Sunday, November 17, 2019

Peak Experience and Peak Performance

When I wrote the recent free blog book, Radical Renewal, I started with the insight that many of the problems we encounter in trading psychology are ones in which our egos become attached to short-term performance.  Once we make profit and loss a measure of our personal success and value, we introduce fear, greed, frustration, and overconfidence into our processing of markets.  To the degree that we become focused on outcomes, it becomes impossible to fully focus on sound trading process.  Too, when we are self-focused, we lose our focus on what is happening in markets.

One idea that emerged during the writing of the book is a bit different:  It's not simply the presence of negative emotional experience that interferes with good trading performance, but the absence of distinctively positive experience.

The psychologist Abraham Maslow wrote about "peak experiences", which are powerful experiences of positive emotion, meaning, and purpose.  In the book, I explore the idea that peak experiences are the positive equivalent of traumatic stresses.  Just as trauma is processed directly with the potential of reshaping personality, peak experiences exert a similar--but more constructive--reorganization of our experience.  Consider the "born again" experience of a religious person or the experience of falling in love.  These exercise an ongoing inspiration that gives us energy and positive emotional experience.

What supercharges our performance is a level of absorption in what we're doing that opens us to the flow state and peak experiences.  I question if we see ongoing peak performance without an engine of peak experience.  The trader's focus on negative emotion is the surest sign that flow states and peak experiencing are missing.  We achieve in any field when we discover something profound and meaningful that inspires ongoing effort.  That is the ultimate psychological edge of any entrepreneur.

Further Reading:


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Tuesday, November 12, 2019

The Two Paths Toward Winning

I recently interviewed with Seth Freudberg of the SMB Options Group, and the interview was posted to YouTube.  In the interview, I summarized research I had conducted at a number of different trading firms regarding what creates success for traders and portfolio managers.  As I suggested in a recent tweet, a major finding is that distinctive performance is based upon distinctive strengths.  The idea that all profitable traders have a particular "secret sauce" ingredient that creates their success is silly.  What we find is that success--in trading as in other fields--leverages native talent and interest, builds skill upon that base, and then channels those talents, skills, and interests in ways that exploit opportunity.  

In general, there are two paths toward winning for traders:

1)  The first path is where the trader has experienced success and is engaged in markets in ways that are interesting and fulfilling to him/her.  Very often, the approach to trading makes use of one or more strengths that show up in other areas of life.  For example, someone who demonstrates unusual intellectual curiosity outside of markets will make use of that curiosity in developing new sources of edge in markets.  Of course, markets are always changing, and so the trader who has experienced early success must work to maintain that success.  Like a talented athlete, this trader is always working on his or her game, refining and expanding skills and finding new opportunities.  Working harder and better at your game:  that is the first path to success.

2)  The second path is where the trader has not experienced success and is frequently frustrated in his or her engagement of markets.  Such a trader may work harder and harder, but the path to progress is a slow one.  Over time, the trading takes energy; it does not energize.  That is one of the best signs that this trader is playing the wrong game.  All the work on refining skills won't be helpful if you're playing the wrong game.  Getting better and better at implementing a random chart pattern that lacks edge is not going to lead to distinctive profitability.  Working harder and harder at approaches to trading that don't leverage your talents, skills, and interests will similarly lead to mediocre results.

If you look at most performance fields, you'll see that each one actually incorporates specific roles that require unique skills and interests.  On a baseball team, the role of pitcher requires very different skills from the role of outfielder or catcher.  In an orchestra, the violin player is "playing a different game" from the percussionist and keyboardist.  The medical world has space for pediatricians, psychiatrists, and surgeons:  very different "games" indeed!  A huge part of success is finding the game that is right for you, given your native abilities, your interests, and your skills.  Very, very often you have to try many paths to performance before you find the one that is right for you.  Indeed, trying out all specialties is a requirement in medical training and in many formal training programs at investment banks.

The most popular TraderFeed post of the year was one that called out many providers of "trading education" for promoting strategies that have no edge whatsoever.  That's a different way in which we can find ourselves playing the wrong game.  A huge part of the learning curve for a developing trader is trying different approaches to markets--shorter term, longer term, discretionary, quantitative--and different markets to see which "specialties" truly fit with talents and passions.  Only then can we find sound mentoring to help us play the right game the right way.  There are some excellent resources in the appendix to my blog book that point the way toward such mentoring.

That is the challenge of trading:  There is no single path toward winning.  The challenge is to find our path.

Further Resource:

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Sunday, November 10, 2019

How The Market Cuts You Up


Perhaps the best trading psychology advice ever:

Move the heart, switch the pace, look for what seems out of place



I find you in the morning

After dreams of distant signs
You pour yourself over me
Like the sun through the blinds
You lift me up

And get me out
Keep me walking
But never shout
Hold the secret close

I hear you say
You know the way

It throws about
It takes you in
And spits you out
It spits you out

When you desire
To conquer it
To feel you're higher
To follow it

You must be clean
With mistakes
That you do mean
Move the heart

Switch the pace
Look for what seems out of place
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Friday, November 08, 2019

How FOMO Can Help Your Trading

I recently posted an article about how we can use our greatest weaknesses to become valuable strengths.  Here is a dramatic example from a money manager I've been working with.

The portfolio manager suffered from that common malady of FOMO:  the fear of missing out on potential market moves.  Although he had rules for entering positions that carefully circumscribed risk and reward, he would see the market moving away from his ideal entry point and, fearful of missing out on the opportunity, he would chase the short term movement.  All too often that led to paper cut losses and big distractions during the day.

Now, of course, the usual coaching strategy to help this person would be to mentally rehearse scenarios that trigger FOMO, along with the "best practices" for managing such market opportunities.  Those visualizations would be accompanied by stress management techniques to minimize the anxiety that is a typical part of FOMO.  Such an approach can be quite useful.

But suppose we view FOMO as a potential trading/investing strength!  Perhaps the FOMO is simply an unhelpful channeling of a positive drive for achievement and performance.  Rather than try to eradicate the FOMO, how could we channel it in more constructive directions?

The way we did that was by transforming FOMO into FOMOP.  FOMOP, we decided, was a fear of missing out on one's process.  It is a fear of losing the process orientation that has accounted for long-term success.  

To deal with FOMOP, the manager actively recounted, during preparation time, instances in which deviations from good process led to losses.  He specifically looked for scenarios in the upcoming day's market action that could lead to process breakdowns and prepared for them as potential landmines.  He actually cultivated his fear; he didn't try to overcome it.  He wanted to be *appropriately* fearful of losing discipline, just as, say, an alcoholic might be appropriately fearful of relapse.

As a way of gauging progress, he graded himself at the end of the day purely on process grounds:  how well he generated ideas; how well he structured trades based on the ideas; how well he managed those positions and their associated risk; etc.  The goal was to achieve consistently high process scores at the end of trading days, whether those days had positive P/L or not.

The interesting finding has been that FOMOP works!  Indeed, this portfolio manager has shown dramatic improvements in the rigor of his trading (he executes his own positions) and investing.  This has translated into a better mindframe and, most critically, into improved absolute and risk-adjusted returns.  Instead of fighting his fear of missing out, he has channeled it in a way that improves his trading.  That fear came out of a positive drive for performance; it wasn't something to be battled and eliminated.  

What if most of our weaknesses are simply strengths channeled the wrong way?  How might it help our trading, our mindset, and our relationships if we can find the positive drive behind the weakness and use it to fuel one of our strengths?

Further Reading:

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Sunday, November 03, 2019

How to Use Our Emotions as Information

Emotion is the output of the brain's fast processing system, a rapid pattern recognition system that quickly captures whether a perceived entity or event is good or bad for us, safe or dangerous, something to embrace or something to avoid.  If we had to rely on slower, analytical thought to assess if an oncoming car was a threat, we would be in a collision by the time we reached a conclusion.  Our emotional processing enables us to act quickly, facilitating fight or flight when needed.

The price we pay for sharing emotional/fast processing with the animals is that we can act quickly and not always accurately.  The salesperson who comes across as helpful and interested may or may not have your best interest in mind; the situation that you fear may actually be the very one you need to tackle in order to grow.  Emotion is necessary for navigating the world, but not sufficient.

There are traders who act impulsively--and unprofitably--on emotion and conclude that the answer to successful trading is to curb or even eliminate emotion during trading.  From this perspective, emotion is a weakness to be overcome if one is to trade rationally.  To put the matter politely, this is a limited view.  Eliminating emotion--even if it were possible--would be to remove our capacity for fast processing.  Good luck retaining a feel for markets if you're busy denying your feelings.  Imagine a parent who lashes out at a child out of anger or frustration and then concludes that he or she will solve the situation by removing all feelings from parenting.  Would they then become a good parent?

The most recent Forbes article tackles a very important topic in trading psychology:  How we can turn our weaknesses into strengths.  Rather than try to overcome or eradicate our feelings, we can channel them in a way that assists our trading.

Here's one way of doing that that:

If I feel something strongly about the market before I have conducted my usual analyses, I immediately entertain the hypothesis that if I'm feeling that way, perhaps others are as well.  In other words, before I do my preparation, I'm processing the same charts, the same headlines, and the same social media chatter as everyone else.  If what I'm perceiving frightens me or makes me think a phenomenal opportunity is at hand, I want to consider the possibility that this is a consensus perception.  In that context, my feelings are not an automatic guide to action, but rather are important information to consider when conducting my pre-market preparation.

So let's say that there is a tremendous amount of bearish chatter among market participants and I'm becoming worried about the possibility of a bear market, triggered by trade wars, political conflict, and economic weakness.  Recognizing my fear and acknowledging it enables me to see if the market data I look at actually support such a view.  In recent weeks, for example, the data have not been supportive.  Indeed, a number of formerly weak market sectors and international indexes have been displaying relative strength.  Noting the disparity between my emotional/fast processing and my analyses allows me to consider the possibility that bears will be trapped on any move higher, sustaining the upside.  In such a case, my emotions are a source of information, not a weakness to be battled.

Many traders turn to techniques such as meditation as "enlightened" ways to rid themselves of emotion.  It's not clear to me that this is the true purpose of meditation, certainly not in the Buddhist and western religious traditions I reviewed for my recent blog book.  Rather, the idea is to gain awareness of our feelings, while simultaneously acting as their observer.  The Forbes article summarizes important research that finds that embracing our vulnerabilities actually makes us stronger, more whole.  Our emotions can derail our trading or inform it.  It all depends upon our degree of mindful self-awareness.

Further Reading:

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