Sunday, July 19, 2015

The Problem With Promiscuity In Trading

Promiscuity and trading:  admittedly not the most common of topics in trading psychology, but I think it's quite relevant.

Alvarez makes a good point:  on important matters in which we feel commitment, there is no promiscuity.  If you're committed to physical health and being in peak conditioning, you won't be promiscuous in what you eat.  If you're committed to a marriage, you won't be sexually promiscuous.  If you're committed to career or a religious faith, you will necessarily be selective in what you pursue.

The problem with promiscuity is that the pursuit of breadth allows for no cultivation of depth.  If I roam from one job to another each year, I never build a career--and never accumulate a career's worth of achievements.  If I flit from one romantic relationship to another each week, I will never experience the depth of relationship that comes from a lifelong commitment.  Once we make a commitment to something, we opt for selectivity.  The pursuit of all things reflects a lack of commitment to anything.

It is common to attribute the breaking of trading rules to a lapse in discipline.  Perhaps, however, those undisciplined occasions reflect an absence of commitment.  Look at it this way:  if you developed your own approach to trading; tested it well, historically and in your own experience; and knew deep down that it possessed unique value, you would feel a degree of commitment to that approach.  You would trade it consistently, not because you impose a discipline upon yourself, but because you believe in it deeply.  An artist doesn't flit from style to style, one painting to the next.  Why?  Because underneath that style is a vision--and that artistic vision expresses an emotional commitment.

When traders flit from one type of trade to another, their promiscuity reflects an absence of such artistry and commitment.  They have not found their trading vision.  Often, their ideas are borrowed from others and not tested and made their own.  One more journal entry or checklist will no more help such traders than they would help the bored overeater.  If you want to eat healthy, you must be committed to an ideal of physical conditioning.  If you want to trade healthy, your trading must be connected to a greater purpose and commitment.   

I will make a bet:

If we were to cut the types of trades that we take by two-thirds and focus solely on the one or two that reflect our greatest edge in markets and our greatest trading strengths--and if we were to meaningfully increase the size/risk taken for each of those trades--our overall profitability and risk-adjusted returns would rise significantly. 

In other words, if trading becomes an expression of a commitment to a particular approach that is ours, many of the problems of trading psychology melt away.  In trading, as in any career, dedication is the most durable source of discipline.

Further Reading:  Solution-Focused Performance