Thursday, September 01, 2016

Finding Yourself as a Trader

The more I work with traders, the more I'm convinced that trading performance lies at the intersection between our approach to markets and our cognitive strengths.  A while back, I shared on the blog that I had gone through a period in which I had been trading like an imbecile.  Not only did I draw down from my P/L peak; I did so by doing something different than had gotten me to that peak.  Hence the idiocy of my trading.

I took a couple of breaks from trading from there and studied the hell out of my winning trades and winning periods in markets.  What I found was that, in winning mode, I was processing markets moment to moment, gauging shifts in flows, riding those shifts, and identifying/exiting when those became extreme.  In my losing mode, I was developing a larger-picture view of where I thought the market would go and placed trades in keeping with that picture--not in keeping with the market's moment to moment behavior.

That led me to think about the difference between what I call macroanalysis--the top/down derivation of trades from the synthesis of analyzed data--and microanalysis, the moment to moment construction of a perspective based upon the recognition of emerging market patterns.  I certain know and respect successful traders who approach markets from a macro perspective, and I also know and respect micro traders.  After a successful period, I drifted from what was working to what does not work for me.  Interestingly during this time, I felt as though I had completely lost my feel for the market.  The market's behavior no longer made sense to me.  When I returned to micro mode, it was as if a light switch had been turned on.  My hit rate returned on trades, because what the market was doing made sense to me.

All of us have different modes of sense-making.  As a psychologist, I do form a larger picture view of what might be going on with a person I'm working with, but I don't intervene in a session until I've listened to what that person had to say and detected some theme or meaning to their communications.  When I perform better in financial markets, I'm doing what I do when I perform better as a psychologist and what I do when I perform better as a father and husband.  I draw on who I am in a cognitive way: I process information in a very particular manner.

Personality plays a role in trading performance and, indeed, emotional factors can be among those nudging us from our cognitive strengths.  My experience is that we tend to know more about our personalities than we know about our information processing styles and strengths.  When markets make sense to us, it often is the case that we're doing our best sense-making.  As in so many areas of life, doing well is a function of consistently doing what we do best.

Further Reading:  Understanding vs. Predicting Markets