Finding Our Greatness

Update:  Here's a valuable reading passed along by an experienced, successful trader.  It explains how we can make very large gains in any area of life by making small improvements every single day.  Note how this builds consistency of mindset, as our daily focus becomes forward-looking and constructive.

In an impactful video, Mike Bellafiore at SMB Capital explains how our development as traders embraces the far larger development of our greatness.   

The reason for this is that, for us to be successful, our development has to be based upon our strengths:  our talents and our passionate interests.  Very often, we find our passion when we pursue our talent:  the exercise of our distinctive talents is intrinsically rewarding and motivating.

That is why our development as traders should always begin broadly and only later proceed deeply.  We need to try different styles of trading, work with different mentors, and trade different markets before we discover what truly speaks to us.  This is why medical students participate in rotations in different medical specialties before they focus their training on the field that matches their talents, skills, and interests.  Play many sports and then focus on one.  Play many positions on the field and then pursue one.  

Many, many times we fail to achieve our potential--and we cannot find our passion or greatness--because we have short-circuited the developmental process.  We try to go deep before we explore broadly.  We are typically meant to date many people before we find our lifetime partner.  If we jump into partnership without the exploration of dating, we are far more likely to make a poor decision.  Some traders so need to make money that they jump into a style of trading before exploring a variety of styles and markets.  Greatness cannot be grounded in desperate need.  It must stem from what speaks to us uniquely.  

Your greatness as a trader will be related to something you already do greatly in life.

Your past successes and passionate interests hold clues to your trading success.  Try many roles and ways of engaging markets.  After you date lots of trading roles, you just may find your mate.

Further Reading:

What Is Your Path To Greatness?

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Two Important Lessons From Professional Traders

 

Here are two key takeaways from successful portfolio managers and traders I've been privileged to work with.  

1)  Create Multiple Ways to Win - A trader who only knows to go long or short a particular instrument is like a baseball pitcher that only knows how to throw one kind of pitch.  There are many ways to win in markets:  by using options to trade patterns of volatility; by trading the relative relationships between two or more assets; and by expressing market views across a variety of instruments and markets.  Note that the stock market pullback today would have hurt a trader who was long, but would have made money for a trader who had recognized the shift in relative strength between small cap stocks and large cap ones.  What is the best way to express a given market idea?  Trade structuring is every bit as important to returns as trade ideas themselves.

2)  Create a Lifestyle That Builds Your Strengths - If we internalize what we consistently do, then consistently exercising our strengths will make us stronger people and more successful traders.  What we do outside markets ultimately finds its expression in our trading.  Profitable trading requires intensity of focus and flexibility of focus, as we shift from generating ideas to executing and managing trades.  If we live a distracted life, we unwittingly undermine the cognitive strengths needed for market success.  The degree to which we actively structure our calendars is the degree to which we can live each day intentionally and use each day to build our capacity for focus and purpose.  There can be no trading discipline if life itself is lived without discipline.

Trading is a performance activity that builds upon our talents and skills.  Whatever you do that is successful in markets will be an expression of what you've already done successfully in life.  We find our passion in expressing our talents:  that is what drives us to build skills, and it is what ultimately builds our trading psychology.  A masterpiece painting is crafted one brushstroke at a time.  A masterpiece life is created one purposeful, meaningful day at a time.

Further Reading:

What Predicts Success Among Developing Traders?

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Sound Trading Is Training In Trading Psychology

 

A sound trading process is a kind of gym where we exercise the functions that contribute to a successful trading psychology.

As the recent post illustrated, what we call a "trading process" is actually a number of interwoven processes that push us to exercise our abilities.  Idea generation alone may have us analyzing historical information; synthesizing information across markets; consulting market research and valued market participants; and making sense of shorter and longer-term patterns of price, volume, volatility, and more.  

Once we've generated the idea, there is the work of defining and structuring the trade to achieve best risk/reward; establishing position sizing to best meet risk management goal; assessing moment-to-moment action to identify sound entry and exit points, as well as points for adding to positions or taking pieces of our trades off.  Notice that all of these processes require:

*  Sustained focus/concentration;

*  Deep, broad, creative thinking to assemble information into ideas;

*  Fast, flexible thinking to execute sound trades;

*  Personality strengths of conscientiousness and emotional balance.

When we treat our trading process as a gym with many workout stations, we build a sense of inner strength, growth, mastery, and confidence.

A poorly defined, simplistic trading process reinforces laziness and fails to build us cognitively or emotionally.  We internalize what we do.  What we do day after day in our trading preparation exercises the strengths that contribute to a strong trading psychology.  When our processes are grounded in our strengths, the efforts of workouts are fulfilling, not taxing.  There is no challenge as important to developing traders as that of defining processes grounded in our particular competencies and strengths.    

Further Reading:

How Developing Traders Are Most Likely To Succeed

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Two Important Takeaways From The Recent Stock Market Action

 

Update:  7/14/24 - We continued to see breadth strength on Friday and finished the session with 1901 stocks across the NYSE making fresh monthly highs and only 109 registering new monthly lows.  This is considerable breadth strength, bolstered by buying of small- and midcap shares.  Interestingly, going back to 2010 (over 3400 trading sessions), we've only seen 45 trading sessions in which we had over 1500 new monthly highs and less than 150 fresh monthly lows.  Three days later, the SPX averaged a loss of -.41% (17 up, 28 down), quite a difference from the average three day gain of +.35% for the remainder of the sample.  Once we look 20+ days out, there was no downside bias.  I will be watching for near term weakness following the recent strength, mindful of the bigger picture bullish implications of the breadth thrust (see below).  I'll especially focus on which sectors are relatively strong and weak during any market pullback; that information could help set up a good trade.  

On Thursday, the stock market was quite the magician.  Good magicians will get you to look at what they're doing with their right hands but meanwhile the actual "magic" is happening outside our awareness, in the left hand.  The market's right hand gave us a solid decline in the SPX and especially in the growth areas that have been unusually strong.  The left hand, however, pulled off the real magic.  Market breadth increased significantly, creating what we call a breadth thrust.

The purpose of most of my quantitative analyses is to investigate market history and see if a given move is likely to lead to retracement (mean reversion) or momentum (trend).  If I can get a clear signal from market history, I then look at high frequency data to identify solid risk/reward points for entry in the direction of the analysis.  From this perspective, the "setup" is not the trade idea; edge occurs when the market sets up in the direction of solid research.

The market magic yesterday is that we saw very strong smaller cap stocks at the same time that SPX and tech sold off.  Up to now, small and midcap stocks have largely underperformed the large cap and especially the tech market.  Not yesterday.  According to the excellent Barchart resource, that created a situation in which 1518 stocks across the NYSE made fresh monthly highs and 187 registered new monthly lows.  Moreover, if we take a look at the number of stocks giving buy vs. sell signals on technical indicators on the very helpful Stock Charts site, we find that yesterday registered over 600 stocks giving buy signals on their Bollinger Bands and only 13 gave sell signals.  That is unusual breadth strength.

I've tracked these readings since 2019 and can tell you that, in over 1200 trading sessions, we've only seen that kind of breadth strength six times.  Moreover, when we've seen 400+ stocks close above their upper Bollinger Bands on the same day (N = 25), the SPX has been up 21 times, down 4 over the next ten trading sessions.  Interestingly, there has been no distinct upside edge up to 5 days out.  Where that leaves me is looking for short term pullbacks in the broad market that cannot make new lows in order to participate in anticipated continued strength.  It also has me looking with fresh eyes at the specific sectors likely to show this momentum.

So what's the second takeaway from yesterday's market action?  It's that the entire move was triggered by a drop in interest rates in the U.S.  Moderation of inflation numbers led to a rally across the curve.  Not so long ago, I was getting close to 5% on my two-year T-notes.  Now we're closer to 4.5%.  The markets are suggesting that economic strength will broaden out if we indeed see a sustained move toward lower rates from the Fed.  That is important information for traders and investors alike.  What were the best trades in a higher rate regime may not be the best trades if rates sustain a fall.

There are many implications for trading psychology in all this...I'll outline those in the next post.  

Further Reading:

Using Breadth, Strength, and Momentum to Track Market Cycles

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How Developing Traders Are Most Likely To Succeed

 

I'd like to call attention to a very important dynamic in recent markets.  Many experienced traders focused on traditional asset classes, such as rates and currency markets, are struggling with their performance.  The ones I meet with who are making money in those spaces are focused on regions of the world that are less crowded than the US and Europe.  On the other hand, many traders focused on individual stocks--especially active traders--are doing quite well.  What's up with that?

The current stock market is not a stock market; it's a market of stocks.  Some sectors have literally gone nowhere in the last few months, such as financial shares (XLF) and industrials (XLI).  Small and medium cap shares (IWM) have similarly traded in a relatively narrow range for months, as have stocks outside the U.S. (EFA).  On the other hand, we see technology shares (XLK) powering to new highs, along with communications stocks (XLC) and consumer discretionary shares (XLY).

What makes the stock market unique--to use a phrase popular at SMB--is that there is always something "in play":  some sphere of opportunity.  The tricky part is that those areas of opportunity are always changing.  Just as important as how to trade is knowing what to trade.  Because the stock market is so diverse, with so many sectors and companies, developing traders are most likely to succeed by focusing their efforts on current areas of opportunity.  Sometimes it will be with an individual stock or sector.  Sometimes it will be with the entire market.  In an asset class with thousands of things to trade, there's usually something promising that is setting up.

Developing traders need to work on improving their game, but also make sure they're playing the right game.  The lesson of recent markets is that even the best fishermen will struggle if they're casting their lines in the wrong lakes.

Further Reading:

Managing Your Trading Business

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How Elite Performance Actually Occurs

 

I believe this is an important post.  Much of what has been written about trading psychology--including what I have written about trading psychology--misses an important dimension of elite performance.

First, an explanation of the above picture.  This is a screenshot from the FreeStyle Libre II blood sugar monitor.  It takes real time readings of your blood sugar via Bluetooth and summarizes the readings over time.  You can think of it as biofeedback for blood sugar.  It's very helpful for those (like me) with diabetes, but also helps anyone stay in the zone between overly high sugar levels (which are associated with fatigue) and overly low ones (which create nervousness and distraction).  

The above picture shows a summary of my readings over the past 90 days.  The device measures the percentage of time when my blood sugar is too high (over 180) or too low (below 70).  As you can see, I've been in the proper zone 99% of the time.  Over the last 7 and 14 days, my percentage of time in the zone has been 100%.  The physicians I've worked with have been quite surprised by this consistency.

When I first started with the feedback, getting to 80% of time in the proper zone was a big accomplishment.  Gradually, I learned what to eat, when to eat, and when to do exercise (which lowers blood sugar readings).  I didn't stop myself from going out to eat and from having treats, but with constant readings, I figured out what to do with insulin and exercise to stay in my zone.  It was a lot of trial and error and a lot of adjustment in real time.

What didn't I do to achieve these readings?  I didn't actively motivate myself.  I didn't engage in exercises for positive mindset.  I didn't meditate or use therapy techniques to alter my behavior.  Rather, I tapped into a couple of my personality strengths (achievement motivation and conscientiousness) and kept taking readings, kept learning from those, and kept making adjustments.  Day after day, multiple times per day.

My pursuit of performance fed my mindset, not the reverse.

What if a path to elite trading is active trading, active collection of detailed data on our trading, and the continuous making of small adjustments?  What if how we lead our own performance--our own self-coaching--is the most important determinant of our trading performance?  

What if the best path to trading performance is to reverse engineer how we have best performed in other life arenas?

Lots of outcome data, lots of adjustments, constant small improvements.  Continuous evolution can create revolutionary results.  

Notice, by the way, that I have sustained these positive changes for quite a few years despite numerous lifestyle changes over that time.  If our performance depends upon our mindset, it will always be fragile.  If our performance follows from a flexible process that we internalize, it will always be robust. 

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Great Trading Requires Leadership

 

I would like to build upon the theme of a Forbes article I wrote quite a few years ago.  Each of us has many facets to our lives:  our trading, our careers, our friendships, our romantic relationships, our families, our community activities, our hobbies, etc.  In that sense, our life is an organization, and how well we organize the parts of our lives will play an important role in how successful and fulfilling our lives will be.  

What that means is that, if our life is an organization, then we are the leaders of that organization.  All of us lead our lives, but not all of us act as the leaders of our lives.  Leadership requires the setting of goals and visions; the division and allocation of resources; the creation of inspiration and teamwork.  If you were leading a business organization the way you typically lead your life, how successful would that organization be?  How well are you setting the standards for what will make today, this week, this month successful?  Are you consistently inspiring your own best efforts?

Of course, we are also the leaders of our trading businesses.  How well are we guiding our own learning efforts and structuring our efforts at improvement?  

We are the entrepreneurs of our lives, and we are the entrepreneurs of our own trading.  Perhaps the most underappreciated part of trading psychology is our capacity to exercise leadership in our lives and in our trading.

Further Reading:

Tracking the Rhythm of the Market

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The Importance of Market Cadence

 

In my recent post, I discuss a conclusion from the writings of many trading psychologists:  that successful active trading requires an intuitive feel for market action.  My experience is that looking at relatively static chart patterns or indicator readings does not provide that market feel.  A structural view of markets can be informative, but we get a feel for how a market is moving from the flows of market activity.  It's interesting that many of the experienced traders I've been reading emphasize the value of "reading the tape".  By watching the flow of bids and offers and seeing how price responds to these, it's possible to get moment-to-moment readings of how the market is moving and whether buyers or sellers are dominant.  From this flow of information, we gain a sense for market cadence--and that provides us with a "feel" for the market we're trading.

It's not so different from carrying on a conversation with a person.  We don't just listen to the words a person speaks and their literal meanings.  We also hear their tone of voice and the cadence of their speech.  Those provide us with a feel for whether the person is excited, fearful, cautious, etc.  Consider the difference between a conversation carried out through text messages versus a live, face-to-face conversation.  The latter is far richer in meaning.  No therapist would work people solely through text messages!

It doesn't surprise me that a trading firm that has been successful in training new traders, such as SMB Capital, makes tape reading part of their curriculum.  It's that feel for when buyers or sellers are becoming more aggressive and dominant that allows us to identify solid risk/reward entries and exits for our trades.  Yes, idea generation may come from our research, reading, and conversations.  What allows us to trade these ideas well, however, is gaining a feel for real time market behavior.  When the cadence of price action shifts, we are alerted to changing dynamics among buyers and sellers and suddenly that good idea becomes a good trade.

I'm not convinced that tracking the order book is the only way to gain a sense for market cadence.  One thing I've been doing in my own trading is tracking high frequency market action by using volume bars.  If I'm trading stock index futures, for instance, I might track a chart of open/high/low/close for each 1000 contracts traded.  When the cadence picks up, I feel the volume rising in real time.  When market direction changes with the cadence, I'm alerted to a new dynamic among buyers or sellers.  Gaining a feel for the market does not magically result from being relaxed or focused.  We can meditate all we want, but if we don't understand the dynamics of price behavior, we will calmly lose money.  Our sense for markets comes from absorbing the flow of information, much as a psychologist absorbs the flow of conversation in a therapy session.  We feel markets the same way we feel music on a dance floor:  through shifts in tone and cadence.

Further Reading:

Feeling the Next Trade

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Feeling the Next Trade

 

What role does emotion play in helping you trade well?

What role does emotion play in disrupting your trading?

How does your trading process harness the intuitive feeling that comes from long exposure to markets and their patterns?

Two weeks ago I wrote about the trading psychology texts I was reading and what I was learning from those.  What I found was that reading multiple books on a given topic opened the door to unique insights.  An important theme from the books I read was that, in some ways, we are wired in ways that prevent us from succeeding at trading.  If we simply go with our natural instincts, we'll sell when things are weak, buy when they're strong, and fall prey to choppy, trendless markets.

Since then, I have scoured texts by Jason Williams, Denise Shull, Mike Bellafiore, Ari Kiev, Eve Boboch and Kathy Donnelly, and Mark Douglas--and there's more to come!

A number of these authors highlight that emotion is a common source of failed trading but point out that our feelings--our gut instincts--often help us identify opportunity.  Denise Shull makes the valuable distinction between trying to figure out what others don't know versus figuring out what people are soon going to know.  In shorter-term trading particularly, we can anticipate how the crowd will respond to various scenarios and position ourselves to take advantage of that.  A good example is seeing short-term volume expand as we move to the edge of a range, setting up a valuable breakout trade.  We often can feel the momentum of such a move long before it's obvious on a chart.

We need a process for staying connected to what others are feeling.  That is called empathy.  

The challenge is that the ability to feel what others are going to do comes from long hours of observation and experience.  It is not unlike the psychologist's ability to sense an important issue from the stream of conversation with a client.  Access to that empathic intuition requires focus and the ability to absorb ourselves in the moment.  That openminded ability can be trained.  It's when we're filled with efforts to predict the market that we're most likely to fail to identify what the market is actually doing and fall prey to the emotions of frustration, fear, and greed.  

Further Reading:

How We Can Improve Our Access To Intuition

The Role of Intuition in Trading Decisions

Trading With Emotional Intelligence - Part One, Part Two

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How We Become Successful

 

Success is not the result of motivation.

Success is not the result of positive thinking.

Success is not guaranteed by talent.

Success is built inductively, from the bottom up, by doing one thing after another successfully, day in and day out.  

We internalize what we consistently do.

When we do small things successfully and consistently, we internalize a sense of being successful.

When we do things greatly each day, we absorb a sense of greatness.

Small actions, planned and performed successfully and consistently:  This is how we learn to trade successfully.

Each activity in daily life, planned and performed successfully and consistently:  This is how we learn to live successfully.

We can be reactive, we can follow mindless routine, or we can act out of conscious values, goals, and plans. 

We become successful when we wire ourselves for success in our smallest activities.

All success springs from the expansion of free will and the consistent achievement of our aims.

Good trading begins with one good trade.  Profitable trading makes the one good trade consistent.  Great trading builds many one good trades across various markets.

Success is built inductively.   

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Beyond Meditation: Using Biofeedback to Change Behavior Patterns

 

Very interesting research on neurofeedback (providing people with real time biofeedback readings of brain wave activity) suggests that when people can learn to control their brain waves, they can change even very difficult behavior problems, such as alcohol abuse, traumatic stress, and attention deficits.  Evidence suggests that neurofeedback builds our self-regulation.  Newer neurofeedback devices can be worn in everday life, including sleep, allowing for ongoing monitoring of our ability to operate "in the zone".  The very portable nature of these devices allows us to use them in performance situations (like trading!) to track and work on our self control in real time.   

Big questions:  Can real time feedback during trading help us build our self-control and capacity for sound decision making under conditions of stress and uncertainty?  If neurofeedback can help us control addictive patterns of drinking and chronic problems of anxiety, might it help us directly reprogram the triggers for our worst trading behaviors?

What I find most exciting about applications of neurofeedback is that they provide us with the data that tell us how we best operate in the zone.  The strategies that work for one person may not work for others.  Neurofeedback is a real time score card for self control.  Each person, getting live data in actual performance situations, can figure out how they are most able to maximize their performance mindset.  As a recent research review of over 3000 journal articles reports, neurofeedback is an example of "personalized medicine", where people, empowered with data, can figure out what works best for them.

I see that the FDA recently approved neurofeedback for the treatment of posttraumatic stress disorder (PTSD).  If we can rewire ourselves even in conditions of trauma, surely we can rewire our reactions to financial markets!

I will be experimenting with the latest technology for use in trading and look forward to sharing my findings.  It may turn out that the most effective coaching is training in self control.  If we can discover the "personalized" strategies that uniquely maximize our performance, that could be a game changer--

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Coaching By Immersion: Surrounding Ourselves With Insight

 

This weekend has been special.  I have immersed myself in books about trading psychology from such authors as Tom Hougaard; Andrew Aziz and Mike Baehr; Steven Goldstein; Steve and Holly Burns; Mark Minervini; Anne-Marie Baiynd; Michael Lamothe; and Jared Tendler.  Next weekend will be a fresh crew of authors that I'll immerse myself in and share in a post.

For me, the key to immersion is reading multiple books simultaneously, focusing on overlapping topics.  When you have several experienced, insightful authors all addressing the unique emotional challenges of trading, it's like sitting in on a conversation and absorbing the unique perspectives and the areas of agreement.  That immersion brings the topics to life in ways that are difficult with ordinary reading.

All this preparation for my next book has had one unexpected impact:  It has absolutely renewed my interest in trading--and in being immersed in a community of dedicated and insightful traders.  As the quote suggests, what we surround ourselves with is what we become.  Perhaps I will be my best as a trading coach (and as a trader!) if I'm immersed in markets and the daily insights and inspirations of dedicated traders.

One lesson I've learned from these authors and experienced coaches:  Success in markets requires more than changing certain behavioral tendencies or emotional patterns.  We literally have to rewire ourselves to adapt to ever-changing markets and the shifting demands of risk/reward.  I love the subtitle of Tom Hougaard's text:  "Why normal thinking never wins the trading game".  Preparing for trading in normal ways and living a normal life cannot possibly wire us for supernormal success.  Making trading successful pushes us to remake ourselves.  

That is a noble challenge.

Further Reading:

Focusing on the Quality of Your Reps

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You Are The Entrepreneur Of Your Life

 

You are the entrepreneur of your life.

From the moment you wake up, from the start of each week, you are in startup mode.

What is your mission?  What is your life's purpose?  (If I asked you, right here and now, to write your life's mission statement, could you do that?)

What is your business plan for achieving your mission?

Who is on your team that provides practical and emotional capital for your life's venture?  Whose ventures do you support, and how do those inspire and enlighten what you do?

What role does trading play in the enterprise of your life?  What incubator helps you grow your trading in ways that grow your life?

You are the entrepreneur of your life. 

Right now, this every day, how are you innovating?

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Video:

The Psychology of Growing Your Trading Business

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Focusing on the Quality of Your Reps

 

During my recent workouts at my gym, I've noticed how much more I get out of the weight machines if I take my time going through the reps.  I have a standard circuit that I go through, beginning with legs, then upper body, then flexibility.  When I slow down my pace at each of the stations--and especially when I take my time extending my body fully through each of the exercises--I get much more out of each set of reps.  On a bench press, for example, it's what I do at the very beginning of the press and at the full extension of my arms that makes the difference.  Taking my time at the most challenging points in the exercise provides a much better workout.

In trading, the reps we put in are our reviews of markets, what we did, and what we could/should have done.  When I worked with active traders in Chicago, I was impressed by the time they spent reviewing the past day's trade bar-by-bar in replay mode.  They didn't just go over charts and whiz through their reviews.  Rather, they slowed down the review, talked out loud what they were seeing bar by bar, and rehearsed making the right decisions.  As I learned from my workouts at the gym, the quality of the reps determined what they took away.  

A review of performance, to be effective, must be a workout.

We build our trading psychology in the course of performing and engaging in deliberate practice.  We can solicit advice from others, but ultimately it's the workouts that make the winners.  Jeff Holden of SMB Capital and I have been challenging developing traders to write up their daily takeaways to cement their learning.  Similarly, experienced traders at the firm put together daily report cards of their trading and monthly reviews.  Some of the writeups are nice summaries.  Others are workouts.

The time and effort we put into our reps determine our level of fitness.  Focusing on One Good Trade is what builds good trading.

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Further Reading:

What Makes an Expert Performer

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An Effective Technique for Mastering Trading Stress

A key to understanding trading psychology is the recognition that trading is a performance activity.  Like sports or performing arts, we practice and prepare and then comes the performance event.  It's natural to have some jitters before the big moment and sometimes in the middle of performing.  That is why this form of stress is known as performance anxiety.  There are medications that can be of assistance in extreme cases of performance anxiety, such as beta blockers, but the majority of people can benefit from a simple psychological technique known as stress inoculation.

Inoculation, of course, is when we inject ourselves with a weakened form of a virus and activate our body's immune system.  This then helps us fight active viruses.  In stress inoculation, we use guided imagery and cognitive therapy to anticipate stressful events before they occur--and then to imagine ourselves coping successfully with those.  So, for instance, before a big public speaking event, I might visualize my audience and mentally rehearse the beginning of my talk.  I might follow that visualization with a scenario where audience members seem uninterested in the topic or imagined situations where I lose my place in the talk.  With each stressful situation, I walk myself through how I would handle it.  Like with medical inoculation, this arouses our psychological defenses--our coping abilities--so that we're prepared for difficult situations in real time.

This technique requires regular practice, but can be a regular part of daily preparation for active traders.  We can imagine our position going against us and getting near our stop; we can visualize not getting filled at our desired level; we can imagine negative thoughts that might intrude during the trade; etc.  During each mental scenario, we vividly imagine how--specifically--we would handle the situation.  By the time trading actually begins, we've been there and done that.  It is difficult for frustrations to get the better of us if they cannot surprise us.

In my next post, I'll share how this technique--and other stress management methods--can be integrated into our ongoing development as traders.

Further Reading:

Three Causes of Trading Stress and What to Do About Them

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A Powerful Framework For Improving Your Trading

 

The most recent post pointed out that our trading psychology challenges evolve as we move from being rookie traders to consistently profitable ones.  Newbies wrestle with the challenges--and inevitable frustrations--of learning markets and weathering periods of risk and reward.  Experienced traders look to build businesses and find themselves tackling new learning curves as they branch out to different markets and strategies.  The reality of a trading career is that the progression from startup trader to experienced one is not a linear path.  Because markets are ever-changing, the winning methods that we discovered at one period may lose much of their edge over time.  I've worked with experienced hedge fund managers who have had to remake themselves as their old strategies became overcrowded.  The learning curve of traders is thus more of a spiral than a straight line.  We always go back to learning, but at higher and higher levels.  

Over time, those who can't evolve become extinct.

The really, really good traders I've worked with continually try new things.  They are like business startups and incubators, innovating and uncovering what works.  I found that a good question to ask traders during the hiring process is to ask them to lay out their pipeline of new ideas.  Just as I would want to invest in a company with a large and promising pipeline, so I look to hire traders that are continually developing.

The most powerful framework for improving your trading is to imitate those innovative traders:  Try lots of new things, see what works, and then build on success.  In psychology, this is known as a "solution-focused" framework.  Over time, identify and study what you are doing when you're not having trading problems and when you're not losing money, because the odds are good that--at those times--you're doing something well.  "Do more of what works" is the motto of the solution-focused psychologist.  Whether you're a developing trader or an established one, look for opportunity, try new things to capture that opportunity, and then focus on and do more of what works.  

Quite simply, this is a formula for evolution.  If you cultivate more and more "mutations" of your trading, inevitably you'll find some that are uniquely effective.  A powerful framework for improving your trading is to discover and then do more and more of what you do well.

Further Reading:

Solution-Focused Trading

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Developing a New Trading Psychology

 

It's not well appreciated, but trading psychology is a developmental psychology.  The issues we face as noobs are not the issues we face as experienced traders seeking to be consistently profitable, and those issues are not those we encounter after years of success.  We evolve and our challenges--emotionally and in trading--grow with us.

Yesterday I went through a list of the traders, portfolio managers, and analysts I've met with over the past month.  Almost all are part of teams at very successful hedge funds.  All are managing portfolios of hundreds of millions of dollars if not more.

None spoke to me about FOMO, emotional trading, or issues of discipline or mindset.

None.

Please hear me out:  It's not that those issues are unimportant.  Rather, they are not dominant issues for those who are well along their expertise curves.  For example, beginning medical students are quite nervous about interviewing patients and performing even simple procedures.  Their emotions can interfere with developing a good rapport with patients.  Experienced residents in medicine no longer deal with that kind of nervousness.  They struggle to sort out complex diagnoses and unexpected reactions to treatments.  As they move along the path to expertise, their issues are less about themselves and more about mastering their work.

So it is in trading.

Once we achieve a high degree of self-mastery, our next challenges involve market mastery.  We learn to sort out supply and demand, risk and reward, across different time frames.  We learn to use the movements of other markets to help us understand our market.  Most of all, we learn who we are and what we do best and we become better and better at applying our strengths to our trading.

As beginners, we struggle with the inevitable negative psychology that accompanies risk, reward, and frequent losses.  As experienced traders, we wrestle with our positive psychology and discover who we are and how we perform at our best.

That is why the book I'm writing is about positive trading psychology.  It's about finding our unique, distinctive strengths and applying them to how we process market information and find superior risk/reward opportunities.

Greatness is more than the absence of mediocrity.  

Success is more than the absence of mistakes.

Expertise is more than a positive mindset.

Our challenge is to uncover who we are at our best and leverage that in the marketplace.  As we grow, we move from a focus on negative psychology to one of positive psychology.

Further Reading:

Greatness in Life and Trading

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A Quick Trading Self-Assessment

 

Here's a checklist to guide your evaluation of yourself as a trader:

1)  What did I learn from today, and how--specifically--will I bring that lesson to tomorrow's trading?

2)  What do I see in markets that others don't see and what am I seeing uniquely in the market right now?

3)  When is not trading the right decision and how have I utilized my time when I'm not in the market?

4)  What is my pipeline of new trading approaches and ideas that I am developing for the future and how am I working on that today?

5)  What have I learned this week from others and what have I cemented by teaching others?

When we do positive things in trading, we grow a positive trading psychology.  When we do positive things in life, we grow a positive psychology.

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The Key To A Successful Life

 

Let's start with the conclusion:  The only path to a successful life is to live a success-full life.

I've been reading a number of books summarizing recent research in positive psychology and will sharing the major conclusions in my next book.

One conclusion especially stands out:  The various attitudes and activities that lead to a happy and fulfilling life--love and social connections; spirituality; gratitude; physical health; achievement; self-acceptance--all are developed by actively exercising them.

If we challenge ourselves in our work, relationships, mindset, and physical development, we can live a life that is successful, because it is success-full.

Living life consciously and intentionally takes a hell of a lot more than sitting for a few minutes and doing meditation exercises.

Living life purposefully means that we create challenges and goals in every area of life that matters to us.  

All of life is a gym.

One question matters:  What is today's workout?

Further Reading:

Building Our Emotional Fitness

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Positive Trading Psychology - III: Framework

 

The first post in this three-part series on positive trading psychology emphasized the emotional and physical side of optimal performance, which has been called flourishing.  The second post looked at the cognitive side of trading success, including the development of focus and deeper, faster processing of information.  In this post, we'll examine the importance of developing a framework for understanding markets and creating our trading edge.

In any competitive endeavor, whether it is chess, basketball, or boxing, we have to understand who we are competing against.  Notice that in all these activities, we don't just prepare for success by building ourselves up.  We also study the opposition and their strengths and vulnerabilities.  An important part of preparation for the next game is watching film, studying the opponent, and then formulating strategies and plays that maximize our strengths and take advantage of our opponent's weaknesses.  Because the opposition is always changing, our game prep always varies.

Over the years, I've found that consistently successful traders possess a framework for understanding markets and opportunities.  That framework clarifies three vital components of strategy:  1) who they are making money from; 2) how those other players behave in particular market conditions; and 3) the types of trading that work in those different market environments.  We can think of a trader's framework as the essence of their business plan:  it guides decision-making under dynamic conditions of risk and reward.  As Michael Dell points out above, we need a dream to succeed, and it's our framework that helps us realize that dream in the real world.

Volume is always changing in markets, which means that market participants are always changing.  Volatility is always changing in markets, which means that market moves always vary in how they extend and reverse.  Correlations are always changing in markets, which means that what we are trading varies in its sensitivity to other markets.  Without a framework to make sense of the environment we are facing today, we are as unprepared for game time as the team that never studies its next opponent.  Can you imagine preparing for an outdoor football game without understanding the probable weather conditions at game time?  Without studying how the opponent varies its offensive and defensive alignments and strategies?

This is an important reason mentoring is vital to a trader's development.  When we are exposed to multiple mentors, we absorb different frameworks and ultimately synthesize those into our own.  We develop our own positive psychology when we broaden and deepen our understanding of what to do and why we are doing it.  Take a look at groups that are active in mentoring, such as SMB Capital; BearBull Traders; and My Investing Club.  All feature multiple mentors that enable a developing trader to internalize a framework for making decisions under dynamic conditions of uncertainty.  The result of all this mentoring, for a trader as well as a football quarterback, is what Mike Bellafiore calls a "playbook".

Trading psychology aids our performance, but having a framework for trading grounds our trading psychology.

Further Reading:

Elements of My Trading Framework

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