In this post, I would like to introduce the concept of co-trading. Co-trading is the collaboration of independent, curated traders within a coworking environment. Let's unpack what that means: First off, co-trading features true collaboration. That means the sharing of ideas and resources, as well as coordinated work on personal and professional development. Within a co-trading environment, collaboration can include mentoring, coaching, research, brainstorming, performance review--all of the functions that traditionally occur within a large trading firm, such as a hedge fund. The members of co-trading teams, however, are independent traders. They affiliate based upon shared values, interests, and experience. Unlike a hedge fund, co-traders trade their own capital, retain their earnings, and bear the brunt of their losses. What is shared is intellectual capital and the benefits of operating within a community. This works best when the co-working community is curated: carefully selected to ensure that the commitments and benefits are mutual. All of this occurs within a coworking environment. Coworking is well known among professionals involved in startups. Sharing a work environment with others who are passionately committed to what they do creates and sustains a high level of energy. Networking among talented professionals generates learning and growth. Surveys find that people thrive in coworking settings: they are more engaged in what they do and happier in their workplaces. For a single membership fee, coworkers enjoy everything from comfortable lounge, cafe, and meeting space to shared technology and the flexibility to work individually or within teams. To be sure, co-trading has occurred in other settings. Traders have affiliated in online chat rooms and groups for years. So-called arcades have been trading firms that offer workspace and technology to traders who rent desk space. Co-trading is different in that traders are physically located in their work areas with other traders, but also potentially connected via videoconferencing with other co-trading pods at other locations. The co-trader has the opportunity to trade at multiple affiliated locations, while traveling across the country, for example. Perhaps most important of all, however, is that co-traders operate within larger shared office spaces with professionals from other fields. Across the aisle could be professionals starting up businesses and developing apps, as well as people engaged in fields as diverse as journalism and business consulting. In a recent trip to a coworking space in New York, I met with an insightful professional mountain climber who conducts personal development hikes for his clients. I would never encounter such a person in my normal daily, office-based routine. These are people who can expand each others' horizons. If I belong to the coworking space in Connecticut, I can choose to work in the affiliated New York or Chicago office. I can connect with my team with high speed videoconferencing, and I can participate in a new team. The coworking space is available 24/7, which means that I always have a home away from home, free of the distractions of home. In my co-trading site, I can attend online education events with members of my team and collaborate on implementing what we've learned. That turns trader education into true continuing education for professionals. Of course, co-trading won't be for everyone. Beginners in financial markets will benefit from joining firms that offer high quality training. Experienced traders who rely on proprietary technology, teamwork, and capital will want to retain the benefits unique to a proprietary trading firm or hedge fund. Co-trading will most benefit experienced traders looking to maximize their independence, while simultaneously maximizing their access to other experienced peers. This coming week, I will be exploring coworking spaces for traders. My sense is that this could be a dynamic way of blending the benefits of teamwork with the advantages of independence.
Traditional trading psychology has tended to focus on the emotional side of human nature as a source of performance success: both controlling emotions and maintaining discipline and using our feelings as intuitive sources of information. Both are essential; indeed, it is only by becoming observers to our emotions that we can learn from them. Still, the research I've undertaken to identify the characteristics of successful traders has consistently shown that cognitive traits, and not just emotional ones, are essential to superior performance. This is why, for example, I have emphasized the structure of the learning process as a source of mastery in the Enhancing Trader Performance book and why I devoted a large section of the Trading Psychology 2.0 book to the development of creativity and the cultivation of our cognitive strengths. Show me a successful trader, and I'll show you someone who displays unusual talents in processing information. The most basic of these cognitive strengths is focus. Indeed, the ability to sustain focused attention is seen (albeit in different ways) among both successful daytraders and successful investors. In the daytrader, we see the ability to sustain intense concentration on a number of variables simultaneously. It is this parallel processing skill that enables the daytrader to act quickly on shifts in buying and selling flows. Conversely, the skilled investor maintains a depth of concentration over time that allows for a deeper understanding of fundamentals and the supply/demand changes that result from monetary and geopolitical sources. The challenge faced by these market participants is distraction. Distraction interferes with focus and thus reduces the quality of our information processing. Distractions can be emotional in nature, but can result from environmental sources as well. Indeed, I've consistently found that both home environments and trading floor environments are poorly suited for the optimization of focus. This is why many of the successful traders I've known have made it a practice to get away from their screens for periods of time during the day to both renew their concentration and to increase their focus on the bigger picture of what they are doing. All of this is important because the quality of our focus mediates the quality of our access to intuition and prior learning. When we have superior focus, we literally have greater access to a larger library of information. In a highly distracted state, we lose any edge we might otherwise possess, because we simply cannot access the sources of that edge. Indeed, it is only through focused immersion in information that we, over time, develop a keen capacity for intuitive pattern recognition. Without that immersion, we never truly internalize our learning. This is why so many successful traders value sleep and physical exercise as part of their daily routines. They realize that fatigue and burnout increase our susceptibility to distraction: to optimize our focus, we have to keep ourselves in an energized and rested state, renewing our willpower. So what can we do to build our focus and reduce distraction? Several steps stand out in my experience: 1) Optimizing our physical environment - Surrounding ourselves with the people who contribute to our decision-making and tuning out others. Creating a trading station that is comfortable and well laid out, with the right lighting, temperature, and sound level. 2) Optimizing our cognitive environment - Making sure we have ready access to the information essential to our decision making, but not more than that. Laying out screens for ready comprehension and action and avoiding a cluttering of our information environment. Controlling when and how we access chat, email, and phone calls to minimize external noise. 3) Optimizing our capacity for focus - I've written extensively on the topic of biofeedback as a tool for improving focus. Indeed, biofeedback is a major treatment modality for children who suffer from attention deficits. In biofeedback, we learn to sustain frontal brain activation over time, literally training ourselves to build our attention muscles. This helps us filter out distractions and maintain focus for longer period of time. 4) Optimizing our personal lives - In addition to maintaining a high quality of sleep and exercise, many people find that how they eat and take in caffeine and sugar impacts their level of focus. Quite a few traders I've known have made use of coaching, not to work on their trading per se, but to sort out challenges in their personal lives (relationship issues, family matters, financial challenges) that can be distracting to their trading. It is generally a mistake to try to put such issues out of your mind. Finding time and a proper forum for addressing the issues directly helps prevent them from intruding on trading time. As the quote at the head of the post suggests, it is very difficult to achieve great things if we're distracting by little things. Building our focus from day to day is helpful in sustaining a greater life focus, where we're not only doing things right, but doing the right things.
Real time stress is one of the most common psychological challenges faced by competitors in performance activities. Even very experienced golfers have been known to get the "yips". Most public speakers have had the experience of going blank during a major talk. The student who has studied all night for the exam can "freeze" during the test and forget what he or she has learned. Traders who have laid out promising plans for trades can find themselves exiting on a small move against them or--worse still--struggling to "pull the trigger" to enter the trade. What causes this stress--or performance anxiety--and what can we do about it? First, note that not all stress is a bad thing. As I pointed out in a recent post, anxious feelings can point the way toward our growth. In such cases, tackling the nervousness that occurs when we push our boundaries is very constructive. The last thing we want to do is try to bury the feelings that point the way toward our growth! Conversely, not all anxiety is performance anxiety. Some people experience anxiety across a range of life situations, not just during periods of performance demands. Broader anxiety problems, such as generalized anxiety disorder, panic disorder, and various phobias, require professional assistance, usually with behavioral methods and medication assistance. True performance anxiety is specific to performance situations. It occurs when we become so worried or concerned about the outcomes of our performance that our nervousness interferes with the performance itself. Fear of loss is the most common reasons traders experience performance anxiety. Instead of accepting loss as a natural part of playing a probabilistic game, such traders view loss as a threat. This is important to understand. It's not simply losing money that creates anxiety, but the interpretation of loss itself. When we view losses as threatening, we naturally respond with the fight or flight stress response--and this colors our subsequent decision making. Very often, we choose flight over fight and fail to enter good positions or bail out of existing positions at poor levels. Sometimes this performance anxiety is the result of having taken large--too large--losses in previous trading. The emotional upset associated with those outsized losses return when positions move against us, so that even normal noise is experienced as threatening. In a previous post, I noted that drama in P/L can create trauma in our emotional responses. Sound risk management is essential so that we ensure that losses cannot become truly catastrophic to our accounts--and to our psyches. A rule that I have long advocated for active traders is to make sure you do not lose so much in a trade that you cannot finish the day in the green. Similarly, you don't want to lose so much in a week or month that you cannot finish the month or year positively. This is helpful psychologically, as no losses become undue threats to our success. Should you find yourself overreacting to past losses, it is very helpful to return to modest risk taking, regain consistency in trading, and gradually rebuild size as the sense of security and confidence return. This is how people recover from all traumas: repeated experiences of mastery and safety eventually reduce the sense of threat. The behavioral techniques described in The Daily Trading Coach are particularly effective in dealing with performance-related stress. Visualizing hitting one's stop and taking planned losses while mentally rehearsing constructive self-talk and keeping yourself calm and focused with deep, slow breathing is a way of reprogramming catastrophic self-talk and the upsetting impacts of past losses. If those visualizations are performed repeatedly before trading hours, they create what psychologist Donald Meichenbaum referred to as "stress inoculation". We expose ourselves to manageable threats and this exposure provides us with a sense of mastery and perspective that helps us deal with drawdowns in real time. I have worked with many successful traders. The great majority lose money on a substantial number of their trades. Where they succeed is that they keep the size of the losers small and profit more meaningfully on the winning trades. If we cut our winning trades short because of performance anxiety, we create a situation where it would take an unrealistically high hit rate on our trades to ensure profitability. Ironically, it's when we can accept and even embrace losses--ensuring that we learn from losers and thus take away something of value from our setbacks--that we can make the most of our trading strengths.
Two factors stand out among the successful traders I've been working with: 1) They collaborate: They find like-minded colleagues and reach out to discuss ideas, research, and performance. That collaboration allows for a richer processing of information, as traders not only see something on a screen, but actively work with that information. Many traders fall short of their potential because they aren't processing information in the ways best for them. Active processing is great, but many traders excel at interactive processing. 2) They find multiple ways to make money: They aren't limited to one strategy or pattern to trade. That allows them to succeed when markets become slower or when trends are not dominant. Many times, the discovery of new ways to succeed comes from the collaboration mentioned above. Seeing how other traders are succeeding sparks ideas for a trader. Imagine how successful you could be if you cultivated a fresh source of edge each year. Over time, you would have quite a portfolio of methods for succeeding, and you could reap the benefits of diversification: always having some methods working while others are not. A great way to not succeed is to be isolated and locked into a single style of trading. To go far in trading, as the proverb above suggests, it helps to go together. So what makes collaboration successful? What do you look for in a trading colleague? This recent Forbes article highlights the research pertinent to teamwork and the factors that will help you effectively collaborate with others:
Of all the psychology problems I observe among highly competitive traders, frustration is the most common. Indeed, as I recently noted in a presentation to fund managers, frustration is a great example of the principle that strengths, taken to an extreme, can become vulnerabilities. When we are achievement oriented and demanding of ourselves, having something get in our way breeds a natural frustration. That frustration, in turn, triggers a fight/flight state and suddenly we are no longer nicely grounded in our brain's prefrontal cortex. Instead, we activate motor areas to cope with the situation and act in ways that we would never entertain if we were calm and focused at the start of the trading day. As the above quote suggests, frustration comes from expectation. When we have a goal and the achievement of that goal becomes blocked, we are wired to take action to remove that block. That can be helpful if, say, our path out the driveway is blocked by high, wind-blown snow. The frustration of the situation can energize us to take out the shovel and remove the block. But what if we cannot take remedial action? If a car suddenly pulls in front of us without signaling and nearly causes an accident, there is no ready, constructive action we can take. So we blow off steam and curse, hit our horn, etc. Suppose, however, that we are in a *rush* to get to our destination. We need to be on time, and the car suddenly pulls in front of us and causes us to get stuck at a red light. That's when frustration is likely to be channeled as anger. The inconvenience is now processed as a threat and our fight/flight mechanism goes into overdrive. It's not just having a blocked goal that creates frustration; it's the *need* to reach that goal that sets us up for a performance-destroying response. Should we react to the traffic situation by running the red light or suddenly switching lanes ourselves, we could create a real accident. Those are actions we would never take under normal driving conditions. As I point out in The Psychology of Trading, many times frustration and anger are responses to current situations that bring up the feelings from prior challenges and conflicts. In such cases, our frustration seems out of proportion to the immediate situation. That is because we are responding to past situations, not just the (similar) current one. For example, if we experienced considerable difficulty learning in school, perhaps because of a learning disability, normal setbacks in trading can feel like past failures, eliciting self-criticism, negativity, and frustration. In such cases, our frustration problems will not be limited to trading contexts. When the past intrudes into the present, that typically affects a broad swath of life domains, including relationships and work. If those patterns are interfering with many life areas, it can be very helpful to seek professional help. When frustration is more situational and shows up dominantly in the trading context, the techniques described in The Daily Trading Coach, such as building positive associations and exposure methods, can be quite helpful. (Another way to access resources relevant to frustration is to Google "Traderfeed frustration" and you'll see quite a few posts pertinent to the topic). One particularly powerful approach is directly addressing the perceived *need* that fuels the shift from frustration to anger. It is natural--and not necessarily problematic--to be frustrated when we don't reach a desired end. When we tell ourselves that we *must* achieve that goal *now*, we set ourselves up for overreaction. In such cases, training ourselves to embrace losses and learn from them is very helpful to our trading psychology. Quite a few times, I have entered a good trade with a positive expected return and it hasn't worked out. When that has occurred, I will say to myself, "That should have worked!" That leads me to entertain the hypothesis that the market cannot sustain the expected direction and may indeed trade the other way. That can be very useful when a breakout trade suddenly stalls and returns to a prior trading range. Embracing the loss and now looking for a possible retracement of that range, given that others are similarly trapped, can turn the losing trade into a tuition for an even more profitable winning trade. Other times, we may extract useful information about our trading mistakes from losing trades. Perhaps our entry execution was sloppy, triggering us to work on firmer rules for entries. That channels the frustration constructively, away from anger. Many traders I work with become very alert to the cues of mind and body to recognize frustration as it's brewing. They are able to recognize that as an emotional pattern that has cost them money in the past, and that triggers them to step back from screens and regain emotional equilibrium. We are best able to change an emotionally driven pattern if we're aware of that pattern. Mindfulness is a great antidote to reactive trading in the heat of battle.
Most traders have dealt with runs of winning and losing trades. We can expect those to occur simply as a function of chance. A greater problem occurs when we have runs of sound and unsound trading processes. In other words, we become inconsistent in our preparation for trading; inconsistent in our research; inconsistent in our sizing and risk management; etc. This inconsistency threatens any possible edge that we can have in markets. One of the reasons I encourage traders to keep regular report cards to grade their performance is so that they can catch inconsistency as early as possible, before it can sabotage their trading and their mindset. A trader I recently met with scored himself unusually low on his ability to anticipate risk. He simply failed to engage in scenario planning should his position fall out of bed on adverse news. Because he had been trading well, he became comfortable and complacent. We used that lapse to help him make the scenario planning part of his daily checklist. The goal was to review the "what if" contingencies--and mentally/emotionally prepare for them--*before* putting the trade on. So what causes us to become inconsistent? There are three important possibilities: 1) The market has changed. Our trading can become inconsistent when markets themselves exit one regime and enter another. As trends change, correlations among markets change, and volatility changes, what had been working may no longer bear fruit. If you find that your trading processes have remained relatively constant but your results are noticeably worse, you want to take a deeper look into what you're trading and whether it has become a different market. If so, you want to make sense of that new regime and develop fresh trading ideas based on new understandings. Be especially attentive to alterations you have made in your trading processes in reaction to changed markets. One trader I recently spoke with found himself trading more frequently as markets became less volatile, in essence pressuring himself to make money by taking more trades since each trade was yielding less. That overtrading led to poor results. 2) Our state has changed. In the example from the second paragraph above, the trader became overconfident and overeager after a period of winning. In other situations, we lose consistency when we become frustrated or fearful. The state change into fight or flight mode causes us to act in a reactive, unplanned fashion. At such times, we place trades as much to manage our states as to optimize our profitability. If we find that critical portions of our planning have been overlooked in the heat of battle, then our goal is to work on staying calm, focused, and mindful in real time. In my Trading Psychology 2.0 book I discuss self-hypnosis as a way of replacing negative states with positive ones. The Daily Trading Coach covers a number of methods for state-shifting, including the use of trance and behavioral exposure techniques. When we can recognize problem states in real time, we can then use meditation and guided imagery methods to switch into a calm, focused mode before the agitated state can hijack our trading. 3) We have become fatigued. Fatigue is a special kind of state change, as it relates to energy level more than emotionality. Very often traders spend long hours in front of screens and overtax their willpower. This is a short-term equivalent of the burnout described in the recent post. In that situation, we need to renew ourselves, typically by getting away from screens and entering a different mode and state that is stimulating and renewing. Taking an exercise break midday, getting off the desk and talking with colleagues--these are ways of shifting gears that can be renewing. Getting the right amount and quality of sleep at night is also an important consideration, as the lack of restorative sleep can lead to diminished concentration and susceptibility to inconsistent trading. The positive impact of healthy eating, healthy exercise, healthy sleep patterns cannot be when it comes to optimizing one's energy level. Building positive, stimulating activities into non-trading time can also be highly renewing. In short, there is no single answer for inconsistent trading, as there are many potential causes. As a rule, if your process is inconsistent, then state changes could well be the trigger and culprit. If your processes have remained rigorous but results have gone downhill, it could be a sign of changing market regimes--important information in itself. Inconsistency in trading generally means that you have fruitful work to do, either on yourself or on markets.
It's no secret that I'm a skeptic regarding traditional technical analysis, per the recent blog post. Still, I respect objective reality and acknowledge that I've been honored to know a number of successful traders who make active use of technical ways of understanding markets. My sense is that they are skilled in identifying stable market regimes and the patterns that characterize those regimes. Peter Brandt's newsletter stands out as a technical resource that covers a wide range of assets, with a track record documented in real time. The newsletter also shares the accumulated wisdom and experience of a seasoned trader, an equally valuable contribution. It's hard to dismiss technical analysis entirely when an experienced hand is garnering real time returns that beat the pants off most money managers. So how can a trader learn the best of technical analysis and avoid the hype and mumbo-jumbo? My favorite text is Cliff Sherry's classic, The Mathematics of Technical Analysis. Another phenomenal resource is the cycle work of John Ehlers, which forms the basis of another service with an outstanding track record: StockSpotter. Both take a quant approach to the analysis of price behavior, adding an important element of rigor to the common use of charts and indicators. Brandt's newsletter stands out as a real time resource that not only makes market calls, but explains these in technical terms. Another recent set of learning resources has been offered by Adam Grimes. He has recently supplemented his book on technical analysis with a free course and a hands-on workbook. The workbook is a compendium of resources Adam has offered over the years, spanning trading psychology, the psychology of learning, chart reading, and basic statistical methods for assessing the validity of technical patterns. Adam makes the excellent point that technical formulations are really ways of identifying patterns that capture two factors: value (mean reversion) and momentum (price continuation). He stresses the importance of understanding the "stories" behind charts and price action, not simply following preset indicators and chart formations. There is a lot of lazy technical analysis out there. One thing stressed by all the above resources is analytical rigor. Technical analysis can provide valuable market insights, but not shortcuts.
In the Enhancing Trader Performance book, I identify a powerful obstacle to developing successful trading strategies: perfectionism. "Perfectionism clearly plays a role in preventing us from cultivating superior strategies," I wrote. "In a very important sense, perfectionistic traders are not seeking to make money. They are trying to not lose money. Their intolerance of loss keeps them moving from method to method in search of a certainty that markets cannot provide." (p.157). The phrase here is apt: *intolerance* of loss. The perfectionist is not seeking self-improvement. The perfectionist is intolerant of anything that falls short of ideal. This sets the stage for self-blame and frustration. While it might look like a shield of high standards that protects us, in fact that shield burdens us, weighing down our performance. A review of one's trading journal often reveals when perfectionism is a problem. A trader might have identified a good idea, placed a trade at a good level, and taken profits at a target, only to see the trade go further in his or her direction. The journal entry will focus on what the trader *should* have done (holding the trade longer) rather than what the trader did well. The "should" is not grounded in any tested rule; that same trader will be equally self-blaming over a trade that is initially profitable but reverses when he or she holds for a further target! Such perfectionism is hindsight bias at its worst. Note how such perfectionism turns a winning trade into a psychological loss by exclusively focusing on shortcomings. It is not constructive, because it does not create concrete learning lessons. It is frustration channeled as self-blame. As such, it robs us of the fulfillment we otherwise would feel after a good trade and leaves us feeling diminished. Over time, such self-blame takes a toll on our energy and outlook, contributing to the problem of burnout. How many of your journal entries and how much of your review time are spent on what you did wrong? To what degree do you learn from your successes and reinforce your best practices? If you are parenting a young child, you would use positive reinforcement, not just punishment, to teach the right behaviors. As a trader, you are always a young child, always developing, always learning. You want to be as constructive with yourself as you would be for a daughter or son you love. Perfectionism wears people down. Perfectionism tears people down. We want to channel frustration toward learning and improvement, not toward self-blame. We want to direct our anger toward our problem patterns, not toward ourselves. That is a very important distinction. So what can we do about perfectionism? Three strategies stand out: 1) Restructuring Our Reviews: By giving ourselves realistic report cards, grading each area of our trading process, we can readily identify what we're doing well and what we're doing that needs improvement. We want to go forward with positive goals--building on our successes--as well as remediation goals, correcting our weaknesses. Every review should identify strengths and improvements and should lead to goals of continuing to do what is working. Every review should also focus on constructive steps we plan to take to improve our shortcomings. The focus of the review is on improvement, not blame. We focus on getting better, not being perfect. 2) Cognitive Strategies - The cognitive strategies described in The Daily Trading Coach enable us to identify negative thought patterns as they occur, so that we can redirect our processing in real time. Very often, perfectionistic ways of thinking are ones we have inherited from parents, teachers, and other early life role models. When we can separate their voices from our own--a great application of cognitive journals--we allow ourselves to stand outside our perfectionistic patterns. In short, when we adopt a cognitive perspective, we turn rigid, negative thinking into the enemy. That allows us to coach ourselves in an empowering way, not in a way that demoralizes us. 3) Behavioral Strategies - Very often, perfectionism is triggered by frustration. Of course it's frustrating to take off a trade only to see it go much further in our direction. That frustration shows up as physiological tension, which in turn cues the negative thought patterns. One of the greatest insights I came to as a trader was the recognition that my poor trading was entirely state-dependent. When in the fight-or-flight mode, I was much more likely to miss what was happening right in front of me and impose my own needs onto markets. Behavioral strategies allow us to pull back from trading screens and change the state we're in, becoming more calm and focused--and much more able to recruit solid coping skills. Sometimes negative, perfectionistic thinking is pervasive, occurring across life domains, not just during trading. If that is the case, it's worth consulting with a psychologist and developing a structured plan for changing those patterns. It's also worth ruling out depression as an underlying problem, as the depressed state can lead to chronically negative thought patterns. As I emphasized in the post on diagnosing our trading problems, it's always a warning sign when patterns disrupting our trading are also disrupting other areas of life. That's when we want to move beyond coaching and get concerted professional help for overlearned patterns. We will never be perfect as traders. That's what keeps us ever-learning, ever-growing. Our challenge is to use our shortcomings as inspirations, fueling continued improvement.
Author's Note: The extensive posting on how to diagnose your trading problems is helpful background to this series on challenges in trading psychology. Before seeking solutions to issues that impact trading, it's important to figure out whether those issues are trading problems impacting psychology or psychological challenges interfering with trading. The above linked post can help you make that important distinction--as well as a few other, key ones. It's not unusual to hear young traders declare their passion for trading and their complete focus on developing themselves as traders. When I hear that, I worry. Very often those same traders are ones that burn out when they hit inevitable stumbling periods in their trading. They pour themselves into markets and when markets don't give them anything back, they have nothing more to give. Quite simply, they're burned out. There are a few tell-tale signs of emotional burnout among traders, including loss of motivation and energy; negative, hopeless, and/or resigned thinking; and a loss of interest in life activities. When I have been in a burnout state, I have felt overwhelmed. I can't find the mental or physical energy to take on another task or responsibility. It's a complete sense of overload. In that state of overload, it's impossible to focus fully, further contributing to missed opportunities and poor decisions. Equally crucially, in the burnout state, we cannot engage in high quality learning. We're merely coping with our experience, not actively processing and learning from it. For these reasons, burnout can take the form of a downward spiral, as lower energy and focus contribute to further performance problems, which in turn drain us of energy. Lack of productivity--working many hours, but accomplishing little--is often an early sign of burnout. Negative attitudes are also an early sign. Many times, burnout in trading leaves people with little energy for the rest of their lives: relationships, family, exercise, etc. This, too, becomes a downward spiral. When we lack energy, it's easy to avoid activities that initially take effort, but that could ultimately renew us. Here are three things we can do to address burnout when it appears and also prevent it from occurring in the first place: 1) Take Breaks - We can exhaust ourselves simply by sustaining concentration for long periods without any form of renewal. Taking breaks during the trading day can help us review performance and make corrections. It can also help us relax, clear the head, and renew our energy. The key to effective breaks is that they keep you active, but not in the way you're active in front of trading screens. Physical activity, social activity: These are stimulating, but in different ways than trading. Changing gears helps you restore those willpower muscles. This principle applies to weekends and vacation periods as well: those are longer periods of renewal. When you are truly burned out, trying something different at work is the wrong answer. Any "trying" will simply further exhaust you. Taking a complete break from work allows you to return with energy and focus, attacking your situation with a fresh perspective. 2) Build In Rewards Even When Trading Is Not Rewarding - I am consistently impressed with how the most successful traders find work-related rewards outside of P/L. Many of them work in teams and thus reap the psychological rewards of developing junior talent and contributing to others. Many of them conduct their own research efforts and thus find fulfillment via intellectual curiosity. During a period of flat to down performance, those research efforts may target new edges in markets, providing a sense of opportunity. In all of these cases, traders evaluate their performance on multiple dimensions, not just P/L. They find intrinsic rewards in managing money and are thus less likely to burn out during frustrating times. 3) Build In Rewards In Life Outside Of Trading - As I emphasized in a recent post, using free time as down time is often a mistake. You want your time outside of trading to be "up" time. That is, you want your time outside of work to be energizing and stimulating--giving you energy at times when you're feeling sapped. It is this positive use of time that prevents temporary overload from becoming a downward spiral of burnout. Romantic relationships, friendships, physical exercise, personal interests, travel--all of these are potentially energy-giving. If you find yourself unable to enjoy non-trading related rewards and unable to benefit from the breaks you take, consider the possibility that your situation is more than a burnout. Depression takes many forms and affects a significant portion of the population on a 12-month basis. Especially if you have a family history of depression, consider seeing a qualified professional for a diagnostic screening. There are many evidence-based therapies and medications for depression that are worth looking into if burnout seems chronic. The key is that true burnout is situational. Once we re-establish an equilibrium in lifestyle, we quickly regain our psychological equilibrium. Balance in daily activities--and in life overall--ensures that no one setback in life will overwhelm us. A great formula for well-being is a diversified and full life portfolio.
An interesting post from Adam Grimes explores the limitations of modeling successful people in trading. There is much more to success than merely copying what others are doing. And yet I find consistently that the greatest success among developing traders comes from working within teams. For the last couple of days I've been working at a firm where all traders operate in teams and the teams operate within larger trading groups. Every two weeks the traders meet in their groups to review performance, set goals, and learn from the experience of others. The team leaders talk about their trading and that sets an example for the other traders. Quite literally, teams expand the number of role models possible to a trader. We learn, not from merely copying others as Adam points out, but from understanding what they are doing and how. Seth Freudberg heads up the Options Tribe at SMB, where traders, operating from their own home locations, learn specific options strategies and then meet as a virtual team to work on performance. Every month I get a P/L statement from Seth regarding the team's performance, so I see how well the development of the traders has progressed. The returns have been very positive and consistent, and that is because there has been teaching by example. Seth trades the strategies, shares his mistakes and successes, and establishes a culture where every participant is both teacher and student. The mistake developing traders make is viewing education as a one-way process, where there is a teacher with all the wisdom and knowledge and students who absorb it all. The team approach features the leader as an advanced student. This creates an environment in which sharing becomes the norm and everyone takes responsibility for the development of others. The advanced students learn from each other and also from the ideas and successes of the newer students. Those newer students absorb the lessons from the more experienced role models. Want to immediately benefit from the power of teams? Find just one study partner for 2018: someone you will work with in tracking markets, learning from successful and unsuccessful performance, and having fun in growing as a trader. In traditional Jewish settings, learning occurs chavrusa-style, where students pair up and intensively prepare for lessons and challenge each other to come up with new and deeper understandings. Just one study partner can create a dynamic learning environment. There are more resources out there than ever, including valuable training resources. (I see Adam has come out with a new book to guide traders through his free online course). We can team up with others participating in trading communities (great way to find like-minded study partners) and create review processes that supercharge our trading. Teams keep each other focused, they keep each other motivated, and they create multiple role models. Show me a successful businessperson, researcher, or athlete, and I'll show you someone who has benefited from teamwork. A great goal for 2018 is to double down on teaching others--and learning from them as well.
You've made strides in your trading. Results have been favorable. How can you ensure that today's success won't be tomorrow's flame-out? It's an important question. How many of yesteryear's Market Wizards would earn that designation from their recent returns? Not one of the Wizards in the original text was a true quant. If the book were being written for the first time now, we would see several math wizards highlighted. Times change. Edges in markets change. Today's success does not guarantee a bright tomorrow. How can we achieve, not just success, but lasting success? Greatness in trading can be found outside of trading hours. It can be found in how traders prepare for tomorrow's ideas and positions, but it also is found in how traders prepare for the long-term growth of their businesses. A good trader has an edge. The great trader is always developing edges for the future. Great traders treat their craft as a true business, maintaining an ongoing research and development pipeline. Show me how a trader utilizes their time outside of trading and I'll show you the odds of their long-term success. One trader I worked with years ago made a spectacular effort to teach himself programming, data management, and quantitative analysis while he held a full time non-trading job. With his new skills, he joined a portfolio management team and together he and his partner achieved multi-million dollar success. It took evenings and weekends of effort to get to the point of being prepared for success. A major challenge is that traders don't feel they have the time for building their pipelines. They are so busy trading that they have little time and energy for cultivating tomorrow's sources of edge. They try to manage their time and create opportunities for research, but aren't productive in those leftover hours. In a recent Forbes article, I wrote about how we can find our success by focusing less on time management and instead energizing our time. Happiness inspires productivity, because we are most likely to immerse ourselves in activity that is intrinsically rewarding. When we find opportunities that truly speak to us, the work effort *gives* energy. Research and development is no longer just another task in a to-do list; it is the pursuit of a vision that provides joy and meaning. This is why so many traders who experience long-term success display unusual intellectual curiosity. They are driven, not just by money, but by the process of discovery. Exercising a strength is not work; it is a high level of play. Our trading success is most likely to last if it is part of a process that exercises our highest capacities. You can find tomorrow's edge in what intrigues you today.
There are two types of traders: One looks for patterns and relationships that will occur universally and trades those consistently over time. The other looks for stable periods in markets and trades the patterns and relationships that typify those regimes. For the first trader, trading psychology is all about consistency and maintaining a consistent mindset. For the second trader, trading psychology is all about flexibility, creativity, and adapting to changing conditions. One is a stiff tree; the other is bamboo and willow. The stiff tree has a hard trunk and looks strong. It breaks when the wind blows hard. Bamboo and willow have no trunk and look frail. They bend with the wind and don't break. There is a distinct regime in the current market. There are patterns and relationships playing themselves out with regularity. How is your P/L? Are you the "strong" and stiff tree, or the "weak" and flexible reed?
So here is a chart of two trending markets. What are they? The blue line is pretty familiar: it's SPY since the start of 2016. That's a pretty high Sharpe trend. The red line is not so familiar: it's a 100-day moving average of the average daily true range of SPY. In other words, the red line represents average daily movement (realized volatility) of SPY. Note that we're getting roughly one-third the movement each day that we saw early in 2016. And it's not getting better: the past five trading sessions have averaged a daily true range of .33%. That is closer to one-fifth the movement we saw early in 2016. No wonder active traders have been challenged lately. It's difficult being a directional trader when there is little movement in the instruments you're trading. The one refrain I've heard from those active traders over the past two years is: this is going to turn around. Stocks are too expensive. Rates are too low. Volatility is too cheap. Everyone wants to catch the turn and profit from the break. So stocks dip, VIX bounces, put/call ratios go to the moon, and the trends continue. Moderate growth with modest inflation and low interest rates that make stocks a desirable carry instrument mean that SPY has ground higher and vol has ground lower. Traders' forecasts for reversals in stocks and vol have had more of a psychological grounding than a logical one. Hope is not a business plan and it's not an edge in markets. What has been more successful have been strategies that have targeted small cap and higher volume momo stocks that provide greater average daily movement. Also successful has been migration to asset classes providing greater volatility, from commodities to cryptocurrencies. And what has been successful has been true trend-following: investing (not actively trading) equity and vol products. The point here is that markets go through regimes and those regimes can last longer than traditionalists can stay solvent. The momo boom of the late 1990s killed short-sellers accustomed to price action from the 1980s. The collapse of momentum and bear markets of 2000 and 2008 wiped out many who had benefited from the prior bull market. Now we're seeing a regime in which there is a major bear market in volatility, quite the change from 2007-2009. This too shall change. As I've noted earlier, volatility bottomed in late 1993 and late 1995, only to see the bull market really roar on higher volatility into 2000. It's not inconceivable those dynamics could repeat themselves, with debt and low interest rates and fiscal stimulus stoking an already growing economy with low official unemployment. A rise in vol does not necessarily entail a bear market in stocks. But that is tomorrow. Our job as active traders is to profit today. We trade what we see, not what we crystal ball. Adapting to the current regime requires a rethink about what we trade and how we trade it. There *is* opportunity out there. One active trader I work with had career high P/L this past week--just as VIX was languishing in single digits. It can be done. But not by merely hoping.
Fascinating research by Andrew Lo and Dmitry Repin at MIT hooked traders up to physiological monitors to assess their emotional responses to markets in real time. They found that all traders exhibit emotional processing. The least experienced traders exhibited the most extreme emotional reactivity. The authors speculate that an important difference between experienced and inexperienced traders is that the experienced ones focus on their emotional experience to access intuitive insights. The least experienced traders become overwhelmed by their emotional experience in a fight or flight fashion. This could help explain why high levels of emotional experience were associated in their research with poorer trading returns in their subsequent research: moderate emotional arousal became a stimulus for focus for the pros, whereas high arousal becomes a distraction for the newbies. This points to an essential difference between a pro trader and an amateur. When the pro faces market challenges, he or she increases focus. When the amateur faces challenges, focus is overwhelmed. In the face of large market opportunity or threat, does a trader gain or lose focus? That distinguishes successful traders from less successful ones. In a recent post, I compared the successful trader with a sniper. The sniper actually lowers heart rate and body arousal as the target comes into focus. It would be an amateur who would become excited over the appearance of the target, allowing physiological arousal to interfere with aim. I knew I had become a professional psychologist when a client opened a meeting by expressing serious suicidal feelings and impulses. I immediately became very calm and focused and gave that person my fullest attention. There was no way I could have done that when I was first learning in school. It was repeated experience--and confidence gained from that experience--that enabled me to view crisis as opportunity, not threat. Every day of trading can be practice in developing focus. We can either exercise our concentration and attention or we can reinforce poor habits of distraction. The successful trader does not *control* emotions. The successful trader is sufficiently focused to learn from emotional experience.
For many years, as I was learning trading, a military poster of a sniper hiding in the brush hung on the wall of my office. In so many ways, the sniper embodies the strengths of the successful trader: * Significant learning and practice precede going into the field and developing expertise. The sniper shoots at many targets under realistic conditions before ever going into actual battle. * The sniper must adjust to conditions in the field. Hiding is different in the desert than in the forest. Shooting is different in the wind and rain. * The sniper maintains supreme self-control. The excited, high-fiving sniper doesn't last long. It's the sniper who can stay motionless for extended periods of time, controlling breathing, and maintaining steadiness who can make the shot and hit the target. * The sniper retreats after the kill. There is no operating on tilt, no taking of impulsive shots, no overconfidence once the target drops. The priority becomes moving and remaining undetected. * The sniper weaponizes math. Many calculations precede the good shot. The sniper adjusts for distance, gravity, and the movement of the target. The sniper adjusts for wind speed and changes in the wind. The slightest miscalibration sends the bullet astray. * The sniper follows an integrated process. Army Manual FM23-10 describes the sniper as following an "integrated act of firing", with a preparation phase (complete maintenance and check of equipment); a before-firing phase (maintaining position and checking aim); a firing phase (controlling breathing and body movement, steady squeeze of the trigger); and an after-firing phase (noting the kill or determining errors that led to an errant shot). Perhaps most important of all, the sniper--like all true performance professionals--spends much more time preparing for the kill (practicing, hiding, observing) than actually shooting. From athletics to Broadway productions, the performance professional practices and reviews performance for much more time than he or she spends on the field or stage. It is the hours of motionless waiting and continual maintenance of the rifle and regular practice under different conditions that prepares the sniper for one good shot. If you're trading with a sense of excitement; if you're spending more time trading than preparing for trading and learning from past trading; if you find yourself firing away without following an integrated process, think about what would happen to the sniper under similar conditions. Snipers operate in an environment of opportunity--and risk. Financial markets offer a very similar landscape. Further Reading: Trading Like a Sniper
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Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), The Art and Science of Brief Psychotherapies (APPI, 2018) and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. Currently writing a book on performance psychology and spirituality. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014.
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