Monday, August 19, 2019

The Building Blocks of Success

How do people achieve and sustain very high levels of success?  Research suggests that there are several building blocks:

1)  TALENTS - These are the competencies we are hard-wired for; our inborn, native strengths.  From an early age, most children display areas of relative strength and weakness.  Sometimes there is a very high degree of early talent, as in the recent case of Kodi Lee, the blind, autistic singer/musician on America's Got Talent.  As a young child, I devoured books on Greek and Roman myths and then became engrossed in books about human potential.  Even now, it's what I gravitate to when I have free time.

2)  SKILLS - Skills are the competencies we develop as the result of experience.  Through ongoing deliberate practice, we can correct errors and build on successes to hone our performance.  Skills are what we drill on the tennis court or football field during practice; they're also what we naturally develop when we systematically pursue areas associated with our talents.

3)  MINDSET - Our psychology cannot substitute for talents and skills but very much can enhance or hinder our access to these.  I outline how this happens in the recent Forbes article, noting that life experience leads us to emotionally encode both patterns of conflict and success.  When the relevant emotions are triggered, this can either hamper or facilitate performance.  

A very important principle is that we are most likely to maintain optimal mindsets for performance if we are truly aligned with our talents and doing what we do best.  Elite talent fuses all three factors, so that our mindset energizes our skill development and that makes the greatest use of our talents.  This is why our passions often point the way to our purpose.

Further Reading:  

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Thursday, August 15, 2019

Common Mistakes I See Traders Making

It's interesting to see:  for quite a while, traders lamented the lack of volatility in the stock market.  Now that we're seeing an elevated VIX and larger daily price ranges in the index products, a new set of woes has come to the fore.  Many traders are perceiving an enhanced opportunity set, but are having problems capitalizing on it.  Here are a few mistakes I see traders making recently:

1)  Assuming that patterns that worked when VIX < 12 will work similarly in the higher volatility environment.  When we have elevated volatility, the greater movement is present across time frames.  What was a good, tight level for a stop loss point will be blown through in the higher volatility environment.  Simply adjusting stops linearly with volatility also doesn't work, as each unit of trading volume produces more movement, precisely when volume is expanding.  It is not a linear function.  Another example is that traders assume that oversold points, for example, will lead to bounces.  In the low VIX environment, which is often one of rising prices, that pattern may work.  When we get significant downside, short-term oversold can easily lead to further oversold.

2)  Overexcitement.  Traders equate movement with opportunity.  That's not necessarily the case.  Movement is only opportunity if we have studied/backtested it and made sense of it.  In the heat of overexcitement, traders will size up positions right at a time when their stocks or indexes are already providing more movement.  The combination of larger size and higher volatility leads to much larger P/L swings, which can lead to debilitating losses and a much worse mindset going forward.

3)  Poor review processes.  In the busier market environment, traders do more trading and leave less time for reviewing and studying their trades.  At SMB, traders work with the "playbook" concept introduced by Mike Bellafiore.  Just as a quarterback and football team works with a playbook to prepare for games, traders have playbooks of the trading patterns that they have tested and successfully employed.  Per the first point above, traders forget to update their playbooks when market conditions change, just as football teams change their playbooks to exploit specific opponents.  But a changing market environment should call for a doubling down of review, to clearly identify what is working in the new regime.  If traders become so busy trading that they spend less time grading their performances, setting goals, and making adjustments, they will underperform the perceived opportunity set.

The key takeaway is that we always play in unique environments.  For the professional bowler or golfer, one tournament site is not like another.  For the football or soccer player, field conditions can change.  Many of the mistakes we make as traders involves failing to make the right adaptation to the environments we find ourselves in.  All the self-help mantras and techniques will not help if we fail to identify and make the right adjustments to today's conditions.

Further Reading:


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Monday, August 12, 2019

Three Key Ideas Of Trading And Spirituality

Around month's end, I will be releasing my new book, Radical Renewal, which is quite possibly the first book to explore the relationship between trading and spirituality.  It will be an online book written on a blog platform, which means that it will incorporate many links and will be free of charge to anyone with an online connection.  It's been a joy to write and will be an absolute pleasure to give to the trading community.

In a recent podcast with Steven Goldstein and Mark Randall, we explored a few basic ideas of trading and spirituality.  Here are three big ideas from the coming book:

1)  Many of the problems of trading do not come from diagnosable psychological disorders, but rather come from intrusions of the ego into the trading process.  It is when we become self-focused and focused on P/L that we are most likely to lose our feel and understanding for markets.  

2)  The answer to our trading problems is not so much self-help and self-improvement, but rather self-transcendence.  We need to transcend our "small selves"--who we identify with in day to day experience--and step back to find our larger selves.  Tapping into our larger identities provides us with meaning and energy.  Our best trading comes from the soul--the larger self--and not from the ego.

3)  The major spiritual traditions of the world provide techniques and paths for us to cultivate our spirituality and access our larger selves.  Our strengths define our essence:  what we are good at and what speaks to us.  A spiritual life taps into those strengths to ground us in an overarching life purpose.  

There is much more to spirituality than doing a meditation exercise a few minutes each day.  I look forward to exploring this with traders in an interactive format and in a practical fashion.  Thanks to Steve and Mark for the opportunity to discuss some of these ideas!

Further Exploration:


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Thursday, August 08, 2019

Two Ways of Achieving Trading Mastery

How do we achieve mastery in a performance field?  Let's use athletics as an example.

One path to mastery is learning from experience.  That is why coaches sit down with teams after a contest and review game film.  Watching the film in slow motion and keying on what team members did right and wrong helps cement goals for improvement in the minds of the players.  That intensive review is common among chess champions.  It is also something I've seen among successful traders.  They will replay the market day after a long day of trading and walk themselves through the "game film", noting areas of good trading and areas needing improvement.  That review turns every day of experience into a day of learning, doubling our exposure to key patterns that might set up the next day.  Learning from experience also takes place among traders when they share their lessons.  This occurs among the teams I work with at trading firms and is also shared online as learning lessons by the teams at SMB.  Online trading communities, such as those mentioned in my recent post, are also great forums for learning from the experience of others. 

In short, the first path to mastery is accelerating our learning curves by reviewing our performance and viewing the performance of others.

A second path to mastery is increasing our overall capacity for learning.  Again, we can turn to athletics for an example.  Much time is spent between games doing physical conditioning and running drills.  When we hone our skills and improve the shape we're in, we can make the most of our experience.  Recently we've seen an explosion of brain training applications for athletes, helping them master their psychology and also master actual brain functioning.  We're in very early days of understanding the brain activity that contributes to successful trading.  By conducting exercises to increase our attention/focus (such as meditation) and our processing of information, we create drills that can prepare us for "game time".  Again to use an analogy from sports, we can develop the best plays and review them but we won't win if we're out of shape.  Drilling the right brain functions may be the next edge in performance mastery for traders.  

I've often mentioned that successful performance professionals spend more time working on their game than in actually playing.  Years of preparation and training go into the making of an Olympic athlete, dance pro, chess grandmaster, or basketball star.  For every hour of game time, there are many hours of practice, drills, and review.  That is how we achieve mastery.  We often focus on what we're doing during market hours, when it's the hours outside of competition that make us champions.

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Monday, August 05, 2019

How To Overcome Fear Of Failure

I've been engaged in an intensive research program exploring unique edges in the market.  The gist of the research is an identification of "who is trapped" in the market when buyers can no longer lift the market and sellers cannot push it lower.  The research is promising (note the recent post on market strength), but it has come with a unique challenge.  The anticipated unwinds of buyers and sellers play out over multiple days and rarely in a straight line.  That means that anyone seeking to benefit from those unwinds has to endure temporary, but very uncomfortable, adverse movement and drawdown.

That really is a challenge, because sometimes the trade idea itself will be wrong.  In such a situation, it can be difficult to distinguish between normal adverse movement and just plain being wrong.  The fear of failure and loss makes it easy to cut the winning ideas short or stop out of eventual winners.  As I recently tweeted, conviction in our trades matters little if we lack the courage of our convictions.

So how do we deal with this discomfort and overcome the fear of failure?  Here are three approaches:

1)  Adjust the Trading - We're accustomed to thinking about how our mindset affects our trading, but how we trade also impacts our psychology.  When we extend our holding period, we are increasing the variability of our returns.  In essence, holding trades longer is sizing up.  If we trade too large over a longer holding period, the adverse movements may not be tolerable.  We need to size positions so that they will matter if they work out, but won't debilitate us if they don't.  We can't win the game if we can't stay in the game.  A second trading adjustment is that I will put on small size initially and only add if I see growing evidence that a top/bottom has been put into place.  I'm not trying to call precise tops and bottoms.  If I am anticipating a good move in the market, I don't need to capture every tick.  Finally, I find it helpful to distinguish between the trade and the idea underlying the trade.  The trade is simply a way to structure good risk/reward in pursuing the opportunity of the idea.  If the trade doesn't work out, I want to stay on the front foot intellectually and ask myself what I would need to see to re-enter the market.  That's only possible if the initial trade is sized moderately, giving room to re-enter.  In short, we want to trade with full awareness of the possibility that this particular trade may not work out, so that stopping out is not failure, but an opportunity to reevaluate the idea.

2)  Adjust the Body - I'm a big fan of using deep breathing and visualization exercises to prepare for adverse outcomes.  The idea is to visualize what we're afraid of in vivid detail (getting stopped out, for example) while we do two things:  a) breath deeply and slowly and keep ourselves calm and focused; b) continue the visualization to include how we would deal with the stop out, how we would talk to ourselves, etc.  This trains mind and body to not overreact to setbacks, normalizing our responses and making it easier to accept losses as part of a bigger picture of winning.  Performance anxiety occurs when fear of outcome interferes with the process of doing.  If we can train ourselves to not overreact to negative outcomes in our pregame preparation, that training carries over to our actual performance.  When trades move against us, we can take deep breaths, place ourselves in a state incompatible with anxiety, and then visualize how we will deal with the situation.  The key is normalizing setbacks so that they don't feel like catastrophes.

3)  Adjust the Attitude - It's important to get to the point where it's possible to embrace our losses, because those can be our greatest learning opportunities.  Our losses are there for a reason.  They can teach us to become better.  Perhaps we need to improve our trading ideas.  Perhaps we need to improve how we express those ideas as trades.  Perhaps we need to improve our sizing and management of the positions we enter.  Perhaps it's our lifestyle and states of mind/body that need work.  What can we take away from losing that will bring us to winning?  If we can use our losses to study our game in greater detail and make incremental improvements in our processes, then those losses are no longer threats.  They are our teachers.  We won't overreact to losses if we can embrace them.  We are fallible.  We will fall short at times.  Those can be great opportunities to start again, smarter and wiser.

Very often, traders will have good ideas but will set stops so close that they never participate in the anticipated movement.  They are playing to not lose, not to win.  Their journals reflect frustration, not learning.  It's one of the paradoxes of performance that we are ready to win when we are no longer threatened by loss.

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Friday, August 02, 2019

Staying Up When You Have Been Drawing Down

I've received a number of emails and comments in response to the most recent Forbes article describing the pain of losing in financial markets.  We don't usually talk about losing and how difficult that can be.  It's more fun to speak about success and profits and always getting better.  But that's not the real world.  As the article makes clear, not all who pursue trading can make a living from their craft.  If I'm a tennis player, I may not make the cut for pro tournaments, but I can enjoy my sport at a local club, playing against local competition.  If I'm just average as a trader, I consistently lose money.  That is not sustainable.

Many entrepreneurs build a number of start-ups before they hit upon a winning idea and execution.  Years of ups and downs, wins and losses, precede any appearance in the Olympics.  In most performance domains, losing is a necessary part of winning.

If you have been drawing down in your trading, what is most important is to step back and ask yourself a couple of key questions:

1)  Am I looking for opportunity in the right places?  So often, the difference between success and failure lies in what you are trading.  As I mentioned to a young trader recently, you can be the best well-driller in the world and, if you're looking for oil in the wrong places, you'll go broke.  The restaurant that works in the downtown location might fail in suburbia.  You can only know what works by studying traders who are actually successful and seeing first hand what they're trading and how.

2)  Is trading truly my area of opportunity?  As I describe in the book I'm writing (due out later this month), sometimes it's our strengths that derail us, not our weaknesses.  When I tried trading full-time, I found myself interacting with other traders and helping them--and losing trading opportunities in the process.  The reality was that I became a psychologist for a reason.  Being a meaningful part of people's lives is what really gets me up in the morning.  When trading took me away from who I actually am, my trading suffered.  

In the Forbes article, I link to a number of training resources and communities that can help us make the most of our trading.  That can help you determine if there are niches in markets that capture your strengths.  But before you worry about winning make sure you're playing the right game.  What are you really good at?  What gives you your happiest and most fulfilling experiences?  Your wins in life--inside and out of markets--can educate you about who your are and what you do best.  Your losses can be a wake up call, a nudge to become the best version of yourself that you can be.