In the last post, we took a look at four patterns that commonly show up when traders experience emotional challenges to their trading. The underlying drivers of these patterns are frustration (over losses or missed trades), distorted thinking (overly optimistic/pessimistic following wins/losses), and anxiety (over possibilities of losing money or failing to make money). Once those triggers are activated and we become frustrated, overconfident, negative, or fearful, it's easy for those states to color our views of markets and our next decisions and actions.
So how can we prevent cognitive and emotional triggers from sabotaging our trading?
My favorite approach addresses prevention rather than care: not allowing state shifts to shift our trading processes.
The approach begins with acceptance. We are not going to eliminate frustration, uncertainty, or mood swings. Trading operates in an environment of uncertainty and risk. That will elicit unwanted thoughts and emotions at times. It's OK to be human and to have human feelings. It's going to happen.
Once we accept that these patterns will crop up, we can then actively anticipate them. Instead of putting them out of our minds, we want to make them our focus.
Once we're in that state of acceptance, we want to make use of a straightforward, but powerful stress management routine. We listen to peaceful, relaxing music; close our eyes; slow and deepen our breathing; and sit very still while slowing down and focusing on the music. We use the breathing to bring our body's level of arousal down, and we use the close listening to the music to intensify our cognitive focus. Through this routine, we keep ourselves out of the "flight or fight" mode of stress and into a mode of peaceful alertness.
The stress management routine requires some practice, so we want to repeat the exercise a few times a day for several days to become good at reaching that peaceful alert state. With practice, we can focus ourselves and get ourselves out of fight or flight mode on demand.
Then, once we've become good at the stress management, we do the exercise with the music and deep breathing, but now we add imagery. We imagine the challenging market situations that normally trigger our frustration, distorted thinking, anxiety, etc. In other words, while we're playing the music and breathing slowly, we're vividly walking ourselves through situations where we miss a trade, lose money, go into drawdown, trade poorly, etc. While you're imagining those situations, you want to actually imagine and *feel* those emotional responses that have sabotaged your trading in the past: you want to feel the fear or greed or frustration.
But you're now experiencing those emotions while you are in control, focused and relaxed. You keep focusing on those situations and emotions until you can stay in your calm, focused zone.
This is an exercise you'll want to do every day before the start of trading and perhaps also during midday breaks. The repetition allows you to actively face emotional challenges while staying in control. Through repeated experience, we reprogram our negative patterns of thought and emotion. We experience them, but they no longer define or control us.
Once we've achieved a level of acceptance and self-control, we then add a final component to our imagery work: we vividly imagine the problem scenarios and our negative emotional and cognitive reactions to those, but now we also vividly walk ourselves through how we would like to deal with those reactions. So, for example, we might imagine missing a trade and feeling frustration and thinking how stupid we are and then visualize ourselves stepping back from the screen temporarily, doing some deep breathing, and coaching ourselves in a more constructive mode, telling ourselves that it's OK to miss something, that opportunities will continue to arise, that the important thing is to stay focused for future opportunity, etc.
All of this mental rehearsal is also done while we're breathing deeply and slowly and listening to the relaxing music while seated in a still position. So through repeated mental rehearsal, we're imagining situations that upset us--and we're practicing ways of thinking and behaving to handle those situations constructively.
The repeated mental rehearsal builds new habit patterns for us. As we build those new habits, we can then experience frustrating and discouraging situations in our trading, take a few deep breaths, and engage in the constructive self-talk and actions that we've been rehearsing. The visualization exercises act as practice, so that we are more prepared to sustain control during actual trading.
Over time, this accomplishes prevention. We still experience losses, we still have frustrating experiences, we still feel giddy at times, but now we have a set of tools for staying calm, staying focused, and staying in control by responding to these challenges in the ways we've practiced. Once we accept that emotional and cognitive overreactions will occur, it becomes easier to anticipate them and deal with them effectively.
Further Reading: Performance Anxiety in Trading as a Cause of Discipline Lapse
For those looking to go into greater depth into related topics, The Daily Trading Coach book contains a cookbook of psychological techniques for traders. The Trading Psychology 2.0 book contains strategies for enhancing positive emotional experiences as a way to buffer trading stresses.
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One of the topics that came up at yesterday's trading psychology workshop was how many trading problems occur as repetitive cycles. Very often, a trader does not have ten problems. Rather, there's one problem, repeated in ten ways, on ten occasions. When we act as our own trading coach, we learn to recognize these patterns in real time, interrupt them, and give them a different ending. The initial goal is not to make the pattern go away--that often takes time because the pattern has been overlearned--but rather to become better and better and recognizing and shutting down the pattern before it sabotages our trading.
What that means is that, when a trigger for a pattern occurs, it is more important to focus on ourselves than on our trading. If one of our patterns is triggered, the trading we're likely to miss is bad trading. We can't change a pattern unless we can first interrupt it. Stepping back from trading temporarily to disrupt a pattern gives us greater control over how we think and how we respond to markets. Every time we interrupt a cycle of bad trading, we build our mindfulness muscles and make it easier to break the patterns the next time.
Here are four patterns that came up during the recent workshop:
* We make money, become overly excited and optimistic, add to risk at bad levels, and then sustain debilitating losses;
* We lose money on a trade or experience a drawdown period, become frustrated, and begin placing marginal trades to try to make the money back;
* We lose money in a drawdown, become negative and pessimistic, and then miss out on subsequent opportunity.
* We make money, perfectionistically think we should have made more money, and then add to positions at bad levels or take poor trades to make up the difference.
Notice how in each situation, there's an event, a set of thoughts and feelings triggered by the event, and then behavior driven by those thoughts and feelings. Mindfulness means that we are on the lookout for those thoughts and feelings, so that we can calm and focus ourselves *before* placing our next trade. When we truly know our patterns, we are in a much better position to anticipate them and take a helpful pause before re-entering the market.
In my next post, I'll outline a few ways of effectively interrupting our worst patterns.
Further Reading: The Power of the Pause
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Jonathan Wai's excellent review of Fernand Gobet's summary of cross-disciplinary research on the development of expertise makes it clear that elite achievement in any field cannot be easily reduced to nature or nurture or any single factors. Crucial to expertise is perception, because what we perceive dictates what we can process, store, and ultimately draw upon. Something can be in our field of vision, but we may not see it. Expert performers see more of their visual fields.
When I trained as a therapist in graduate school, I was struck by differences in ability among the trainees. I later noticed these differences even more glaringly when I began teaching brief therapy to interns and residents in psychology and psychiatry. The less talented trainees simply did not perceive what was going on with the patient. They were interpersonally insensitive. For example, a client might begin talking about his or her childhood, start to show emotion, and then quickly change the topic. The talented therapist would perceive this and either return the conversation to the avoided subject or bring the avoidance to the client's attention, as a way of exploring how feelings were being handled. The less talented therapist would not notice the shift of topic and how/why it occurred. They would simply allow the conversation to proceed without exploring the promising area. As a result, their sessions were notably unproductive.
Detailed research of expert athletes by Helsen and Starkes found that top performers possess strong linkages between knowing and doing. They not only understand what to do in various situations; they are able to efficiently act upon this information. Helsen and Starkes explain that "Many athletes, coaches, researchers, as well as people in general, still misunderstand and underappreciate the importance of the cognitive demands in dynamic sport settings. In team sports where the environment is constantly changing decisions and responses have to be made quickly and accurately" (p. 24).
Their conclusion could have been made for traders in financial markets, not just athletes. As traders we indeed deal with constantly changing environments and need to make responses quickly and accurately.
A few years ago I directly observed a successful trader while he was trading. I noticed that he had a highly organized manner of perceiving what was going on in the stock market. He made reference to the broad market and what was happening in related macro markets, but quickly shifted attention to specific sectors within the market and individual stocks. At one point he perceived opportunity trading the stock index futures. A little while later, he placed trades in sector ETFs. A less successful trader nearby had the same information on his screens but did not make note of the sector behavior. He became narrowly focused on the general market and thus missed the opportunities in the sectors.
In football parlance, the talented trader was like a quarterback who could see the entire field. A talented quarterback's perception takes in more, and that provides more options for successful action. The quarterback who has narrower vision misses opportunities to make the big pass or the first down run. Both quarterbacks can be knowledgeable about the game and both can have exemplary emotional awareness and control. The difference is in perception. We can only act upon what we see and process.
This helps to explain why so many young traders I've known who ultimately have developed into elite performers began their trading in intensive simulation mode. They did not merely attend classrooms, and they did not simply read books on "setups" and begin trading. Rather, they were like athletes watching game film, studying market behavior and reviewing their decisions at each juncture. Developing chess players intensively study chess games--their own and those of masters--to see at each point in the game what the best options look like. Their learning is all about practice and practice is all about training perception. In Helsen and Starkes' terms, they are learning to coordinate their knowing and their doing.
The reason many traders fail is because markets change and they never truly return to the simulator. They never retrain their perception. This is a very important concept.
There is so much more to successful trading than learning good setups, following a discipline, and being aware of one's feelings. Expert performance is a function of training: training the eye and brain to truly see the entire playing field.
Further Reading: Supercharging Your Learning as a Trader
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A common view, held among traders and coaches of traders, is that emotional factors account for the difference between trading success and trading failure. Some hold that emotions should be controlled, held in check, and made secondary to the discipline of rules. Others hold that emotions should be accepted and experienced in a mindful way and, when possible, used as information. In either case, the goal is to ensure that decision making is achieved through a proper trading process and not driven by the emotional experiences and impulses of the moment.
I believe this emotive view of trading performance is incorrect and, in fact, is not plausibly asserted in any other performance domain. No one, for example, would contend that the path to reaching grandmaster status in chess is a function of successfully dealing with one's feelings. Emotional self-control, while necessary for exemplary performance, is hardly sufficient. Very often, emotional loss of control is the result of poor performance and not its primary cause.
Consider an algorithmic trading system that has been overfit, using many predictors over a lookback period to anticipate future price behavior. Such an overfit system has negative expected returns, but hardly because emotional factors have interfered with its performance. Rather, it is generalizing from improperly derived rules, assuming that the future will rigidly replicate the past.
My years of working with traders as a performance psychologist have led me to the view that success in financial markets is more a function of cognitive strengths than emotional/personality ones. Moreover, my experience has suggested that these cognitive strengths are domain specific, rather than domain general. That is, the skilled trader develops ways of thinking about markets that are unique and distinctive to financial markets and doesn't simply develop general reasoning skills that would lead to success across fields of performance.
An analogy would be the performance of a physician. The skilled physician picks up on symptoms, takes a good history and physical, decides upon tests to conduct, assembles the findings into one or more plausible diagnoses, conducts more tests to differentiate among the diagnostic possibilities if necessary, and eventually finds treatment options based upon the preferred diagnosis. All during this time, the skilled physician is maintaining a good rapport with the patient and engaging the patient in a supportive way, encouraging the patient to be as forthcoming with information as possible.
Should the physician get the diagnosis and treatment wrong, we would not immediately assume that emotional factors got in the way of a successful outcome. Rather, we would look for breakdowns in the physician's reasoning and decision-making process. This process is domain specific in that it is not used by professionals in other performance-related fields. The reasoning process of the chess grandmaster does not resemble that of the physician and neither resembles the reasoning of a successful daytrader.
(Notice in the case of the physician that more than one reasoning skill may be at work simultaneously. The judgments involved in sensitively engaging the patient and maintaining rapport are different from those used to navigate a decision tree for diagnosis. For a successful trader, the reasoning used to identify a worthy investment could be quite different from the reasoning used to determine when to make that investment. The skill needed to accurately diagnose a tumor is different from the surgical skill needed to remove it.)
When trading firms *have* shown interest in cognitive factors when recruiting traders, they often have looked for general competencies rather than ones specific to the trading domain. Thus, for example, they might have candidates perform a general reasoning test or they might look for good grades on a college transcript. When I was teaching full-time at the medical school in Syracuse, I was surprised by the fact that grades in college *did* predict medical school grades--but only in the first two years of classroom-based medical education. College grades and even grades in basic science courses in the initial years of medical school were not meaningful predictors of clinical performance with patients. Knowing how to study for tests did not correlate highly with knowing how to engage patients, navigate decision trees of diagnosis and treatment, and implement actual procedures.
The domain specificity of the cognitive processes that contribute to successful trading performance helps to explain one observation that has always struck me. Traders trained in classroom-like settings (or left to their own devices to learn trading through reading books and watching screens) rarely achieve success. I consistently observe the highest hit rate on trader development in situations where the new trader directly observes the experienced trader and models the behavior of that more senior professional. In other words, trading is not learned through general learning mechanisms (classrooms, study), but through very specific observation and modeling.
It is not coincidence that medical education starts in the classroom to gain basic knowledge of physiology, biochemistry, and pathology but then quickly moves to the clinics and hospital floors to allow for shadowing and direct observation of practicing physicians. You learn to treat a patient by watching competent physicians treat patients and by modeling their decision-making processes and domain specific skills. No amount of reading or self-study could help a student become a successful psychiatrist or gynecological surgeon.
The domain specificity of trading skill also helps explain why very intelligent people often don't make for very successful traders. Other traders I've known who are quite successful in markets are notably weak in their performance in other areas of life (as parents and spouses, for example, or in the conduct of their own personal finances). Several trading firms have been known to look for potential trading stars by recruiting successful poker and video game players. They are hypothesizing that the skills specific to those performance domains are generalizable to trading. That focus on domain specificity is one of the rare pieces of recognition that it takes more than emotional discipline and awareness to succeed in trading.
All of us have two eyes, but many of us have different views. It's what happens cognitively--in our information processing--that determines how perceptions become expressed as views. Traders truly interested in developing themselves as professionals need to do what aspiring chess masters and physicians do: learn from the masters.
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In the last post, I outlined a way of determining when technical analysis provides us with potential information versus randomness. Above I've charted one of my favorite indicators, NYSE TICK (red line), as a two hour oscillator, plotted against the SPY ETF (blue line) during a recent stationary regime from January 20th to the present. The oscillator is yet another way of defining "overbought" and "oversold" conditions, different from the rate of change measure with event time depicted in the previous post.
A couple of things are evident from the chart above. Recall that the NYSE TICK is a measure of stocks trading on upticks minus those trading on downticks across all listed NYSE shares. What we see during the recent regime is a preponderance of positive TICK values: the mean is considerably greater than zero. We've been seeing net buying and that has translated into an uptrend over the period.
But let's take a closer look. The rate of change in SPY over the course of the lookback period has accelerated. The NYSE TICK distribution has been stable over the period, but we're seeing greater upside price change in the second half of the distribution than the first half. What that tells us is that each unit of buying pressure is giving us greater upside bang for the buck--a market that is gaining strength. When we see that bang for buck increasing or decreasing over time, it's an important tell regarding the ability of buyers/sellers to move the market.
I refer to this bang for buck as the efficiency of buying/selling activity. An efficient market is one that yields a relatively large amount of price change for each unit of buying or selling. Typically, when we see the starts of bull and bear moves, we see an upswing in efficiency. When we see those moves topping or bottoming out, we see a decline in efficiency. Most recently, we've seen SPY fail to make fresh highs on recent buying, the first meaningful inefficiency we've seen in a while, and a condition that has led to overnight weakness.
Momentum trades come from jumping aboard moves that are gaining efficiency.
Value (mean-reversion) trades come from fading moves that have lost efficiency.
The smart trader doesn't trade trends and doesn't fade them. The smart trader trades the patterns that show up during stable market periods.
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Above we see a chart of the ES futures going back to January 23rd (blue line) drawn from early this morning. A new data point is plotted every time we see 500 price changes in the contract. This means that the X axis is denominated in price movement (volatility) units, not in time units. When markets slow down (such as during overnight hours or at midday), we draw fewer "bars". When we see an upswing in movement, we draw a greater number of bars. Thus, when nothing is happening in the market, nothing is really happening in the chart.
The lookback period going to January 23rd is one that I identified as a stable market regime. In statistical terms, the distribution of prices over that period was stationary. I run simple tests in Excel to compare volume and buying/selling distributions within that lookback period to identify when we have a stable regime. Within stable regimes, we can use simple technical indicators, such as overbought/oversold measures, to help us identify candidate buy and sell areas. The overbought/oversold measure in red looks at how price deviates from its 50-bar average in standard deviation units.
As a rule, in a stable regime, I want to be a buyer of higher price lows (oversold areas where price remains higher than at the prior oversold levels) and a seller of lower price highs (overbought areas occurring at successively lower price highs). When the recent market is not stable (significant differences in participation and in the behavior of the participants), there is no a priori reason for believing that technical indicator readings drawn from the recent past will be relevant to the immediate future.
What that means in practice is that using standard preset levels on standard technical measures to derive trading signals in all markets is a very inefficient process. Much of the time, we'll be inappropriately extrapolating the past into the future. When those strategies yield (predictably) random results, traders become frustrated and then look to trading psychology to cure their woes. Clueless coaches are apt to provide those traders with less than helpful advice to "follow your process" and stay "disciplined" in trading. Slavish adherence to a random process will only yield consistently random results.
Technical analysis is like card counting in blackjack. It works if there is a constant number of decks from which cards are drawn. If the number of decks in the shoe changes randomly, knowing the number of face cards played in the recent past will not provide information about the number likely to show up in the future. If there is a relatively constant set of participants in the marketplace and their buying and selling activity falls within stable parameters, we can make a reasonable inference as to the probability of forthcoming buying or selling.
The smart trader is not looking for where to buy or sell. The smart trader is looking to see if the current market activity is stable relative to the activity of the recent past. The smart trader watches the dealer and figures out when card counting truly yields a betting edge.
Further Reading: A Dynamic Approach to Technical Analysis
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In my recent Forbes article, I reflect upon traders that I see making money in these low volatility market conditions and identify four strategies that they are employing. In each case, they look at markets in a different way to detect meaningful movement in seemingly choppy, difficult market conditions.
What the article doesn't highlight is that the great majority of those traders had to go through challenging P/L periods to get to the point of embracing the strategies that have proven helpful. They stayed on the dance floor long enough to find opportunity. Many times, inspiration came from seeing what other traders were doing that was making money. That inspiration led them to try new things in small ways, build familiarity with a new way of viewing and trading markets, and then build out those strategies.
In my most recent trading, I have been focusing on identifying stable market regimes--periods in which who is in the market and what they are doing has been relatively constant--and then identifying winning trading patterns specific to those regimes. When I detect the current day's trading to fit within that regime, I wait for those winning patterns to emerge. Those define opportunity for that particular market. Another market may yield a very different pattern of opportunity and still others may yield none at all.
Note how different this is compared to expecting one particular "setup" to work across all market conditions. It opens the door to opportunity in a new way.
If markets are always changing, traders must always innovate.
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Perhaps you've heard the definition of a hater: Someone who watches you walk on water and then announces to the world you're not able to swim. The sad reality for all who aspire and achieve is that we occasionally deal with people who are threatened by the best of who we are and what we do.
A great friend is one who is sensitive enough to be there for you when you're down and secure enough to celebrate when you're soaring. Haters are never secure, happy people. They may show a great deal of interest when you're down, reveling in your setbacks with false concern, but they're remarkably silent when you have cause for celebration.
I deeply appreciate the trader who recently wrote to me about the topic of integrity. He had heard a false rumor that I was fired from a hedge fund where I had worked--and that my firing was supposedly for reasons of improper behavior. It meant a lot to me that the trader chose to share this with an email labeled "private and confidential". I let him know that I still worked at the fund, that I remained on good terms with the traders and managers, and that indeed I have never been fired (or disciplined for impropriety) on any job I had held.
Still, someone, somewhere had felt the need to start and spread a rumor. Not because I had done anything wrong, but because I had achieved a measure of personal and professional success.
It's sad but true: If you succeed in your trading, if you find happiness and fulfillment in your relationships and your career, if you build a loving and caring family, not everyone will be happy for you. Some will try to bring you down.
Haters hate what they do not have. They resent what they cannot themselves achieve.
So how can you learn to love dealing with haters?
The greatest response you can give is to not allow yourself to be consumed with hate and rededicate yourself to the best of what has brought you to this point. You double down on caring, loving, working hard, and being the best person you can be. When I heard the rumor from the trader, I smiled, told the story to Margie, and quickly scheduled pro bono time to help a young professional in need. I took extra steps to help my sick cat and get her a specialized, hard-to-find medication that could ease her symptoms. The best way to do well is to do good. The world is far too beautiful a place--and far too filled with opportunities to do well and do good--to be wasted in hate and envy. You're truly in a good place when haters redouble your love of life.
Further Reading: A Unique View on Why Traders "Sabotage" Themselves
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One of the things I'm most looking forward to in this coming Sunday's four-hour seminar at the New York Trader's Expo is the opportunity to conduct true group coaching with attendees. It's surprising how little coaching of traders occurs in group mode, especially given the common overlap of concerns among traders. I'm looking forward to the experience because of several powerful advantages of working in groups:
1) In groups, there are opportunities to gain insights from other members as well as from the group organizer. Take AA as an example: much of the impact derives from the interactions of members to support, challenge, and enlighten one another.
2) Groups, run properly, can be fun. They lend themselves to interactive exercises and lively dialogue. We tend to be most focused on what is most engaging. Groups can actively engage us.
3) The loyalty built within groups brings the best out in people. I saw this when I ran group therapy sessions on the inpatient psychiatry unit of a hospital. Members reached out in ways for others that they couldn't always do for themselves.
Perhaps best of all, groups can become phenomenal creativity resources. Imagine a group of dedicated traders, each bringing their best trade of the week--and their best psychological practice--to the group meetings. Everyone can play off everyone else, modifying the ideas, applying them to their own situations, and generating new best practices for the entire group. When group members are passionate about what they do, that passion becomes self sustaining, fueling the development of new ideas and methods. It's an important reason some traders choose to join trading firms rather than trade on their own. It's an important reason solo traders maintain active networks with like-minded peers.
Think of basketball and football teams. Think of AA. Think of Special Forces units. So often, groups push us in ways that we would never push ourselves. Groups support us in ways we cannot support ourselves. Groups give us feedback we'd never think of on our own.
(While writing this, I'm listening/watching MMJ doing their early Conan session. From 2:45 on in the video, you can see how groups, passionate about what they do, make beautiful music.)
Look forward to some great music making this weekend!
Further Reading: Joining a Hedge Fund or Prop Trading Group
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Thanks to a savvy trader for passing along this enlightening news account of how coach Gregg Popovich is helping mentor his young talent through the use of game film. Interestingly, the assignment is not to watch games but to watch specific performers who have the skills that the young players need to develop. By watching the greats in action, the rising stars absorb their example, integrating what they do into who they are as players.
This observational learning occurs in many performance arenas. Chess students study the games of the grandmasters and learn from each move made. In medical school, students undergo a clinical education that teaches them how to care for patients. The motto is "see one, do one, teach one." First you observe experienced physicians in practice, then you do what they do with close supervision, and then you teach more junior professionals, thereby cementing your own learning.
No one pretends that you could become a chess grandmaster or a successful physician by simply sitting in a classroom or by randomly trying things out and hoping to hit upon success. Professional development is a function of internalizing the performance of experienced masters. We become what we repeatedly observe and study.
The power of observational learning helps explain why so many of the most successful traders have developed under mentors, often as part of teams. The Tiger cubs trained by Julian Robertson are an excellent example of observational learning in practice. When world class talents mentor promising students, the result is further world class talent.
As Bella at SMB observes, successful teams not only teach skills but also actively nurture talent with support and caring. This is essential during rigorous and challenging training conditions. It is a major reason why elite military groups, such as the SEALs, conduct their training and operation in teams. Teams take responsibility for their members. Many obstacles are overcome, not just through individual effort and determination, but through team spirit and dedication.
Do you want to know some of the best ways of distinguishing real trader education from the fake kind? Look for teams, look for videotape, and look for the Gregg Popovich approach to mentoring, where you spend considerable time seeing one before doing one. And do you want to see what makes for a future trading star? It's the willingness of a Dejounte Murray to sit on the bench, wait his turn, and use that time to observe, observe, observe the greats and integrate that learning into his game.
Trader education has just scratched the surface of the potential of observational learning.
A thought experiment: What if you recorded your trading and regularly reviewed your best trades? What if you were in a classroom of developing traders and everyone regularly reviewed each other's best trades?
Perhaps so few traders succeed because most are so busy trading that they never sit on the sidelines and absorb the lessons from successful traders.
Further Reading: Four Pillars of Trading Process
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We've heard a lot lately about fake news, both from the political right and left. The truth is that it's difficult to report truth, objectively. Too often agendas slant what we present, turning what should be enlightenment into persuasion or, at worst, propaganda. A credible academic journal presents studies supporting and not supporting various ideas, allowing the data to speak for themselves as much as possible. No one would read an academic journal that only published information supporting specific views, suppressing contrary evidence.
In trading, we see a great deal of web content, seminars, webinars, and books offered as "education". Too often, this is fake education, in that it promotes a particular agenda that is marketed by the writer. How often have we seen something offered as education that starts with a tease and ends with a sales pitch to get interested students to purchase a service or product? That's an infomercial, not information. It's not education; it's advertising.
So what is *real* trading education?
* Real education educates. You come away with specific information and/or skills that you didn't previously possess.
* Real education is on the cutting edge. It provides new information and new skills. It does not merely repeat what has been written many times previously. If what you encounter in a book or webinar could have been encountered three years ago, thirteen years ago, or thirty years ago, it's rehashing, not educating.
* Real education is grounded. It draws upon actual research and actual practice. It is not mere opinion or preference.
* Real education stands on its own. It is not a throwaway lead-in for commercial products or services.
As many of you know, I teach in a medical school. I value the education and training of medical students and residents, and I especially respect the continuing education of practicing physicians. Without continuing education, a physician is locked in old information and old practices and become stale. Patients suffer. Without quality continuing education, traders--and their capital--suffer the same fate. Education is far too important to be left to fakery.
True continuing education for experienced traders is the next great frontier in trader development. Not rehashings of worn out technical trading patterns, bromides about discipline, or trading tales from old timers. Real, actionable education based on real research and real practice. It's an important part of what distinguishes a profession from a hobby.
Further Reading: Toward a Curriculum for Traders
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Consider the following situations that I've encountered recently:
* A trader was concerned about his inconsistent performance. He asked for help with sticking to a set routine. When I gathered background information, it turned out that he had significant symptoms of depression and a family history of depression. Because he did not have a full-blown major depressive disorder, he assumed that his inconsistencies of mood and energy level were simple lapses of discipline.
* A trader asked for help with overtrading. He took too many trades, especially when he became frustrated. His impulsive decision making was costing him money. He wanted to find a way to achieve greater discipline in his trading. His history documented a lifelong pattern of attention-related problems and poor frustration tolerance. He had been diagnosed with attention deficit disorder in grade school but stopped taking medication and assumed he had outgrown the problem.
* A trader showed good trading results, with superior risk-adjusted returns. He did not take meaningful risk, however, and as a result never made much money. Despite encouragement from his manager, he found it difficult to increase the size of his trades. His early adult history included episodes of social anxiety and psychosomatic problems related to anxiety.
In each of these cases, the trading problem was the result of a larger problem. The trader approached the problem as if it was a trading issue when in fact it required professional attention.
Not every problem that impacts trading can be solved by goal setting, writing in journals, and placing motivational post-it notes on a computer monitor. Sometimes a trading problem is a manifestation of a much broader problem. No amount of talking with a trading coach can properly address issues of depression, ADHD, or anxiety. If you examine your history and find problems that have occurred outside of your trading, perhaps those need to be considered as possible causes of your trading concerns. The right diagnosis and the proper help can be the best thing you could do for your trading.
Further Reading: Best Practices for Dealing With Drawdowns
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Here are five helpful questions that traders too rarely ask:
1) What was the price path of what I was trading *after* I stopped out of the trade? Does my exit execution actually add value?
2) What has been the price path of what I've been trading after I entered the trade? Does my entry execution have positive expected value, or am I better off entering in a rule-based, mechanical fashion?
3) When I've added to trades, what has been the P/L just for those added pieces? Does adding to trades truly add to my profitability?
4) What has been the price path of trades I decide to not take because of lack of conviction? Does my conviction in an idea truly correlate with the profitability of trading that idea?
5) How does my P/L behave after I've had a string of winning trades? A string of losers? Does recent performance affect my trading, and--if so--is that impact positive or negative?
Tough to come up with answers for better trading if we're not asking the right questions.
Perhaps the best question of all: How much time do you spend studying your trading vs. studying the markets you trade?
Further Reading: Preparation and Success
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The beauty of financial markets is that, quite literally, you can trade almost any publicly listed asset in the world. If you want to buy stocks in India, Brent crude oil, Japanese currency, or a curve spread in European interest rates, it's very doable. Despite this historic access to global assets, something unheard of for the public just a few decades ago, we find traders locked into trading the same things, the same ways.
Too often developing traders focus on finding the right trading signals and setups; some hidden formula for making money. The reality is that trading success is as much about what to trade (and when) as how to time market tops and bottoms. The past six months in the U.S. stock market have been quite bullish, but notice from the excellent chart from Finviz that sector performance has varied widely over that period. If you were trading interest rate sensitive utilities and consumer shares or healthcare issues, you barely made money if at all. If you were trading financial shares, such as banks, you likely killed it.
What you trade is as important as how you trade.
Some years back, a successful trader I knew well found it difficult to make money trading stocks because volatility had declined. He scanned the universe of commodities and found several that moved similarly to stocks when stocks were volatile. He began trading those commodities and--lo and behold--he started making money again on a sustained basis.
When I recently visited SMB, I met with several traders who were achieving unusually positive results. I quickly calculated their Sharpe ratios and found that, not only were they making significant money: they were doing so with excellent risk/reward. It was clear in speaking with them that they had leveraged technology to identify stocks with the right kind of movement, that provided the best opportunities for that day. Had they traded the exact same patterns in large cap energy or retail shares, they would have struggled for profitability.
A macro portfolio manager who I recently worked with also had achieved consistent profitability with excellent risk-adjusted returns. The strategy involved tracking macroeconomic data in detail and identifying which economies were accelerating and decelerating. The portfolio then went long the growing economies and short the weakening ones. Results were not only positive, but completely uncorrelated to the major market indexes. All because that trader looked in places in the world that others were ignoring. While the great majority was focused on the U.S. President's policies and trading only U.S. currency and rates, the successful trader was long some Latin American assets, short others; long some Asian assets, short others.
If your trading results have been subpar, consider the possibility that your problem may not be psychological and may not even be with your methods. Instead, you could be like the gold prospector who is digging where everyone else has been mining. If you wanted to successfully mine for gold, you'd conduct geological surveys, inspect the land, and go somewhere promising where no one else was looking. Purchasing better equipment and doubling down on your "passion for mining" can't help you if you're digging in the wrong places.
Further Reading: Reflections on Opportunity
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When I first began working with traders, my central insight was that trading is a performance activity. What makes for trading success is not so different from what makes for success in other performance fields, whether they be performing arts, athletics, chess, or surgery. In each of these fields, the star performer begins with certain inborn talents and then refines those through a process of training, mentoring, and coaching. Training and mentoring build knowledge and skills and accelerate the learning process. Coaching provides guidance and helps performers channel their talents and skills to where they can be most successfully applied. Long before elite performers acquire fame or fortune, they spend long hours in becoming. Their focus is on improvement, the refinement of skills, and the development of new ones--not on the the trappings of success.
There are few, far too few, places where developing traders can benefit from the thoughtful integration of training, mentoring, and coaching. It's one reason I've been such a fan of the building of teams within trading firms. Those teams enable senior traders to benefit from the work of junior traders, and they provide hands-on learning, mentoring, and coaching for those juniors. The learning takes place on the desk, just as an athlete's learning takes place on the field--in practice and during games.
No one expects an athlete to develop by reading books, taking classes, or practicing on their own. No one develops as a performing artist by writing in journals and trying out different songs or plays. In performance fields, aspiring performers learn from experienced performers and those knowledgeable about the performance domain. Medical students are trained at the bedside by practicing physicians; chess players hone their talents in academies run by chess masters and grandmasters.
If I were looking to become successful in the trading world, I would learn some skills and/or develop some area of expertise that would make me valuable to a trading team or firm. I would then contribute my skills to that team and learn everything they're doing that makes them successful. Over time, I would integrate my abilities and experience with what I've learned to develop my own path to success--and then I would cement that learning/development by serving as a mentor for a new generation of juniors who could in turn make me better.
I've worked with many individuals, many trading teams, and many trading firms. That is how success happens.
Further Reading: The Foundation of Trading Success
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I had an interesting experience recently. Until the snowfall of the last few days, I had been doing my jogging outdoors. It's great exercise, and it is very effective in clearing out the head and starting the day.
With the recent snow, I went back to the treadmill and resumed my jogging. The great thing about the treadmill is that it continuously measures pulse rate, calories burned, distance traveled, heart rate, and more. As I replicated my outdoor run on the treadmill, an uncomfortable reality hit me: I was not coming close to my target heart rate for optimal aerobic benefit. In simple terms, my outdoor runs were not pushing me nearly hard enough.
That's the great thing about keeping score: there's far less room for making faulty assumptions about your performance. In trading, we think we're working hard at improvement when in fact we're not really breaking a sweat: we're not truly pushing ourselves outside our comfort zones. When I gave a recent talk to the SMB traders, I was asked about patience and discipline and proposed the following exercise: calculate the median number of trades you've placed each day over the past two months. Then divide that number by two and limit yourself to that number of trades for the day. Once you hit that limit, you're done for the day.
Now that is a bit like getting on the treadmill. We're no longer relying on a subjective intention to trade more selectively; we're keeping score and forcing ourselves to actually *be* more selective. If you've averaged four trades per day and now can only take two, you've created a situation where you use half your bullets for the day if you take a single marginal, low-quality trade. Knowing you only have two trades to make during the day forces you to look for the best opportunities and to keep powder dry for possible later opportunities.
When I'm on the treadmill, I can't avoid looking at the screen that tells me if I'm cheating or not. When you're limiting the number of trades, you can't overtrade and somehow convince yourself that you're working on your game. There's a saying that talk is cheap, but it's not. It's quite expensive if it deludes us into thinking we're making progress when in fact we're not making sufficient efforts. Bella was right to lay into some of the traders, just as I was right to chastise myself and double down on sticking with the treadmill. If I want to clear my head and get fresh air, great, go for a jog. But if I want to work out and develop myself, then dammit keep score, track objective reality, and really figure out if I'm truly developing.
It's all about use it or lose it: if it doesn't grow, it stagnates. And if we don't break a sweat and push our boundaries, we never truly grow.
Further Reading: The Greatest Mistake Losing Traders Make
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How can we identify the strengths that can bring us to the next level of trading success?
How can we effectively work on the weaknesses that undermine our current trading?
What specific psychological techniques, proven in research, can help us not just make changes but sustain them?
At the upcoming Traders Expo in New York, Sunday February 26th at 8 AM, I'll be conducting a four hour workshop that will really be a group coaching where we learn about strengths, weaknesses, and change techniques. The longer workshop format will ensure that we address your specific challenges and goals. Please note that the basic Expo event is free; the workshop sessions do have a fee and registration is on a first-come basis.
There will be some good speakers and topics; hope to see you there!
Brett
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