Wednesday, July 30, 2014

The Essence of a Trading Process

At the broadest level, trading consists of analyzing, synthesizing, and doing.

Analyzing is extracting information from markets, immersing ourselves in data.  It is our look through the microscope.

Synthesizing is assembling those data into a coherent picture, extracting pattern and meaning from the reams of market information.  It is our telescopic view.

Doing is taking action on the meaning we have extracted from studying markets.  It includes everything from determining the best expression of a view to managing risk and reward once the view has become a position.

In trading, the microscope and telescope of viewing are transformed into real world doing.

At the end of a trading day, week, or month, we repeat the process--only we turn the lens inward.

We analyze our performance, immersing ourselves in the data that tell us how well we executed and managed our trades; how well we discerned genuine opportunity in markets.

We synthesize our performance observations into goals that move us forward, capturing what we've done well and what we need to improve.

Then we return to doing, feeding those goals forward into future market analysis, synthesis, and doing.

Deliberate practice is a cycle of stepping back to observe and stepping forward to act.  It's also a cycle in which we first act in the world and then act upon our performance.  

Analyzing, synthesizing, and doing, in markets and with ourselves:  that is what a trading process is all about.

Further Reading:  Trading as a Performance Activity

Tuesday, July 29, 2014

The Proactive Personalities of Traders and Entrepreneurs

Successful traders share a number of qualities with successful entrepreneurs.  This is not surprising, as trading is all about defining, discovering, and realizing value in a marketplace.  Both successful traders and entrepreneurs have a proactive side to their personalities:  they possess a vision of what they want and work in a directed way to achieve it.  As Lori Greiner astutely observes, it is this drive that leads entrepreneurs to work long hours to avoid working the standard work week. 

While broad personality traits have been associated with entrepreneurial success, research suggests that very specific personality characteristics are the best predictors of entrepreneurial pursuit.  Specifically, four traits are common among successful entrepreneurs:

*  Proactivity - the ability to spot opportunities
*  Creativity - the ability to generate innovative ideas
*  Opportunism - the tendency to pursue opportunities as they arise
*  Vision - the desire to make a difference in the world

What stands out is that successful entrepreneurs are thinkers, dreamers, and doers.  This is very similar to successful investment success, which combines research and idea generation with the management of positions and portfolios.  The vision dimension is particularly interesting.  Having unique ideas might not be sufficient to motivate the entrepreneur to get through inevitable roadblocks and setbacks.  It's the vision of creating something worthwhile--something that makes a difference--that provides the extra motivational push.  Interestingly, many of the Market Wizards interviewed by Jack Schwager are known for their involvement in charitable causes.  Those activities are one way that market success becomes a way of making a difference in the world.

The proactive personality that distinguishes entrepreneurs is seen among people who are not especially constrained by situational forces.  They tend to take action and persevere in challenging situations, particularly when they perceive opportunity.  This capacity to sustain intentional action in the face of potential distractions and obstacles speaks to a high degree of focus and motivation.  In short, the successful entrepreneur is good at locating opportunity and then pursuing it relentlessly.  This sounds very much like a domain-specific version of the "rage to master" noted in the recent blog post.  Indeed, it would not be far wrong to suggest that entrepreneurs have a rage to create.

This may be the key to why some traders succeed over time, adapting to ever-changing markets, while others do not.  If a trader's primary motivation is proactive creation, then he or she will sustain innovation.  When we think of the great business leaders, they are not just entrepreneurs--they are serial entrepreneurs.  The rage to create ensures that great traders will remain creative, continually searching for fresh opportunity.  It's what traders do when they make money that reveals their capacity for long-term success:  do they become comfortable and complacent, or do they chafe at the status quo and look for continued ways to innovate?

Further Reading:  Trading, Entrepreneurship, and Gambling

Monday, July 28, 2014

Performance Niches in Trading: The Rage to Master

A grateful shout out to Abnormal Returns for linking Adam Grimes' post on the "rage to master".  As Adam points out in his blog:

"People who have the rage to master are completely obsessed beyond any sense of balance, beyond any reason, with mastering their chosen craft. For these people, hard work usually doesn’t seem like work. They are motivated by the end goal, yes, but perhaps even more so by the process of learning and the process of getting better."

Ellen Winner, who coined the term "rage to master", makes the argument that innate talents have a motivational component and that the mastery drive is often present from an early age.  She points out:

"No one disputes the biological basis of retardation (with the exception of that due to extremely impoverished environment); and yet some do assert that high ability, the flip side of retardation, is entirely due to hard work.  But if biological retardation exists, why not biological acceleration?"

Citing evidence from children who display early talents in the visual arts, Winner observes that young people with precocious talent are intrinsically driven to pursue their domains, accelerating their learning and development via supercharged deliberate practice.  The rage to master occurs at the intersection of natural talents and immersive practice.

An important implication of Winner's view is that one of the best predictors of performance in a domain is an early and rapid learning curve.  This is the notion of "niche" that I emphasized in the trading performance book.  Exercising our talents is intrinsically rewarding, which leads us to immerse ourselves in the activities that provide deliberate practice.  Greatness, from this perspective, is a function of how we approach life; the rage to master is, as Adam points out, a form of obsession.

Per the Michelangelo quote above, if you're working ordinary hours in an ordinary manner, you're probably not operating within your mastery niche.

The work we're meant to do is not what we push ourselves to do; it's what no one can keep us from doing.

Further Reading:  Greatness and Creativity in Trading

Sunday, July 27, 2014

Trading and Our Emotional Temperament

One of the more interesting findings in the positive psychology research literature is that happiness is more related to the frequency of positive feelings than their intensity.  Occasional feelings of intense joy are less important to our overall happiness than frequent positive experience.

Related to this finding is the important observation that positive and negative emotion--while negatively correlated in the short run--are largely independent of one another over longer time frames.  This is due, in part, to the intensity dimension.  People can have frequent positive experiences amidst occasional intense negative experiences and vice versa.  During highly emotional periods, positive and negative emotion are strongly negatively correlated.  Over longer periods and ones of more modest intensity, positive feelings are recalled relatively independent of negative ones.

Indeed, if we think of positive and negative emotion as independent, we can define four temperaments:  1) happy (high positive/low negative); 2) distressed (low positive/high negative); 3) volatile (high positive/high negative); and 4) stable (low positive/low negative).  An interesting hypothesis is that these temperaments impact how people view markets and trading.  We commonly think that successful trading is a function of controlling one's emotions, as in the fourth category above.  Might it be the case, however, that successful traders find constructive ways to engage markets within their particular temperaments?

A good example would be the distressed category above.  Traders who worry about their positions and focus on what could go wrong in their trades might be successful by tightly managing risk and achieving superior risk-adjusted returns.  That would be different from more volatile, risk-taking traders, who sacrifice Sharpe ratio to achieve superior absolute returns.

Even on shorter time scales, might traders experience varying mixtures of positive and negative emotions throughout the day and week?  Once we adopt the scientific temperament described above and treat positive and negative emotions as separate, independent experiences, then we can ask interesting questions about the types of events that lead us to feel positively or negatively.  We can also track performance as a function of the two states and examine whether, say, increases in market or P/L volatility correlate with increases in the volatility of both positive and negative emotions.

Given that temperament impacts emotion, attention, and activity, it is surprising that we know so little about how temperament is related to performance success.  We would think, for example, that very outgoing people with loads of positive emotion would make good salespeople.  In fact, the opposite appears to be the case:  those with moderate temperament tend to do the best at sales.  Interestingly, something similar appears to be at work among traders:  a study I conducted with Andrew Lo and Dmitry Repin with traders studying with Linda Raschke found that high levels of emotional reactivity were associated with worse trading performance.  Personality traits did not predict performance, but the intensity of emotionality during trading did--in a negative way.  It didn't matter whether the emotion was positive or negative: intensity of experience was disruptive of performance.

Still, the research of Lo and Repin suggests that emotions do play an important role in trading decisions.  Even experienced traders, hooked up to biofeedback units while trading, display patterns of emotional arousal in the context of their trading.  That research also found, however, that experienced traders displayed less intense emotional reactivity than inexperienced traders.  Once again, we see an important distinction between emotional intensity and frequency.  Perhaps one valuable aspect of training and experience is that they enable us to dampen the intensity of our emotional reactions within whatever temperament we might have.  Once we've been there, done that, it's easier to not overreact to situations.   

We gravitate toward particular trading approaches for many reasons:  our cognitive strengths, personality traits, and emotional temperament all likely play a role in determining whether we seek success as systems traders, investors, daytraders, or active portfolio managers.  Ultimately, our trading reflects who we are and either generates emotional experiences that suit or frustrate our temperaments.  That fit of trading experience and personal temperament may well be an important mediator of sustained trading success. 

Further Reading:  Peyton Manning and the Heart of Peak Performance

Saturday, July 26, 2014

Trading and Life Satisfaction

Recent posts have emphasized the role of emotional well-being in creativity, health, and productivityWell-being is also likely to moderate the frustrations that can lead to lapses in trading discipline.  When we maximize positive experience, we broaden our thinking and build new competencies.

But what is well-being?  We commonly equate well-being with happiness, but that is only one dimension of positive experience.  Our physical and emotional energy are also crucial to well-being, helping us turn goals into achievements.  Well-being also stems from experiences of affection and the development of close, meaningful relationships.  Finally, our positive experience depends upon our level of life satisfaction.  It is difficult to pour ourselves into trading, for example, if we are dissatisfied with trading

A 2013 Pew Research poll found that 81% of Americans say they are satisfied with their lives.  Interestingly, however, only 50% rate their relationship with their partner/spouse as "excellent"; only 38% describe an "excellent" spiritual life; 28% rate their employment situation as "excellent"; 27% rate their health as "excellent"; and only 13% describe an "excellent" personal financial situation.

A tempting inference from these findings is that most people are satisfied with less than excellence.  There is, however, a different possibility.

A very interesting study found that personality changes over the lifespan--and those personality shifts are more responsible for changes in our life satisfaction than our changes in income or employment.  Indeed, changes in personality accounted for 35% of changes in life satisfaction, compared to only 4% for income and employment and less than 4% for marital status.

What this suggests is that life satisfaction may be more about who we are than what we do.  Subjects in the research study who rated themselves as less agreeable over the years also reported lower levels of life satisfaction.  Conversely, those that reported becoming more open to experience also described higher life satisfaction.

This leads to an important question:  How has involvement in financial markets affected your character?  Has trading made you a better person or a worse one?

I strongly suspect the answers to those questions are meaningfully connected to traders' life satisfaction and, ultimately, the ability to sustain a successful career in markets.  Profits from markets can make us happy, but what might be more important to long term well-being  is the perception that we are personally profiting from our trading experience. 

Friday, July 25, 2014

Maximizing Personal Energy: Turning Goals Into Achievements

There's a very important distinction between activities and people that give us energy and those that sap our energy.  Imagine spending time adjusting the thermostats in your house and installing sophisticated heating and cooling systems while leaving all the windows wide open.  That's what we commonly do:  we manage our time, but allow energy to leak through the windows of our lives.  By spending time in low energy activities, by surrounding ourselves with low energy people, by failing to engage in the sleeping, eating, and exercising activities that could energize us, we live life in less than an energized mode. 

How many of our trading lapses, whether in concentration or discipline, occur because we are operating at a low level of willpower, our concentration fatigued, our focus lost?

Imagine if the overriding priority in your life was to keep yourself at a maximum level of mental, physical, and emotional energy.  What would you be doing to maintain that state?  What would you eliminate from your life to stay at your peak?

The answer to a leaking gas tank is not to fill up your car every few hours.  

Goals without energy are simply good intentions.

The car takes us much further when we repair the gas tank.

Further Reading:  Top Ten Reasons Traders Lose Their Discipline

A Few Good Ideas to Wrap Up the Week

*  A worthwhile quote above from Jim Rohn, who calls this "the skill of selecting."

*  The link for the recording of my recent group coaching webinar on getting to the next level in trading performance is available via WindoTrader;

Bulls have been fleeing this market, the sobering prospect of a solar storm, and other eye-opening insights from Abnormal Returns;

*  Per Rohn's observation, might we be the average of the five activities we spend the most time with?  It's all about creating the right life mirrors.

*  One key to success from a once-homeless billionaire:  doing what others aren't willing to do.

Derek Hernquist talks about his new role and a venture that uses technology to provide superior asset allocation to investors.  Very interesting.

Thursday, July 24, 2014

Abraham Maslow and the Ultimate Trading Edge

The recent post describing the single best predictor of sustained trading success emphasized the difference between being drawn to markets because of personal strengths vs. pursuing markets to mask personal deficiencies.  The psychologist Abraham Maslow distinguished between basic--or deficit--needs and being--or growth--needs.  Among the deficit needs are physiological needs, needs for safety, social needs, and esteem needs.  A cardinal principle of Maslow's thinking was that deficit needs grow stronger when they are unfulfilled.  They need to be fulfilled, he observed, in order for people to focus on being, or self-actualization, needs.  

In other words, gifted people fail to open their packages when more basic (unmet) needs trump the pursuit of their (self-actualization) gifts.  Can we really build and sustain career success if our more basic physical, social, and self-esteem needs are not being met?  Can we truly expect to succeed if we burden our work with the demand that it compensate for all our unmet basic needs?

If our self-worth and social status hinge upon our trading success, how can we remain objective and dispassionate during times of drawdown?

When we overtrade or bail out of positions at the worst possible times, violating our planned exits, is it really that we lack discipline, or could it be that our trading is carrying too great an emotional burden?

When basic needs are met, you can feel good about yourself, good about your connections to others, and secure in your finances even during periods of market loss.  Drawdowns in our trading accounts don't have to become emotional drawdowns.  

To pursue markets in the drive to actualize skills and interests and not to fill deficit needs:  that is the ultimate market edge.

Further Reading:  Greatness in Life and Trading

The Single Best Predictor of Sustained Trading Success

It's true of all great performance fields:  they can bring the best--and the worst--out in people.

Trading can bring out our worst fears, our greediest ambitions, and our innermost self doubts.

Trading can also reveal our greatest character strengths:  perseverance, creativity, and self mastery.

What is the difference?  What determines whether financial markets bring out our greatest efforts or our worst biases?

A wealth of research on character strengths suggests that when we draw upon those strengths, we achieve higher levels of emotional well-being.  Indeed, people who more consistently draw upon their strengths report lower levels of stress, higher levels of positive emotion, and higher levels of self-esteem over three and six month horizonsA study of college students found that those who are best at making use of their strengths also are most successful at making use of social supports and most likely to build on successes by applying their strengths to new situations.

Optimism fuels performance; successful performance fuels confidence and self-efficacy; confidence fuels broadened social networks and resources and builds further competencies.  In other words, exercising our greatest strengths with the greatest consistency sets up virtuous cycles that, over time, expand our horizons and abilities

At the risk of oversimplification, I would like to suggest a straightforward hypothesis:  Some traders are attracted to markets as a way to exercise their strengths and some are attracted to markets to compensate for their weaknesses.  This is why trading, like football in the Marv Levy quote, reveals character.  Some traders don't want to work for a living; they don't see themselves as successful in the world.  They view markets as a way to strike it rich and provide them with the esteem they lack.

Other traders find in markets the performance challenges that engage their greatest cognitive and emotional strengths.  Trading, for them, is an affirmation, not a compensation.

What brings you to markets determines what markets bring out in you.  I strongly suspect that is the single greatest determinant of sustained trading success.

Further Reading:  The Power of Teamwork

Wednesday, July 23, 2014

Selective Attention, Repetition, and Internalizing a Winning Sense of Self

Thanks to a savvy trader for pointing out this excellent post from James Clear on the role of selective attention in the development of expertise.  His observations regarding repetition as the source of skill development is spot on.  So much of expert performance is a function of knowing what to tune out--and then intensifying concentration on the essentials that remain.

While you're at it, check out James' post on quantity vs. quality and how that impacts our work output.  Expertise is all about learning-by-doing, not seeking an abstract standard of perfection.  As he puts it, "start with repetitions, not goals."  

The reason this is powerful is that frequent, positive experience--those small wins--have a powerful mirroring impact.  When we are doing things better and better, we begin to experience ourselves as being better and better.  Our self-concept is an internalization of what we do, not something we can merely talk ourselves into.  Viewing changes with doing: repetitions created repeated positive experiences and repeated reinforcement of a new experience of self.

Further Reading:  How to Change Your Self

Tuesday, July 22, 2014

Transformation Via Trance Formation: Using Hypnosis to Accelerate Change

Milton Erickson, M.D. was a pioneer of brief approaches to psychotherapy, making use of hypnosis techniques to accelerate change.  "You use hypnosis not as a cure," he observed, "but as a favorable climate in which to learn."  His work stood traditional therapy on its head.  Instead of using insight as a means to promote change, he employed hypnosis to directly instill new behavior patterns.  "Change will lead to insight," he insisted, "more often that insight will lead to change."

Recent neuroscience research into hypnosis suggests that it represents a distinctive state of consciousness.  Specifically, hypnosis is associated with activation of attention and deactivation of "default mode" functions such as self-awareness and semantic thought.  It is as if the person in a hypnotic induction intensifies their focus at the same time that they shut off their active reasoning.  This has made hypnosis particularly useful as a treatment for pain, as it enables us to process the experience differently, where we no longer identify with the discomfort.

One of Erickson's most provocative ideas is that hypnosis is a naturally occurring state of consciousness and does not require formal induction processes.  Indeed, in his therapy, Erickson commonly told stories, often of a complex and even confusing nature, that held listeners' attention and helped them think differently about their problems.  His goal was to allow change to occur naturally and indirectly by changing people's views of their problems, including the language they used to describe their experience.

A classic Ericksonian therapy described by Jay Haley was his single session treatment of a patient's insomnia.  He encouraged the insomniac to get out of bed when he couldn't sleep and meticulously scrub his apartment floor with a toothbrush to get the floor perfectly clean.  When the patient had tried to make himself sleep, of course, his efforts only heightened his awareness of his problem.  When he scrubbed the floor, however, he became so bored with the task--and so focused away from his problem--that his natural tiredness took over.

When we become absorbed in a task, we enter a state very similar to hypnotic trance.  It appears that the flow state associated with creativity--the state of being "in the zone" familiar to traders--is actually a form of trance.  Just as cancer patients can disconnect from their pain through the focused attention of hypnosis, it may be possible for any of us to disconnect from unwanted behavior patterns by shifting our conscious state.  Similarly, we may best acquire desired patterns--including the patterns of markets--when we are in a flow state of enhanced cognitive processing.

Traditional therapies and coaching interventions have tended to emphasize verbal communication and conscious reflection on one's problems.  It may well be the case, however, that change occurs most efficiently when we are in an alternative mode of processing that facilitates the internalization of new patterns.  Staying in a single state of consciousness keeps us locked in our routine modes of viewing and doing.  What Erickson realized is that it takes a gear shift of consciousness to help people process experience in new ways.  Trance formation may be the hidden key to transformation:  first we change, then we achieve insight.

Further Reading:  Why Controlling Emotions Should Not Be a Goal of Trading Psychology

Monday, July 21, 2014

Getting to the Next Level of Trading Performance: A Group Coaching Experience

Many traders I've spoken with have expressed the feeling that they are very close to breaking out and taking their trading to an entirely new level.  Often, their unspoken assumption is that once they reach that new level, the problems of mastering markets will be behind them.  As the all-too-spot-on quote suggests, however, new levels bring new devils.  With fresh success come the demons of overconfidence, envious colleagues, and the renewed humbling challenges of changing markets

Not infrequently, getting to the next level of trading requires getting to the next level in your personal development.  That can be difficult when a big part of you might be committed to old ways of doing things.  It is easy to do something well, but far harder to turn best practices into established habits.  I find that getting to that next level generally is more a matter of doing many small things consistently well than making any single explosive breakthrough.  You can't have a successful year without having a successful month, and you need successful days to make a successful month.  It's great to have great goals for the indeterminate future, but what is the energizing vision and specific, concrete actions that will transform your work today?  There is no greatness without individual acts performed greatly in the present.

A vivid example of doing small things well is Rory McIlroy, the young golfer who recently won the British Open.  He revealed, before the competition, that he had two secret words that were his cues for success.  He invited the media to guess the words, but no one was successful.   The words were "process" and "spot".  His entire focus was on the process of taking the right swing with his long shots and hitting desired spots on the green with his putting.  No thoughts of where he stood in the competition; no thoughts of how he performed on the previous hole.  Rory was entirely present-centered, absorbed in the mechanics of doing the right things and letting the score take care of itself.

There is no great trading without making individual great trades.  And there can be no individual great trades without great ideas, great entry execution, great position management, great planning.  Process, spot.  That's the focus Bella talks about at SMB when he emphasizes making "one good trade".       

It would be nice to have a trading coach spurring your development, much as personal trainers work with people in the gym.  For most traders, however, that is neither a practical nor available option.  Recognizing this, Terry Liberman of WindoTrader approached me with the idea of offering a webinar on the topic of getting to the next performance level in trading.  Unlike traditional webinars, however, this will not be a didactic session.  Rather, it will be a free group coaching session, where the content is brought to the event by traders in the form of questions, challenges, and keen observations.  My role will be to help traders think about old problems in new ways, both to address trading flaws and build existing strengths. 

The event will be held this Wednesday, July 23rd at 4:30 PM EST; check the WindoTrader site for details and registration.  My hope is to provide a unique, interactive learning experience for traders--look forward to seeing you there!