves spiritually:  I believe this is one of the most promising frontiers of trading--and performance--psychology.

Further Reading:


Monday, March 26, 2018

The Greatest Thing You Can Do To Improve Your Odds Of Trading Success

In a recent blog post, I emphasized that it is what sets our soul on fire that leads to sustained learning.  We experience the exercise of our unique strengths as particularly meaningful and rewarding.  That's what sets our souls on fire.  It's also what we learn with pleasure.  The rewarding, pleasurable aspect of learning cements lessons for us and drives us forward on our learning curves.

There is a huge implication of this line of thought:

We can best improve our odds of trading success by structuring our development processes to maximize the intrinsic rewards of learning.  

Please let that sink in.  We can greatly accelerate our growth as traders by structuring our learning in the right ways:  focusing on the right skills, but also focusing on the right ways to work on these skills.

We learn via mastery, not via randomness or frustration.  Improving our curriculum--our learning process--is the single greatest thing we can do to increase our odds of getting to that proverbial next level of performance.

Many times we struggle with trading because we are not on a developmental path that allows us to learn with pleasure.  We focus on the wrong things--we don't draw upon our actual strengths--and so we unwittingly fight learning every step of the way with frustration and distraction.

At 5 PM on Wednesday, April 11th, Mike Bellafiore of SMB Training and I will be presenting a free workshop as part of the Wealth 365 online conference event.  That workshop will cover two vital areas of trading development:  1) specific skills to work on; and 2) ways of structuring the learning to maximize our learning curves.  Mike and I work together with developing traders at a prop firm and we see what has led to success and what has not.  In this workshop, we will share that experience so that you can greatly improve the effectiveness of your learning.

The entire Wealth365 event is free; you can register here.  I look forward to seeing you!



Sunday, March 25, 2018

Focus and Flexibility: Why So Few Traders Are Participating In Recent Market Moves

Friday's trade in the ES futures/SPY presented an excellent lesson to traders.  We opened strong, moved lower, and then traded within a range through the morning and early afternoon.  During that initial portion of the day, there were good short-term swings to participate in for nimble traders who were focused on the minute-to-minute action.

The larger trade occurred in mid afternoon, with the breakdown from the range.  This occurred on high volume with very negative NYSE TICK readings, indicating a broad market selloff.  Indeed, that breakdown took us to lows of the day.  To see that trade, however, required a bigger picture view of what the market had been doing the last several days and how it had formed a range early in the day.  The key identification was that the market was *already* oversold and yet could not sustain a rally above its opening high. 

The focus to see what is happening on shorter time frames move-to-move and the flexibility to move to higher time frames for a larger picture is a combination that I see among successful traders.  As I mentioned in my recent article, this represents the ability to continually frame hypotheses about the market and update those based upon unfolding market behavior.  If the shorter-term market behavior is a text that we read with focus, the larger picture is a context that requires flexible perception.  

Quite a few traders I've spoken with have been frustrated.  With the recent volatility, they perceive opportunity, but their results have not reflected this.  My sense is that two problems account for this:

*  Short-term traders are so busy focusing on the immediate swings that they miss the larger patterns, such as Friday's break from a range;

*  Longer-term traders are so busy focusing on possible trends that they enter at poor levels and get stopped out by the market swings.

What I saw working on Friday was the flexible switching from microscope to telescope, as the short-term movement constructed a longer-term pattern and opportunity.  More successful traders have been better at constructing hypotheses, validating and invalidating them, and moving on.  They demonstrate a higher idea velocity, but also display a rigor in implementing those ideas.  Actively talking ideas aloud in a team context is one way to turn the idea wheel quicker, with accountability and rigor.  Building a trading process that implements rapid review on multiple time frames is a great way to exercise and strengthen our cognitive processing.

Further Reading:  


Tuesday, March 20, 2018

Focusing on What Really Creates Your Trading Success

One of the most important articles I've written was recently posted to Forbes.  It examines the odds of sustained trading success and the factors that raise those odds.

It turns out that trading success requires:  a) personality strengths; b) cognitive strengths; and c) a developmental process that leverages those strengths in finding good risk/reward opportunities.

Great performers--great actors/actresses, great athletes, great musicians--are great at some-thing.  When we're great at something, we intrinsically enjoy exercising those talents and skills.  That intrinsic excitement drives and supercharges our learning process.

Elite performance never came from standard learning efforts.  It's what sets our soul on fire that leads to deep and sustained learning.

What sets your soul on fire, in and out of markets?  Most likely, that's the performance path to pursue.

Further Reading:


Sunday, March 18, 2018

Brett Steenbarger's Podcasts

Below are interview/podcasts that I have participated in recently on the topic of trading psychology.  The groups hosting the podcasts represent unusually valuable resources for traders and are worth checking out:


Friday, March 16, 2018

The Importance of Idea Velocity in Trading

One's skill as a trader is only as good as one's ability to generate ideas worth trading.  This is an underappreciated aspect of trading performance.

Specifically, we can look at the idea velocity of a trader--the number of independent ideas generated per unit of time--as an important component of trading success.

Why is this?

Imagine a trader who generated one good trading idea per year.  That one trade would have to be sized quite meaningfully and held for quite a while to generate a year's worth of income.  Indeed, it really wouldn't be a trade; it would be an investment.  But with only one idea per year, it would be an undiversified investment.  If the idea didn't work out, losses could be significant, but more importantly there would be no other source of returns.  Over time, such a low velocity trader/investor would have a very lumpy set of returns, unless they just happened to hit one big idea after another infallibly.

At the other end of the spectrum, imagine the skilled daytrader who notices many different trades setting up among many different stocks or instruments.  That trader is highly diversified on a serial basis, as each day's returns reflects the probabilistic outcome of many bets.  That will produce a smoother equity curve.

The skilled hedge fund manager generates many independent trade ideas at one time and weights them properly within a portfolio to achieve diversification benefit.  The idea velocity is achieved by researching across multiple markets and strategies and putting on many bets at once.

In my recent webinar (you can listen to it here), I emphasized that there are two broad sets of skills that define successful trading:  pattern recognition and analysis.  I also pointed out that extraordinary returns in trading come from unusual talents and skills in at least one of these areas.  An important way that these skills are manifest is through idea velocity.  When someone is a great pattern recognizer, they recognize many patterns.  When someone has great analytical skill, they research effectively and generate many ideas.  Profound talent and skill manifest themselves in creativity.

A recognition of the importance of idea velocity helps us appreciate why, increasingly, we're seeing superior returns among discretionary portfolio managers who make use of quantitative models and trading strategies.  Computers simply have more bandwidth than people, both in terms of the number of patterns that can be recognized and the number of markets and strategies that can be researched.  Moreover, the use of automation enables the trader to not only generate many ideas but trade them simultaneously--again vastly expanding the number of sound, independent bets placed per unit of time.

A recognition of the importance of idea velocity also helps us appreciate why traders learn and perform better in team settings.  Teams model more and different ideas and ways of generating ideas and teams share ideas they generate.  A team of discretionary traders, each of who generates independent models and automates their trading strategies, is powerfully diversified, able to make money in dozens of ways.  

Idea velocity encourages us to get broader, not just bigger.

Further Reading:


Tuesday, March 13, 2018

Is Your Trading Authentic?

My subway ride to the hedge fund where I'm working today was an interesting one.  I was standing on the platform waiting for the next train.  I was thinking about something I had read on the train ride from Connecticut to the city.  The gist of what I read was that, in biblical times, people worshiped by sacrificing animals.  Today our worship can take a different form:  by sacrificing our animal needs and desires and using them for spiritual growth and development.  Thus, for instance, I can work as a trading coach to accumulate money and material things, or I can work to become a meaningful part of people's and use the money earned to better my family and the world.  It's not that we fight against our animal nature; it's that we tame it, elevate it, and direct it wisely.  We can eat for gluttony or we can eat for health.

So that's what I was thinking about standing on the subway platform.  A young woman walked in front of me listening to music on headphones and bopping about.  She then turned around, walked in front of me again, and kept grooving to the music.  By the third time she did this, I felt a little distracted, a little annoyed.

The train stopped, we got on, and Ms. Headphones continued to bop on the train.  I was going to sit down, but I noticed a man lying down on the seat.  He was noticeably dirty and smelled bad.  My impression was that he was a homeless person.  I stood nearby but chose to not sit next to the man.

Ms. Headphones, still dancing to her music and smiling, took off the shawl she was wearing and wrapped it around the man.  She then offered him a piece of gum.  He looked up bleary eyed, took the shawl off of himself, wadded it up, and used it as a pillow.  She looked at me, we both smiled, and she continued her dance.

So I'm reading and thinking about using the animal/material world to achieve a higher purpose, but this young woman was actually living the lesson.  Out of her happiness--her dance--she freely gave of herself, oblivious to the man's appearance and smell. 

Authenticity is about living our truths, not just talking them or studying them.

How authentic is your trading?

If someone watched you trade, would they know what your plans were for the day?  Would they know what you were working on?  

There is talking the talk and there is walking the walk.  If we are not authentic in our trading--actually acting on our beliefs and understandings--all our plans and journal entries are empty.  There is a profound message in the young woman's actions:  we find our authenticity when we live our joy and we find joy when we are who we are meant to be.

Further Reading:


Saturday, March 10, 2018

How Fast is the Learning Curve for Traders?

Trading is one of the most challenging, stimulating, and potentially rewarding careers I can think of.  Every day is a new challenge.  Every day pushes us to overcome the biases and tendencies that get in the way of sound decision-making.  Like all great performance activities, trading rewards our self-development.

But what are reasonable expectations for a learning curve for traders?  Some years ago, I looked at research concerning the success rates of day traders and the numbers were sobering.  Over 80% of traders were unprofitable in the study and, after expenses, only a small proportion were profitable.  Not surprisingly, the smallest traders tended to be the least successful.  The larger ones, of course, were large precisely because they had accumulated some degree of success.

This is not only true of day traders.  Research by Barber and Odean finds that individual investors consistently underperform the market and fall prey to trading biases.  Recent research finds that the average active trader not only loses money, but persists in trading after being unprofitable.

That's the part that trading educators, coaches, brokerage firms, and others don't like to emphasize.  Just like in acting, just like in music, just like in athletics:  many are called, few are chosen.  The proportion of people who can make their living from golf, chess, football, or car racing is a fraction of the people who participate in those activities.

What that means is that any developing trader has to approach their learning curves with eyes wide open and ask the questions, "Am I on track?  Is this where I'm going to find my success?"  It's nice to dream of trading success, but it's important to understand the realities of making it as a trader.

Bella at SMB recently wrote about a trader who was now earning a nice paycheck after 18 months of trading.  I happen to know this trader personally and heartily agree that he has a bright future.  I also know that we had recognized his potential during his first year of trading.  Still, it has taken a while to bring home that paycheck.  In his admirably honest post, Bella notes that it typically takes 18 months to two years for a trader to achieve significant profitability (i.e., to make a living from their trading).  And that is with considerable mentoring, support, education, and coaching.  

In an earlier post on the failure rate of prop traders, Bella notes that every developing trader needs to anticipate 6-8 months of hard work and study when they start out.  My experience is that it is during that initial 6-8 month period that we see the shape of learning curves.  During the first year, the trader develops his or her style of trading, builds a playbook of opportunities, and displays growing consistency in following and profiting from that playbook.

During the second year, the trader builds on that consistency to take more risk, manage that risk well, and find new sources of opportunity.  It is after the first year of trading better that the trader becomes bigger, and that's when the paychecks start.  If traders are still struggling to find consistency and their own style after a year of effort, the conditional probabilities of meaningful success go way down.  When innate talents fuel skill acquisition, learning curves are quicker and steeper.  I have found that success in year one is highly predictive of longer term success.

And so it is in all performance fields.  If, by your junior year of college, you are only able to make the second team of your school's basketball squad, you probably should be planning alternatives to an NBA career.  That doesn't mean you can't enjoy basketball as an avocation, and it doesn't mean that your accomplishment is meaningless.  It just means that your greatest career success will be found elsewhere.

This month alone I have heard from several traders who have spent years--and all their family's money--pursuing one trading strategy after another.  They are broken people, and they have hurt their families in the process.  They could not let go of the dream, and it became a nightmare.

If you're a developing trader, pour yourself into learning.  Find yourself mentors and colleagues you can learn from.  Work as hard on your trading outside of market hours as when you are trading.  And then gauge your progress.  Have the courage to let your dreams become realities, and have the wisdom to not allow them to become nightmares.


Friday, March 09, 2018

A Surprising Best Practice of Successful Traders

Here's an interesting observation I've made about traders who are doing well recently versus those not doing so well:

It's not just the quality of the trades that distinguishes the successful trader, but the quality of the time during market hours when they are not trading.

The least successful traders are glued to screens throughout the day and have very little structured, quality time away from the screens.  

The more successful traders take breaks during the day and keep themselves fresh and focused.

The most successful traders have a structured non-trading process during market hours.  They are just as plan-oriented in their non-trading time as in their trading time.  When markets are open and they are not trading, they have processes they follow to identify new opportunities and to maintain their performance zone.  

Productively planning and structuring your non-trading time:  that is an unappreciated best practice.  The great traders are highly productive when they are *not* trading.  A big step that can move your trading forward is to start keeping a report card where you grade the quality of your time during the trading day when you are not trading.

On Monday at noon EST, I'll be joining Jigsaw Trading for a free webinar on three psychological techniques to improve trading psychology.  In that session, I will go into detail about specific practices I see best traders engaging in during non-trading hours.  Registration for the session can be found here; I hope to see you there!


Wednesday, March 07, 2018

Three Techniques for Mastering Your Trading Psychology

This coming Monday, March 12th, at 12:00 noon EST, Jigsaw Trading will be hosting me for a webinar on three powerful psychological techniques to aid our trading.  The registration for the free session can be found here.

This session will be different from my recent presentations, as we will focus on three specific psychological techniques that have been found to be effective in controlled outcome research.  These methods effectively address such issues as performance pressure/anxiety; frustration/overtrading; and loss of trading discipline.  

The goal is to describe these techniques in how-to terms that will allow traders to take skills away, practice them, and truly become their own trading coaches.  And, even if you're like the puppy and just want a comfortable spot, you're welcome on the couch on Monday!  Look forward to seeing you there--



Sunday, March 04, 2018

Who is Controlling the Market?

One of my favorite measures of buying and selling pressure is the moment to moment upticks versus downticks across all listed stocks.  Most of us are familiar with the NYSE TICK measure ($TICK), which tracks the number of stocks trading on upticks versus downticks for all New York Stock Exchange listed issues.  The U.S. TICK ($TICK.US-ST on the e-Signal platform) measure simply extends this measurement to all stocks, and so it is more inclusive of small cap issues.  

Another strength of the U.S. TICK measure is that its opening readings look at upticks/downticks from the opening prices of stocks, not from the prior day's close.  As a result, the numbers are not skewed by the overnight gap in prices:  we get a purer sense of buying and selling flows during the day session itself.

The major value of the U.S. TICK measure, however, is that it tells us who is controlling the market:  the buyers or the sellers.  If we get persistent and high positive readings, we know that institutions are lifting offers across a wide range of stocks.  Conversely, persistent and extreme negative readings tell us that institutions are hitting bids across the universe of shares.  (If your trading platform does not track U.S. TICK, the standard $TICK measure is also quite informative of who controls the market).

Notice on 3/2/18 how the evolving U.S. TICK numbers were positive and got more positive as the morning progressed.  We barely saw any net selling pressure whatsoever.  Even in the afternoon pullbacks, buying and selling activity were only relatively balanced (pullbacks to the zero area) and price held well off the morning lows.  

(As an aside, the outperformance of U.S. TICK relative to $TICK was a nice tell for the relative strength of small cap shares that day).

This ability to see how the tug of war between buyers and sellers is evolving as the market unfolds helps us check our assumptions and adjust to how the market is *actually* changing.  I came into the day with bearish expectations, partly due to our difficulty in bouncing from oversold levels and partly due to the trade war news.  The early strength in buying pressure was a great indication that the market, in fact, was dominated by the buyers.  Sure enough we experienced an upside trend day, where we opened near the day's lows and closed near the day's highs.

Once we can observe the ebbs and flows of buyers and sellers, we're in a much better place to trade what we see and not what we expect.

Further Reading:

Three Questions to Ask About Any Market - most popular TraderFeed post