The Trader As A Sniper

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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Controlled Aggression: Trading Like A Sniper

When I wrote the book on developing trader performance, one group that I studied intensively was military snipers.  (See this post for an overview of how good trading is like good sniper technique).  Good trading is all about the integration of aggressiveness and self-control.  The sniper is concerned, not only with the kill shot, but doing so in a way that will not be detected.  That means that the sniper must only act when reward is high relative to risk.

In practice, that means that the sniper does not simply start firing when the high-value target first appears.  The sniper waits, slows his breathing, and looks for the ideal opportunity for a lethal head shot or an unobstructed shot at center mass.  Then it's a single pull of the trigger and a quick move to another location before the enemy can figure out where the shot came from.  It's all about controlled aggression and the patience, selectivity, and self-control that leads up to the ideal shot.

A sniper who "overshoots", like a trader who overtrades, is not one with a long career.  It's not enough to wait for the "setup" to occur.  You want to wait that extra few seconds to see price confirming your idea before you fire.  You want the lethal shot.  That means you don't try to catch exact tops and bottoms:  you hold your fire until you have *reason* to believe a top or bottom has been put into place.  

A good sniper does not feel confident or anxious; a good sniper does not feel excitement or fear.  

A good sniper feels a bit of recoil.  

That's controlled aggression.

Further Reading:

The Trader As Sniper

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Trading Like a Sniper: Blending Aggression and Self-Control

In my recent post, I outlined how a trader's very achievement motivation can lead to "pressing": trying so hard to make trades happen that trading plans and rules are abandoned. This often happens when traders become frustrated with losses or slow markets and try to make up for the lack of results by sizing positions too aggressively or by taking too many positions. Traders press when they feel pressure, whether for profits, for action, or to achieve competitive advantage over other traders.

The result is a loss of self-control, as aggressiveness takes over and judgment takes a back seat. Successful trading may be discretionary or system-based, but it should always be rule-governed: controlled by basic considerations of risk management and opportunity. Indeed, this might be an apt definition of poor trading: when the need to trade overwhelms the need to preserve and add to capital.

One of my favorite posters in my office is of a military sniper in the field, peering out from ground cover. The caption beneath the picture reads, "The sniper's greatest weapon is a sharply honed intellect. He combines a mastery of stealth, situational awareness, ballistics and precision shooting skills into one of the most lethal weapon systems to ever strike fear into the enemy."

If the sniper became too aggressive and excessively bored with sitting in the field waiting for the right shot, he might leap from his cover and begin spraying the enemy with fire. Most of the shots would probably go wild, and the out-of-control sniper would quickly be located and mowed down.

No, the sniper waits for the ideal shot: "stealth" and "situational awareness" are essential tools of the trade. Being a sniper means combining aggression with exquisite self-control and judgment. It is controlled aggression.

Over the years, I've learned to trade like a sniper by not placing one trade after another in rapid succession. When a trade is concluded, I go flat and wait for a fresh setup. During the waiting time, I refresh my "situational awareness" (assessment of market conditions, my own condition), and return to my basic trading rules.

The idea is to trade only when I have an unobstructed view of the target. Everything else is waiting and preparing, staying low in a defensive posture. It's the time between those shots at the target that provide the self-control. It is difficult to press if you take the time to reassess, reload, and return to cover after an errant shot. With repetition, that reassessment and reloading become automatic: your default mode becomes one of self-control.

Plan. Trade. Reassess plan. Trade: It's a rhythm that combines the best of achievement motivation and aggression with the best of judgment and forethought. It's a beautiful feeling to plan one good trade, execute it to perfection, and then sit back and wait for the next opportunity. Any performance skill, honed and executed with precision, is a kind of work of art. I think the best snipers understand that.

RELATED POSTS:

Bridging Hot and Cold Emotional States in Trading

Three Steps for Breaking Out of Frustration
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The Ability to Not Trade: An Unappreciated Contributor to Successful Trading

In a previous post, I compared the trader to a sniper, blending self-control with a high level of aggression and decisiveness. There is one other respect in which traders are like snipers: both engage in periods of intense performance activity punctuated by potentially long periods of inactivity.

The sniper may wait hours or even days in a hide, waiting for the perfect shot. Wet, cold, cramping, and simple boredom are the sniper's greatest enemies. It is a rare individual who can keep still for extended periods of time and then function with the utmost skill and accuracy. How do they do it? Many keep themselves mentally occupied and active, even while they're physically still.

One characteristic I've found among successful traders is that they function effectively when they're not trading. When markets become very quiet and range bound, they occupy themselves with a variety of activities, from sharing ideas with peers to conducting research. Traders who do not tolerate inactivity well inevitably feel the need to trade, often when there is no objective edge present. For them, losing money is less onerous than experiencing boredom.

By structuring your non-trading time, you can be like the sniper: fresh in your thought and perception, even as you're waiting patiently for the next opportunity. Reviewing markets and relationships, reviewing your performance, testing trading ideas, learning from and teaching others: there are many activities that make non-trading time productive.

If, however, your motivation is not to understand markets and develop yourself--if your motivation is to enjoy the thrill of risk and action--you will find non-trading time to be aversive. There are those who live to trade and there are those who trade to make money. Trading success is an expression of what you bring to markets; it cannot fill a personal void.
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How Can We Stay Chill In A Volatile Market Environment?

 

When I began my career working as a performance coach for traders, the first poster I placed in my office was a signed photograph from a military sniper.  It showed the sniper lying in the weeds, well camouflaged, and looking dead ahead with rifle poised.  The absolute stillness and focus of the well-hidden figure was striking.  What makes the best snipers special is that, when battle conditions heat up, they have trained themselves to slow down.  It's when multiple high-value targets come into view that they breathe slowest and become most still.  Opportunity brings focus, not excitement.  

The most common psychological issue I'm hearing from traders today is how to stay calm and focused during volatile market conditions.  It's natural that directional traders view lots of movement as lots of opportunity.  The excitement that brings when markets start to move your way, the frustration that brings when markets reverse on you--all have the potential to disrupt our planning, our concentration, and ultimately our best trading.

It's under these conditions that I find training with biofeedback to be most helpful.  Below are some links that can get you started looking into the topic.  It's also a topic I discuss in The Daily Trading Coach, particularly in the sections on Cultivating the Quiet Mind and behavioral Exposure methods.  In exposure work, we first learn to slow our heart rate and lower our body's level of arousal through the help of such methods as heart rate variability feedback and brain wave feedback.  Once we learn what we need to do to keep us chill, we then actively visualize trigger situations that tend to stress us out.  For example, we might visualize a market going against us and having to stop out with losses.  We vividly imagine the disappointment and frustration of the situation--while keeping ourselves in a state of low arousal and high concentration and monitoring our feedback.  We do this again and again and again in our practice, until stressful situations no longer take us out of our zone.

This requires regular practice, but is amazingly successful in rewiring our emotional responses to situations.  Our job is to climb the mountain of success, not carry mountains of fears and worries on our shoulders.  It is indeed possible to rewire ourselves and reprogram our responses to challenging situations.  When we are encountering volatile and choppy market conditions, this enables us to become like the sniper:  more and more focused as opportunity presents itself.

Further Reading:

Using Biofeedback to Manage Stress

Mastering Trading Psychology With Biofeedback - Short Video   

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The Right Way to Trade With Confidence

Here's an idea I've been discussing with a few of the traders at SMB who are increasing their confidence--and their size--in many of their trades:

When you have *real* confidence in your trading, you're not threatened by the possibility of being wrong.  All of us are fallible, and if we are secure with who we are, we can accept that.  True confidence means we have the inner strength to deal with setbacks as well as successes.

When we have big confidence in a trade, that is when we want to double down on our planning for the possibility of being wrong.  Too often, traders become confident in an idea and stop looking and planning for alternate possibilities.  We want to use confidence to trigger our awareness of fallibility, so that we are aggressive in the trade AND aggressive in planning an exit if the trade doesn't work out.

The holy grail is to have conviction *and* open-mindedness.  We can size up a trade at the same time that we intensively review our exit strategy.  Aggressive and nimble...just like the sniper.

Further Reading:

The Trader as a Sniper

TraderFeed Home Page and Index

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Think Like a Price Maker, Not a Price Taker

Adam Warner has an excellent post up illustrating the volatility assumptions of $VIX and $VXX. To summarize in Adam's words: "longer term volatility assumptions just keep eroding."

With a holiday period around the corner, followed by a holiday period next month, traders begin to pack it in for the year.

I notice that Friday's volume in SPY was the lowest in over a month. The next lowest volumes? Tuesday and Wednesday of this past week.

With contracting volume comes contracting volatility. Tuesday was an inside day. Friday traded within its overnight range.

As portfolio managers pack it in and take their volume with them, that leaves market makers--including those infamous algorithmic programs that operate close to the market--as the dominant players. If you don't understand how they trade, you're likely to be on the other side of their trades.

Look for places where bears and bulls are loaded up, but can't push prices lower or higher. They are the ones that will have to flee their positions, giving good prices to those market makers. That means picking your spots in slow, range markets; it also means thinking like a price maker, not a price taker.

It is possible to make money in slow markets *if* you can slow yourself down and become the sniper. Thinking like a price maker, you will take money from those that play for expanding volatility in a contracting environment.

More:

Trading Like a Sniper

The Power to Not Trade

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What Goes Into A Perfect Trading Psychology?

 

What ingredients go into an ideal trading psychology?  Here are a few that stand out in my experience:

1)  Planning - Think of an elite boxer going into the ring with a plan; a football or basketball team that plans for an opponent; a surgeon that plans the procedure; a military unit with a battle plan.  Wherever we see high level performance, we see evidence of extensive, detailed planning.  The ideal mindset for the trader, like for the entrepreneur, is focused on a plan and its execution.

2)  Focus - Without a plan, there is nothing to focus upon that is within our control.  It's not enough to have a plan; we also have to be laser-focused on that plan so that we can implement it automatically, as the result of considerable repetition.  The analogy I often use is that of the military sniper.  All focus is directed to the target and the execution of the plan.

3)  Calm - An excited mindset is a distracted one.  No sniper, no surgeon, no chess grandmaster emotes during a performance.  The intense focus on the plan creates a flow state, a sense of being in the zone:  total absorption in the task at hand.  It is in this flow state that we are best able to discern what markets are doing and respond.

4)  Purpose - Before the performance there is a sense of challenge, opportunity, and enthusiasm.  The focus is on doing something special, something meaningful, something important.  After the performance, there is a sense of accomplishment, appreciation, fulfillment.  The elite performer is motivated by purpose and that drives an energized mindset that motivates the calm, focused planning.

Think of the Broadway actor or actress before going on stage.  There is anticipation and enthusiasm and the desire to connect with the audience and provide an amazing experience for all.  And that drives a complete absorption in the role and on everything that has been rehearsed.  It's all about calm focus and being that person you've rehearsed so often in practice.  Preparation for trading and going live each day in markets is not so different.

Resources for Trading Psychology

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Focus: What Distinguishes Trading Professionals From Amateurs

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.

Further Reading:  Emotional Creativity and Trading Success

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Keys to Great Trading

 

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3/28/25 - The best trades occur when markets are trading thematically, with the themes representing the actions of the largest investors who move the most money.  I am watching the correlation between equity markets overseas (VGK, EFA, EEM) and the U.S. stock market.  Until recently, those had been moving in different directions.  If we were to have genuine trade wars, we could see a toll taken on global markets.  On the radar as a potential opp...nice example in real time of allowing a big picture to inform short-term trading.

3/26/25 - Quick shout-out:  TraderLion is coming out with a book published by Harriman House detailing the process of finding your edge in markets.  It is so important to understand markets in ways that make sense to you; only then can you have the confidence to take meaningful risk and sustain your risk-taking.  What has worked for me is a lining up of time frames, where I look at my markets (stock index futures) on three different time frames.  As I've mentioned previously, the X-axis actually isn't time; each bar on the chart represents an amount of volume traded.  So the short-term chart has bars representing relatively few contracts traded; the medium-term chart has bars representing a moderate number of contracts traded; and the longer-term chart has bars representing open-high-low-close for a large number of contracts traded.  The charts thus adjust to the busyness of the market.  I overlay the same technical indicators on the three charts and wait for signals across all three.  I then turn to my very short-term chart of the NYSE TICK to time my entry, looking for occasions when buying/selling are drying up and reversing.  I'm comfortable taking sizable risk when everything lines up, and I'm comfortable not trading when signals are mixed.  As a very bright and creative money manager taught me, so much of success comes from not needing to trade.      

3/25/25 - Yet another key to trading success:  The ability to recognize, in real time, when your market is lining up for an unusually good potential opportunity and then to be able to size up for that opportunity without losing sight of sound risk management.  Selective aggression is all about being willing and able to wait for the right opportunities and, when those arrive, being able to pounce decisively.  Very often, a meaningful part of overall profitability for discretionary traders comes from a relative handful of trading opportunities.  A key to great trading is being able to outline--in detail--the criteria for a true A+ opportunity and then having the discipline to wait for those criteria to be met and being able to go from waiting to pouncing.  In my next post, I will outline the high opportunity criteria that guide my largest trading.  

3/24/25 - Here is another key to great trading:  understanding market context.  Reading the "text" of the market--the short-term patterns that set up--is crucial to good risk/reward entries and exits, but what tells you the "context" of market action?  Is this setting up as a trend day?  Are we seeing a rotational day?  Who is in the market; how busy are we and how far could we move?  How does today's market fit into the pattern of recent trading?  Is there a theme driving trading across asset classes?  Who is setting up to be trapped:  Are buyers and sellers moving price effectively, or are we seeing signs of exhaustion? 

Great trading comes from looking beyond the market and time frame we're trading to see the bigger picture that will be driving price action.  The microscope helps us get the best price for our orders; the telescope tells us what to order and why.      

3/23/25 - What if a key to great trading is found in what you do during the time when you're not trading?  What are you doing between trades to generate ideas, to track shifts in what you trade, to track shifts in the markets that impact what you trade?  When I compared being a trader to being a sniper, I pointed out that "It's a beautiful feeling to plan one good trade, execute it to perfection, and then sit back and wait for the next opportunity.  Any performance skill, honed and executed with precision, is a kind of work of art.  I think the best snipers understand that".  

The artistry of great trading is found in what we are doing when we're not staring at screens and firing away.  Like the sniper, we succeed because of our focus during the 99% of the time that we're not firing.  Creative vision is what makes a work of art.  It is also what makes for artful trading.  Skilled traders have studied and experienced so many markets that they can recognize when a meaningful pattern is playing out.  What if we only traded when that creative insight came to us, when we saw--truly saw--how things were playing out?  The cost of overtrading lies not just in the P/L lost, but in the damage we inflict upon our capacity for creative insight.  Our job is not to make great trades; it's to have the wisdom and restraint to allow great trades to come to us.    

How Overconfidence Derails Our Trading

Here's an observation I've made of both traders and investors--those with little experience and those who have been doing this all their lives:

They are at their best when they treat their ideas as hypotheses and continually update their hypotheses as price action, news, and fundamental data emerge.  Their focus is on what they would need to see to disconfirm their hypotheses.  That allows them to exit quickly and limit risk in adverse conditions.  It also enables them to take the opposite side of a trade should they observe a meaningful disconfirmation of their ideas.

The traders are at their worst when they treat their ideas as conclusions and dig in their heels in these views in the name of "conviction".  This leads them to interpret market information with confirmation bias, looking at data that support their views and minimizing information that might not support their ideas.  Such an approach leads to a loss of flexibility and a situation where the only effective stop level is pain.

One way we turn confidence into overconfidence is by crystallizing our observations into narratives.  Among portfolio managers trading global markets and strategies, this is sometimes pejoratively referred to as "macro story telling."  The trader observes information--perhaps fundamental, perhaps monetary, perhaps intermarket, perhaps price-action based--and turns these observations into a narrative.  "Stocks are going higher because economic conditions are improving and sentiment is bearish."  That could be a simple narrative.  It is not a tested set of relationships, and it is not treated as a hypothesis.  It is a conclusion drawn from limited pieces of information.

It's surprising how often traders with bullish or bearish biases can find information to weave into bullish or bearish narratives!  

Once the narrative has crystallized, it organizes our perception.  We see the world through the lenses of our narratives.  That makes us less sensitive to other, possibly more relevant lenses and information.  Seeing the world through our story-telling--and then justifying that in the name of confidence--is the height of overconfidence.  What we want instead are multiple hypotheses, each with shifting odds as information comes out.  At some point, the odds shift sufficiently that we can put on a trade.  But we are always updating those odds, and we are always aware of what would lead us to reverse that trade.

A great exercise is tracking your self-talk during the course of a trade.  Is your internal dialogue information-based, or are you grounded in a single narrative?  Are you flexibly assessing odds and possibilities, or are you looking for information to support your fixed view?  Or are you so self-focused and P/L focused during the trade that you never get the chance to update your thinking?  That often occurs when our "conviction" views suddenly prove vulnerable.

This is one of the great ironies of trading:  It takes unusual confidence to believe that we can outperform the world's most experienced money managers.  Taken too far, however, that confidence can ensure our failure.

Further Reading:  

The Trader As A Sniper

TraderFeed Home Page and Index

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The Perils of Achievement Motivation: When Traders Press Too Hard to Win

A deadly pattern among some of the best traders is to channel achievement motivation into trading *more*.

The best traders do have a strong achievement motivation and work quite hard at their craft. That achievement drive makes them hate losing. Their impulse is to go for the jugular; they want to not only achieve, but achieve *more*.

This drive can be a trader's greatest weakness, however. It can lead to stubborness in taking losses, leading to outsized losses. It can also lead to overtrading, as the driven trader attempts to *make* things happen. That is a particular recipe for disaster on slow, narrow days such as yesterday, when it's easy to get chopped up jumping aboard seeming trending moves.

The net result is that *pressing* to achieve can take the trader out of his or her game. It subverts risk management by leading the trader to trade too large, without careful attention to stop loss points. It also interferes with decision-making by leading the trader to take trades without an objective edge.

A good analogy is the fighter who goes for the knockout on every punch, leaving himself wide open to jabs and punches from the opponent. When the boxer is *too* aggressive, defensive skills go out the window. So it is with the trader.

Another analogy is the soldier in the battlefield. Too hyped up and too aggressive, he may charge out of his foxhole and make himself an easy target for the enemy. Sometimes the best strategy is to maintain control and pick off the enemy sniper-style.

How can you know if this is a problem for you? If you keep metrics of your trading results, you'll see that the average size of your losing trades exceeds the average size of the winners. You'll see that your biggest losing days are ones in which you trade most often and with largest size, particularly when the market was showing no special opportunity. You'll also know by your state of mind: traders who *press* to win typically experience high degrees of frustration when the profits don't come quickly.

If these are concerns for you, self-control strategies such as meditation and biofeedback can be tremendously helpful. How to use such strategies will be the focus of my next post.

RELATED POSTS:

The Most Important Skill Traders Need

Biofeedback for Performance
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Strategy, Tactics, and Rule-Governed Trading

My recent post emphasized the importance of understanding one's own trading and the value of distinguishing between trading strategies and tactics. Hats off to Crosshairs Trader, who responded to the post by breaking down his trading into Grand Strategy, Strategies, and Tactics.

What I'd like to highlight in response to Crosshairs Trader is the value of expressing one's strategies and tactics in terms of rules. His rules will differ from mine, and both of ours no doubt are different from yours. The value of rules, however, is that they cement sound trading practices and guide our behavior when we're "under fire".

Once we formulate rules for entering, exiting, and managing trades, we can mentally rehearse those rules prior to trading and ground ourselves in best trading practices. We can also draw upon those rules in difficult market conditions to help us make difficult decisions. Once we have sound rules, moreover, we can assess our performance relative to those rules and gauge how well we're trading.

One question I have posed to traders is: "How can you be disciplined when you haven't even formulated the rules for proper trading?" To be disciplined is to be rule-governed, and to be rule-governed is to be mindful of one's strategies and tactics.

More:

Rule-Governed, Discretionary Trading (one of the better TF posts, IMO)

Trading Like a Sniper

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The Two Ingredients of Trading Success

There are two necessary ingredients of trading success and it sometimes seems as though they are at odds with one another:  prudence and aggressiveness.

Prudence is all about staying in the game with proper risk management, position sizing, and selectivity of trading.

Aggressiveness is all about making the most of the game with proper risk taking, position sizing, and assertiveness of trading.

Depending upon the frequency of your trading, it is good to have a loss limit to constrain the downside each day, week, and/or month.  If that loss limit is set prudently, it will keep you in the game (psychologically and financially) during normal, expectable periods of drawdown.  

Less well appreciated is that the daily/weekly/monthly loss limits should also serve as benchmarks for your profitability.  If a trader has a loss limit of X, he or she should make X or more during that period of time.  Thus, for a developing trader who has a $1000 daily loss limit, we should see in the span of a month occasional daily gains of $1000 or more.  It is that ability to make the daily limit and not lose it too often that provides good risk-adjusted returns:  the ability to make a good amount of money per unit of risk taken.

Many traders lack prudence and trade aggressively, so that their big losing days outnumber their big winning ones.  Eventually this leads to trading stress and possible blow up of the account.

Many other traders trade with prudence but not aggressively, so that they don't have many large losing days and they also don't have many large winning days.  Implicitly, they're trading to not lose.  Eventually this leads to a lot of wasted effort and frustration.

Trading with prudence and aggressiveness means that--during the life of the trade and during preparation for the day/week--you must engage in prudent self-talk and planning and you must engage in aggressive self-talk and planning.  In practice this might mean mentally rehearsing where your trade is wrong and planning a stop out (prudence) and also mentally rehearsing what tells you your trade is right and planning an add to the position.  In practice it might also mean using the information from a losing trade to place an even larger trade in the opposite direction.

The point here is that your planning and your self-talk have to embrace both prudence and aggressiveness if your trading is to integrate these elements.  Many performance fields--from being a fighter pilot to being a chess champion to being a race car driver to being a football quarterback--require the combination of prudence and aggressiveness.  Your trading statistics will tell you how well you are doing with both of these vital trading ingredients.

Further Reading:

Trading Like a Sniper

TraderFeed Home Page and Index

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Why Time is Key to Trading Psychology

The recent Brexit trade and its volatility has given us an opportunity to explore an important and neglected topic in trading psychology:  time.

Here's a useful distinction between novice and expert performers:  Under pressure, the novice feels threat and speeds up.  Heart rate, galvanic skin response, muscle tension--all increase under pressure for the novice.  The expert performer has trained under pressure.  Under pressure, the expert slows down and focuses.  

Put novices behind a rifle and the odds are good that when the target appears, they will speed their breathing, start to shake, and miss the shot.  Put an expert sniper behind the rifle and breathing slows, all movement stops, and the aim is true.

As a psychologist, I've experienced the same thing.  During my beginning years, I felt panic if a client I worked with reported thoughts and feelings of suicide.  Later, crisis talk made me hyperfocused.  I hung on every word.  I became more deliberate in my responses, more attuned to the person I was speaking with.  So it is with mountain climbers, professional athletes, and elite military units.  They replace fight or flight with focus and freedom--the freedom to stay in control over a situation and not allow it to control them.

OK, so what does all this have to do with the Brexit trade?

As part of my trading, I have a short-term system that provides entry and exit execution guidance.  The system adjusts entry and exit points for the market's volatility.  During Friday's trade, the volatility unit risked by the system was about three times the size of the volatility unit from the first week of June.  The same exact setup now could make or lose three times as much as recently.  It was no different from tripling trading size all at once.

But it wasn't just volatility that changed.  Time itself changed!  The system works from event bars, not chronological bars.  Each bar represents a number of ticks in the market, not a number of minutes or hours.  For all of Friday, we printed almost 200 bars.  For the first Friday in June, we printed nearly 60 bars.  

The novice is calibrated to the chronological clock and thinks in terms of standard trade sizing.  As a result, each trade is far more risky.  Under those conditions, market volatility begets emotional volatility and either the fight of reactive trading or the flight of the deer in headlights.

Calibrated to the market clock and adjusting trade sizing for volatility, the trade opportunities are the same--there are only more of them in a given trading session.  A crisis session for a psychologist is an entire therapy compressed into one meeting; it is what you do all along, only compressed.  That compression is a catalyst for focus, because each time unit carries greater meaning and significance.

The novice trader cannot adapt to changes in the market's clock.  Movement slows, the VIX falls to 12, and boredom sets in--the need to trade.  Movement picks up, the VIX nears 30, and excitement sets in--the fight and flight.  Once you define time in terms of market movement, the switch from slow markets to fast ones is like the change on a dance floor from a slow tune to a fast one.  There are times for slower and faster dancing...our job is to adapt to the market's music--not dance a given way regardless of the music that's playing.

Further Reading:  Why Trading Markets is So Difficult
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Trading Noisy Markets With A Quiet Mind

In a recent video, Don Miller talks about the perils of information overload--something traders weary of headline-driven moves can appreciate.  The single most common theme I'm hearing from traders is getting "chopped up" by irregular market behavior.  Consider this:  if we add up the average true ranges for the past 14 trading sessions, SPY has moved 29%--even as it has closed flat over that period.  Lots of movement, little direction.

What I find during these periods is that many traders, frustrated by the lack of good moves in what they look at, start looking at more and more things, trying to find the next catalyst, the next trades.  They create their own information overload by failing to filter information.  To put it succinctly, as markets get noisier, their thought processes also get noisier.  More frantic looking for ideas, more frantic stopping out of trades, more frustrated self-talk.  

Here's a psychological principle you can count on:  As conditions become more challenging and dangerous, peak performers respond with increasing mental quiet and focus.  That is what happens in the emergency room; that is what happens in the fourth quarter of a playoff game; that's what happens on the 18th hole of a close golf tournament.

As a psychologist, if I meet with someone who talks seriously about suicide, I become laser focused on the conversation.  I'm processing every word carefully, filtering my internal noise, because every word matters.  When I was a rookie, learning therapy in grad school, the mention of suicide would make me frantic, searching for the right things to say and do.  

The key difference is that, under stress, experienced performers double down on observing and listening.  They become more quiet, more focused.  Just like the sniper.  Just like the surgeon.

The rookie performer never enters "the zone" because attention and thought are frantically jumbled, flitting from market to market, from self to market to P/L and back to self.  This past week, I noticed a great trade in which the market (ES futures) was stretched to the upside and could not sustain further buying at the NY open.  I was focused on the market's behavior second by second, seeing buyers and sellers interact and watching the price behavior of the market's sectors.  It soon struck me that the buying was exhausted and that selling was taking over.  That led to a great trade.

We like to talk about "idea generation", but the reality is that the idea came to me; the only thing I generated was an open minded state of enhanced focus.  How different that is from when I enter the day with a fixed opinion about the market's direction and completely miss how the market is actually trading!

The problem is not a noisy market; it's making the market's noise our own.  It's amazing what can come to us when we focus and filter...all performance training is a training of the capacity to act decisively when we are in the zone.

Further Reading:

What It Takes To Trade In The Zone

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Fresh Weekend Perspectives

* Thanks to Mike at SMB Capital for this link to a major leaguer who has the right attitude about learning; here's Mike's take on Friday's post-Dubai news trade;

* Removing the self from performance;

* Food stamps now feed 1 in 8 Americans and 1 in 4 children;

* Getting off the performance roller coaster;

* Trading like a sniper;

* A rush for land in Africa;

* Thanks to a sharp reader for this video on China and why it's encouraging citizens to buy gold;

* Will Dubai become a major default?

* Bank stocks look to be affected by Dubai's crisis;

* Ethanol has become a disaster;

* Stocks paying high dividends.
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When Your Passion Becomes Your Poison

A while back, I asked the question:  Does your trading psychology have a dark side?

It's an important question.  So many times, it's not our weaknesses that trip us up, but the misdirection of our strengths.

Consider the motivated, eager, passionate trader.  He becomes so pumped up that he pounces on the first "setup" or idea to come his way, only to lose meaningful money minutes and hinder his subsequent efforts.  That very passion has become his poison.  Enthusiasm, taken to an extreme and not directed, breeds impulsivity and overtrading.

The risk prudent trader can become risk averse.

The active trader can become overactive and distracted.

The competitive trader can become frustrated and unfocused.

The creative trader can flit from one idea to another, one system to another, never developing expertise.

The disciplined trader can become rigid and unable to adapt to a change in the market.

In all these cases, strengths can become vulnerabilities.

This helps explain why so many common approaches to trading psychology don't work.  When we try to reduce or eliminate our problems, we find it difficult to stick to those efforts because those problems spring from our strengths!  We naturally gravitate toward what we do well and what speaks to us, so it's not surprising that we find ourselves repeating problems despite advice to the contrary.

So how do we use our strengths and ensure we don't abuse them?  The key principle to keep in mind is that we best channel our strengths by cultivating their opposing, balancing qualities--and then integrating the two.  The more we draw upon a single strength, the more we need to develop a balancing strength.  A good example would be the aggressive trader.  He or she reaches a new level of development by blending patience with aggression.  The blending of the balancing strength--patience--with the original strength creates a new, higher-level capacity.  The potentially crazed warrior becomes a self-controlled, lethal sniper.

Yet another example of using a balancing quality to channel a strength would be for the introverted, analytical researcher to develop a social network and identify when positioning runs counter to tested models.  The blending of the research focus and the ability to read sentiment creates an entirely new opportunity set, where it becomes possible to take advantage of situations where the crowd leans the wrong way.

Notice in these examples, by cultivating a balancing strength and integrating it with a strength and passion we already possess, we create something new.  We create opportunity.  Strengths only have a dark side when they are overutilized and unbalanced.  Cultivating balancing strengths can literally take our game--personally and professionally--to new levels.

Further Reading:  How to Identify Your Greatest Strengths and Virtues

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Satisfaction With Trading: Why It's Important to Performance

My recent post discussed some of the dynamics behind job satisfaction and outlined factors that account for satisfaction and dissatisfaction among traders.

This is an important topic, because the learning curve of trading (like that for most performance fields) requires immersion: an ability to completely focus on the tasks at hand. Think of a golfer during a key putt; a chess champion during a decisive moment in a game; or a sniper just before taking the shot. All require the ability to be absorbed in the performance.

Traders who lack satisfaction--who are distressed, stressed, anxious, frustrated, or depressed--cannot sustain immersion. Those emotional states inevitably return attention to the self, so that the sources of dissatisfaction can be addressed.

When I ran an internship program for traders in Chicago, I found that one of the best predictors of success was simply the joy, energy, and satisfaction students had with the learning process. If the students fought the market and approached the learning curve as a chore, they could not sustain the immersion needed to internalize market patterns. It was the students who found markets endlessly challenging and fascinating that poured themselves into the learning and mastered the learning curve.

So how can developing traders sustain a sense of satisfaction with learning, even as they make all the rookie mistakes and face the usual experiences of inadequacy? Here are several keys:

1) Turn Every Day and Week Into a Learning Experience - Make sure that you take away from each day something positive that you've learned and will work on in the days ahead. If you grade yourself on your learning and your improvement, you'll be able to weather the trading setbacks;

2) Find Teammates - One way soldiers get through the rigorous training of Rangers and SEALs is with the support of buddies. Colleagues can advance your learning, but can also be a source of encouragement and challenge when times are tough.

3) Hone Your Niche - Relentlessly identify what is working for you in your trading: what you're doing well when you're making money. By focusing on your strengths, you can build upon those and stay in your performance sweet spot.

4) Have Plenty of Reserves - You can't be pressuring yourself to make a living from your trading when you're just first learning how to trade. Like any business, you need to be well capitalized, so that you can survive the lean times and the start up phase.

5) Make Sure You Have Support at Home - A spouse needs to be part of a trader's business planning. The support at home is key when it comes to facing those lean times and start-up frustrations. To sustain that support, the trader needs to make sure that the financial needs of the couple and family are not jeopardized by the time (and capital) devoted to trading.

Ultimately, you will fight experiences that are dissatisfying, and you will absorb yourself in those that bring satisfaction. How you approach the learning curve ultimately helps define your performance level.

More:

Questionnaire: The Emotional Experience Behind Your Trading

Why Positive Emotional Experience is Important to Performance

The Factors Behind Positive Emotional Experience

The Importance of Daily Trading Goals

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Standing Aside in Slow Markets

I haven't traded this week. I placed two trades last week and closed them out quickly, one for a modest winner; the other for a modest loser. So this will possibly make two weeks where, basically, I haven't swung the bat and haven't made any money trading.

I'm fine with that. And therein lies a lesson.

When I began trading late in 1977, I made a conscious decision: I would pursue the markets, but not for my primary livelihood. My market activity would always be to supplement my income, not constitute my income.

Because of that decision, I've always had savings separate from my trading capital, and I've had investments separate from my trading capital.

And that gives me an important option: the option to stop trading.

My trading is mostly in the S&P 500 Index. Over the last twenty trading sessions, the median daily high-low range in SPY has been 1%. That is down 50% since June. Daily trading volume is down by a comparable percentage.

Here are the daily closing prices for SPY over the last 20 sessions: 111.11, 111.14, 111.14, 110.02, 109.41, 111.00, 110.80, 111.27, 109.44, 109.55, 111.25, 111.36, 110.81, 111.11, 110.93, 109.82, 109.81, 110.71, 111.05, 111.78. That's a little bit more than a 2 point range.

If I'm sitting at the poker table and keep drawing poor hands--a couple of low cards, unsuited--will I be placing big bets? No. I'll muck hand after hand. Eventually I'll draw cards worth playing.

If I'm a good baseball hitter and a pitcher is pitching around me, will I start swinging hard at pitches outside the strike zone? No, I'll stand there and wait for my pitch. Eventually I'll get balls worth swinging at, whether it's during this at-bat or a later one.

And eventually I'll get market moves worth trading for my style of trading.

But one key to longevity in markets is being able to stand aside when markets aren't giving you good pitches. It's the capital I don't have at risk in markets that allows me to keep my trading capital out of unnecessary risk.

To have a passion for trading--but not a need to trade: that's a great place to be if you're going to last in the markets.

More:

Power and Powerlessness in Trading

The Ability to Not Trade

Sniper Trading

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