Monday, August 20, 2018

Failing With Enthusiasm

Thanks to a savvy performance/trading coach for forwarding an excellent NY Times article on "Talking About Failure".  

Talk about our failures?  For most of us, that's the *last* thing we feel like doing!

The idea makes sense, however.  Not only does talking about our failed ideas and failed trades help us put them in perspective; it also enables us to accept them, learn from them, and put them into perspective.

One exercise I strongly suggest to developing traders is the following:

On your flat or down days/weeks, reach out to other, similar traders who made money on the day/week and learn what they did and how they did it.  Let them talk about their success and see what you can take away as ideas, learning lessons, and goals going forward.  Having one or more trading "buddies" who can openly talk about mistakes and successes helps everyone cement what they did right and learn from what didn't go right.

And if you have no trading buddies?

It's worth reviewing your trading and looking for the plausible opportunities you may have missed.  In other words, if you had been trading your way, at your best, what might you have done differently?  In that situation, you are looking to the ideal trader within you to act as your "trading buddy".  By openly facing your "failure" and using it to prod your ideal trader, you turn setback into learning and opportunity.

The psychology of having flat or down periods is determined by whether you view them as setbacks and defeats versus inspirations, prods, and opportunities for growth.  Churchill had it right:  it's all about failing enthusiastically.

Further Reading:


Thursday, August 16, 2018

Changing How We See The World

One of the most important findings in psychology is that people make important changes in their lives when they are in the midst of deep emotional experience.  Simply talking with a coach, counselor, or therapist doesn't in itself lead to profound change.  Rather, it's when we experience things strongly that our existing views of the world are shaken up.  That shake up opens us to new ways to view ourselves, others, markets, and the future.

This is one of the reasons important change can occur when people "hit bottom".  It's when everything has gone wrong and we're in despair that we're willing to make a complete overhaul in what we do.  Therapists refer to this as "corrective emotional experiences."

But it's not just negative experience and setbacks that can help us see and do things differently.  Sometimes powerful positive experiences have the same impact.  One example is the experience of awe:  when we are so inspired by something positive that it becomes a part of us and changes our perspectives going forward.  In a new article, I describe recent research into awe and how experiences of awe literally renew our energy and help us become more successful.

A theme I have never heard expressed in conventional trading psychology is that markets--and participation in markets--can become sources of awe.  That is, they can be awe-inspiring.  When we perceive the vast complexity of markets and so immerse ourselves that we perceive a meaningful pattern, it's as if we're catching a glimpse of the universe.  It's not an ego thing at all, strutting about and proclaiming your "conviction" in an idea.  Rather, it's standing back and absorbing all that is happening and allowing ideas and themes to come to you.

Trading with your ego ultimately depletes our energy, as we take too many P/L dings.  Trading with a sense of openness and awe can give us energy.  It can be inspiring.  And that inspiration and awe can help us change how we see the world--it becomes a *positive* corrective emotional experience.  Many traders become frustrated with markets and fight what is happening.  How different it is to experience markets as awe-some!

Further Reading:


Saturday, August 11, 2018

From Discipline To Professionalism In Trading

In sports, as in trading, performance often begins as an ego-driven activity.  The boxer is all about knockouts; the basketball player focuses on scoring; the golfer looks to ace each hole.  The novice trader wants to make money, and so trades, trades, and overtrades.  This ego focus is not entirely negative; it's a big part of the initial attraction to the performance arena.  But it is not enough.  When we perform out of ego motivations our personal needs overwhelm the requirements of each performance situation.

Many thanks to Mark Meadows and the Top Step Trader team for posting my recent webinar on trading performance.  One of the key points that I make in that session is that a passion for trading is actually a predictor of failure.  That is because the need to trade comes from that ego place where we need to prove ourselves right and need to make money.

More predictive of success is a passion for markets themselves--and especially the passion to understand what is going on in markets.  When we prioritize understanding, the focus shifts from ourselves to what is happening in front of us.  Sometimes not much is happening.  Good trading in those situations can mean not trading.  Mike Bellafiore recently made this point when describing the development of a trader who developed rules for when to not trade.  Discipline--rule following--takes the place of ego:  it's not about trading, but about trading successfully.

Across performance activities we can see that disciplined performance is a necessary phase of development.  The basketball or football player learns to follow a game plan, not just do what they feel like doing.  The poker player learns to fold when the cards aren't right.  It's common for developing psychologists to learn their craft from manuals that are research-validated and that give them a game plan for helping people with various problems.  Discipline is all about sublimating the ego to sound rules and principles.

Later phases of development find that disciplined rule-following turns into positive habit patterns.  Calling the right plays, making the right moves, becomes second nature.  Through repetition, the rules are internalized.  Discipline is no longer needed to do the right thing.  In this later phase of expertise, we see professionals able to read unique situations and make conscious decisions to veer from rules or modify them to the situation.  Instead of following the therapy manual, a sensitive therapist may reach out to a distraught client and offer support.  Instead of backing off trading in the afternoon hours, the index trader recognizes that relative volume has picked up and finds a great place to go short when buyers can't retrace much of the morning's losses.  A football quarterback learns when to call an audible; a poker player learns when to bluff.

That is what professionalism is all about:  Having so much experience that you not only follow good rules and processes, but you know how to adapt to unique situations as they present themselves.  It takes discipline to become a good trader; it takes expertise to know when to veer from that discipline.  It's all about putting our own needs on a back burner and becoming ever more sensitive to what we are trading.

Further Reading:


Thursday, August 09, 2018

Trading With Patience

You've no doubt noticed that many markets have slowed down with the summer trade, creating narrow daily ranges and little follow-through on directional moves.  The word I most often encounter in trading journals is "patience".  In slower markets, there may only be occasional opportunities worth pursuing.  That means that a good, disciplined trader is often not trading.

What happens during these patient periods--the times of *not* trading--plays a huge role in trading success and failure.  The successful traders I work with use the down time to work on generating new ideas,building new analytical tools, and reviewing their performance.  The less successful traders cannot abide patience and turn trading into overtrading.  They have to have something to do and so they trade, even when an edge is not apparent.

The best traders turn the patient periods into alternative forms of stimulation.

The worst traders experience patience as boredom and find something to trade.

With the VIX below 11 and my "true volatility" measure (movement per unit of volume) at multi-month lows, I'm finding a lot of movement within ranges and then false breakouts from those ranges.  This makes trading very difficult for a momentum style.  A value-based style--buying short-term oversold and selling overbought conditions that break out of a range--has worked much better--especially when directional moves of the index are not accompanied by similar moves across major sectors.  Buying strength and selling weakness on average fail in the slower environment.

In a future post, I'll be reviewing Larry Connors' forthcoming book Buy the Fear, Sell the Greed.  It's an unusually practical trading book, with each chapter describing a specific source of edge and a backtested way of implementing that edge.  One of his tools is a short-term variation of the RSI measure originally developed by Wells Wilder.  During slow market times, I've been experimenting with the measure to exploit the behavioral biases Larry discusses in the book.  Such research is a great way to turn patient times into productive ones.  

Years ago I did an experiment where I showed people a chart and asked them to predict where the market would go from there.  The charts were identical, but half of the subjects saw a chart with a nice green up bar as the most recent bar and the other half of subjects saw the last bar as a good red, down bar.  Not surprisingly, those seeing the most recent green bar expected the market to rise and vice versa.

It's a great example of recency bias.  We overweight recent experience.  In slow, low volatility markets, there is a worthwhile edge in fading that bias.  That's a great lesson I learned during my patient period of not trading:  markets don't have to trend to provide opportunity.

Further Reading:


Sunday, August 05, 2018

Trading With Energy

One thing I've noticed among traders is that success breeds optimism and energy and optimism and energy breed success.  It's not difficult to walk onto a trading floor and see who is active, interactive, and inquisitive and who is glumly staring at screens and pacing the floor.

I've written in the past about the ratio of activities that give energy to activities that drain our energy and why it's so important to have a positive balance.  It is very difficult to sustain effort--whether it's concentration in following markets or researching trade ideas--without feeling energized.  This is why quantity and quality of sleep are so important to performance; it's why being in good physical shape is helpful.  It's also why clinging to moment to moment, day to day P/L can be so deadly, draining us of willpower resources.

In a recent article, I set out three keys to thriving in any work we perform, including trading.  The common element among these is positive energy.  When we say something has expired, we mean it is no longer fresh, no longer potent.  When we say we are inspired, we mean that we have gained vitality.  There is a world of difference between expired traders and inspired ones.

So here's a quick self-assessment to identify if you are trading with energy:

1)  Does your morning routine give you energy or rob you of vitality?

2)  Do your conversations and interactions with other traders distract you and interfere with your best trading, or do they inform and inspire your best trading?

3)  When you research trading ideas, do you feel inspired and energized?

4)  Do your trading reviews lead you to constructive, energy-giving goals or do they discourage you?

5)  Does your self-talk move you forward and motivate you, or does it discourage you?

If working for someone who managed you the way you manage yourself would lead you to quit your job, you know you have a problem.  All of us are managers of our lives and careers, and--for better or for worse--we are coaches to our own trading.

Is your self-coaching giving you energy or is it holding you back from your best performance?

Further Reading: