Sunday, May 21, 2017

Taking the Drama Out of Your Trading

There's a line in one of my favorite J-Pop songs that, roughly translated, says that the ill-naturedness of a love based on appearances is second only to getting a cold in summer.  We fall in love with appearances and quickly find there is no substance.  We should be enjoying the warmth of summer and instead we're miserable with a cold.

When I first started working with traders as a psychologist, I found a common assumption was that great traders were highly competitive.  Many were specifically selected because they had a history of athletic competition.  A surprising number of those traders turned out to be idiots.  They approached each trade as a win/lose situation of cardinal importance, falling in love with the appearances of great "setups".  The drama created by getting hopes up and getting hopes dashed took its toll.  When good opportunities finally did arise, they often could not fully participate.  They were miserable with summer colds...nursing wounds from the bad trading that came from sizing things up when they had confidence and sizing way down when they lost that confidence.

Here's an analogy that I recently provided to a trader:

When I was single, I finally figured out that the best way to meet the right person was to go on many first dates and relatively few second ones.  I couldn't perfectly predict who my soulmate would be without actually meeting the person, so the key was to meet lots of people.  If and when my soulmate showed up, I'd know for sure.  I didn't have to predict what would work and what wouldn't, and I didn't need to approach first dates with high expectations.  I just needed to let odds work in my favor, have lots of first dates, few second ones, and put my energy on the relatively few situations that were promising.  

It was that reasoning that led me to go out with a woman who was 10 years older than me, not yet through her divorce, and who had three children by that marriage.  I would not have considered that a promising situation but that first date led to a second and third and we remain together after 33 years.

A trade is like a first date.  It might work; it might not.  You look for certain patterns and you see what happens subsequently.  When it doesn't go so well, you don't let the first date spill into a second and third.  You exit when you're least invested.  If it goes well, you invest a little more and stick with it.  It's all about probabilities and learning that first dates that don't become second dates are not failures.  They are simply experiences that are necessary to find those opportunities of a lifetime.

Once you fully accept those probabilities, in dating and in trading, there's little drama.  You don't go in with huge expectations and, indeed, you embrace the possibility that this will be nothing more than a one-time situation that doesn't work.  It's not about winning/losing, and it certainly isn't about you being a success or failure.  If you draw poor cards in poker, you don't become depressed and frustrated.  You muck the hand and wait for the next round.  

First trades are small and they are exploratory.  If the idea behind them is sound and flows support that idea, you'll have plenty of opportunity to size up by buying the dips or selling the bounces.  If the flows don't support the idea, or if the idea is incorrect, you'll scratch the trade or stop out when you're least invested.  

Trading with drama is like carrying on relationships with drama.  It becomes exhausting.  Once it becomes about probabilities, our ego is no longer part of the equation.  That allows us to see beyond mere appearances and enjoy the summer warmth of truly promising situations without the hangover of ill-natured colds.

Further Reading:  How Drama Can Create Trauma