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:

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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:

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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:


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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:


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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:


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Thursday, April 05, 2018

How You Learn Determines How Much You'll Earn

So now the secret of my working with traders gets out...it'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!

Brett

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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:


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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:


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