Renewing Our Trading And Regaining Our Passion

One of the most striking differences among traders I have encountered is their grounding in a problem-based mindset versus an opportunity-based mindset. The problem-focused trader is chronically frustrated, battling one challenge after another.  The opportunity-focused trader is inspired, finding meaning and direction in setbacks.  It's easy to become problem-focused when losing money and it's easy to perceive opportunity when things are going well.  The successful traders I've known look for problems when things are going well, because they are always looking for opportunities to improve.  They are also looking for what is going well during periods of drawdown, because that is where opportunities may be showing up.

In a recent article, I outline why I believe we could be on the cusp of important market opportunities. Yes, it's been a challenging period for traders in terms of low-volatility market behavior and erratic trends.  But, as I outline in the article, there *are* strategies and approaches that are working; I *do* see people succeeding.  There is opportunity in current difficulty.

What has kept me alive in markets since the late 1970s, besides risk management, has been research.  Every week I update my database, explore ideas, and test out strategies.  Easily 80% of what I look at is either worthless or duplicates what I already have.  Another 10% is promising but ultimately has limited value.  It's that final 10% that opens new doors and yields fresh opportunity.  I could become discouraged about the 90% of research that never finds its way into my trading, or I could be energized by the 10% that moves me forward.  

If I were not innovating, what would keep me interested, driven, optimistic, and energized during periods of drawdown?  Too often, we are mired in problem-based mindsets because our focus is solely on P/L.  So our focus and passion rises and falls with our equity curves.  When we approach markets with intellectual curiosity and a love of sharing ideas with like-minded colleagues, we create whole new sources of motivation.

Trading was fun when it was new.  The challenge is keeping ourselves re-newed.

Further Reading:  Why Trading Has A Future

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Why We Overtrade and Why We Miss Opportunities

So many psychological problems of trading boil down to underaction, failing to act when it is appropriate to do so, and overaction, taking actions that are not warranted.  Undertrading means that we fail to "pull the trigger" on our ideas.  Overtrading means that we trade outside the range of our ideas.

As Gandhi's quote suggests, our actions express our priorities.  The trader who fails to act is very often prioritizing preservation of capital and avoidance of risk and loss.  The trader who acts excessively is prioritizing gain and avoidance of "missing out".

What I find in working with traders is that underaction and overaction occur in a specific context. Very often the trader has figured out the idea that would have them long or short a market or stock. What they have not explicitly outlined is the specific set of conditions that would have them act upon this idea.  In other words, traders have an idea, but not a clear "setup" criterion that would have them execute that idea.

In the absence of a clear entry or exit signal, traders are left with ambiguity.  That ambiguity is the fertile ground in which those psychological priorities--avoidance or risk, fear of missing out--grow and become dominant.  It is necessary to have sound ideas with edge to succeed in trading, but having great ideas is not sufficient to bring success.  One also must know how to implement those ideas.  Without a sound basis for implementation, ideas cannot come to consistent and optimal fruition.

To be sure, we see the opposite problem as well.  Traders will grasp as "setups"--patterns of price movement--as ideas and trade these without any objective verification of having a probabilistic edge in outcomes.  "Selling is holding at the X price level" may be a useful observation, but it is not a plan and in itself confers no edge.  A common problem among daytraders is such eagerness to trade and make money that relatively little time is spent researching ideas that are actually worth trading and that have the potential to make money.

Once we distinguish between the idea we're trading and our plan for executing that plan, we're in a better place to figure out when we need to work on our ideas and research (i.e., trading the wrong ideas) and when we need to work on the trading of those ideas (i.e., faulty execution of our ideas). Very often, we overtrade and fail to act on valid opportunities simply because we have not been explicit about the idea we're expressing and how we are expressing it.

Further Reading:  Why Disciplined Traders Make Bad Decisions

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Evaluating Yourself as a Trader

Very quickly, evaluate yourself on the following criteria:

1)  Innovation - Researching new sources of edge in your trading, drawing upon different inputs; learning new strategies and markets; finding new opportunities; learning from your experience and the experience of others.

2)  Flexibility - Ability to find opportunity in different market conditions, different markets, and different time frames; ability to move from being aggressive to being patient and back again; ability to trade different strategies and different sides of markets.

3)  Self-Improvement - Always assessing what you could do better and making steady improvements; following through on goals with concrete plans and actions; keeping yourself in peak performance condition.

If I had to identify one flaw affecting struggling traders, it would be stasis.  The static trader does not innovate; is too fixed in doing one thing; and has no consistent process for improvement.  Most important, struggling traders aren't following Elon Musk's advice and questioning themselves.  

Show me what traders are working on outside of market hours, and I will show you the odds of their future success.  A passion for trading in the absence of a passion for innovation and improvement is a sure path to losing money.

Further Reading:  Finding Your Trading Strike Zone

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Reaching the Next Level of Trading Performance

Einstein observed that we cannot solve our problems with the same level of thinking that created them.  In other words, problems exist in our deficiencies of perspective.  Once we reach a next level of perception, thought, and analysis, problems can give way to solutions.  An important contribution of mentors and coaches is to introduce us to next levels of thinking.  If we are locked into our old modes of perception and thought, we will be locked into our level of performance.

On Wednesday, July 19th, I'll be speaking at Stock Twits' second ever Futures Forum in New York City.  We'll be meeting at Slattery's Midtown Pub and enjoying food and drink--and I'll be presenting key ideas regarding getting to the next levels of trading performance. (Registration information for that free event can be found here).

One very important idea is that almost always we are already performing at that next level of performance on some occasions.  It is when we are at our best that we can clearly perceive our next level of development.  That is what we are ready for.  That is what we are already capable of.  At times, we are closer to our goals; at times we are more distant.  When we clearly identify what we're doing when we are nearer to our ideas, we start to piece together a roadmap for getting to our next level.

What are you doing well now and how are you doing those things?

Those are some of the most important questions in trading psychology.  Our next level of thinking is the thinking we're doing when we're performing at our best.

Further Reading:  Building Self-Efficacy

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Beyond Coping: The Inspiration Mindset

Let's consider a key distinction:  Being in a coping mindset versus being in an inspiration mindset.

The coping mindset is problem focused.  It means tackling a difficult, stressful, and/or unpleasant situation and getting through to completion.  The focus of a coping mindset is getting past a negative; getting through a disagreeable challenge.  Coping mindset is what we experience during a subway delay or during an interminable contentious business meeting.  Coping mindset is also what we experience when we have chores to tackle at home, responsibilities with family, and a backlog of demands from work.  

The inspiration mindset is different.  Whereas coping takes energy, inspiration gives energy.  Inspiration is value focused.  It follows from engaging in a meaningful activity, immersing ourselves in a greater vision or purpose.  The focus of an inspiration mindset is appreciating a positive, finding affirmation through our actions and/or experiences.  Inspiration is what we experience when we encounter a breathtaking vista or when we achieve a meaningful goal.  The inspiration mindset is also what we experience when we find closeness in our relationships and a sense of purpose in our work.

Very often the same activities can be undertaken in a coping mindset or in an inspiration mindset.  Performing physical exercise could be experienced as coping with an unpleasant, demanding routine or as a valued development of your capabilities.  Going to work or tackling your trading could be an exercise in coping with threats and frustrations or it could be an opportunity to make a meaningful difference and achieve new and better things.  A marriage can be something we cope with to avoid conflicts, or it could reflect a deep emotional, spiritual, and physical fulfillment.

During periods of flat performance or drawdown in markets, trading can feel like an exercise in coping.  I recognize this when I speak with traders and hear nothing of the excitement, challenge, discovery, and growth that initially attracted them to markets.  It is like speaking to a person who was once in love and now copes with a relationship that has lost its romantic spark.  The trader may choose to work on problem A, B, or C, but it's all just different deck chairs on the Titanic.  The problem is not A,B,or C, but the devolution to the coping level.  The problem is the absence of inspiration:  the way in which trading has become divorced from value, meaning, and purpose.

Traders who sustain an inspiration mindset find value and meaning in markets above and beyond recent performance.  They discover new opportunities through research; they learn new things in their professional networks; they benefit from developing teams and mentoring up and coming talent; they use their trading as a way to develop themselves as people.  To sustain an inspiration mindset means figuring out how to make negative P/L days winning days in process terms.  

Coping and inspiration mindsets are self-reinforcing.  Others respond to the energy we project.  If we come across as inspired, others are attracted to the meaning and fulfillment we radiate.  If we are absorbed in coping, our negative vibe will attract a very different tribe.

What will inspire your day today?  Your week?  Coping is far better than not coping, but there is much more to life than getting through tasks and burdens.  You know you're on the right path when you find meaningful, energizing ways of tackling unpleasant responsibilities and challenges.

Further Reading:  A Powerful Technique for Changing Your Trading Psychology

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Self Awareness and State Awareness in Trading

One of the topics I'll be addressing in depth at the upcoming Chicago workshop (July 24-26) is understanding your physical, emotional, and cognitive states and how those contribute to good and bad decision making.  

Much of our behavior--in and out of markets--is state dependent.  How we interact with others, how we take risk, how we tackle challenges:  all of these are impacted by the degree to which we are energized or fatigued; calm or keyed up; fulfilled or frustrated; distracted or focused; etc.  

In the right states, we can access our greatest strengths.

In the wrong states, we fall victim to our greatest weaknesses.

Awareness and management of our states--and the ability to cultivate new states and extend existing ones--is central to peak performance.

One of the great challenges of trading is balancing market awareness and self-awareness.  

You have a trading process: a way of identifying opportunity, defining trades, and managing the risk and reward around positions.

Do you have a self-awareness process?  

We track price action closely; how aware are we of ourselves and whether we are in the right states for peak performance?

This is one of those areas where work on our trading requires work on ourselves: in becoming better traders, we become more self-aware and self-determining human beings.

I look forward to working on that self-development at the workshop.

Further Reading:  A Cognitive View of Trading Psychology

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What Is Making Money Now In Financial Markets

I recently wrote on the topic of how trading has sharply moved in an evidence-based direction.  That has enormous implications for trading process.  Specifically, it means that traders are spending the bulk of their time researching opportunities in markets, not staring at screens and putting on trades.  The successful trader is looking less and less like an intuitive market wizard and more and more like an insightful, disciplined researcher.

Read carefully the recent blog post from The Mathematical Investor describing which hedge funds are outperforming the others--and outperforming the markets.  It's a relative handful of funds that are performing very well and gaining assets.  These funds have several significant advantages:

*  They utilize high frequency algorithms to place trades and manage positions, making trade management a profit center, but also freeing up traders' time from the tasks of execution.  In many situations, it is far more time and cost-effective to systematize execution than to hire a small army of discretionary execution traders.

*  They have the capability of ferreting signals from large, complex data sets, allowing them to generate edges in trading not available to casual inspection and intuitive processing. 

*  They have the bandwidth to develop many models in many markets, creating highly diversified sources of returns and more reliable revenue streams.

These advantages are conferred by superior processing power (supercomputers); superior programming capabilities (capacity to store and access data and automate processes); superior data sets (more information and more unique information); and superior mathematical expertise (better ways to transform and analyze large data sets without overfitting).

The point that The Mathematical Investor is making is not that quant trading is superior to discretionary trading.  It's that mathematically sophisticated trading/investing has been superior to everything else, including lower-level quant that attempts to systematize discretionary insights by applying basic statistics and modeling methods.

In that sense, trading is looking a lot like weather forecasting.  Forecasting was once a wholly discretionary activity based upon the reading of cloud patterns and the feel of the air.  Later, it became possible to quantify such variables as wind speed, air pressure, and humidity and use this information to understand weather patterns and make forecasts.  At present, computer models capture the complexities of interacting weather systems to make forecasts that would be impossible to an individual forecaster looking at a thermometer and barometer.  

Where I am seeing the greatest success of individual traders is in niche strategies and markets, where inefficiencies are most likely to be present.  Many of these exist in strategies and markets where there is limited liquidity and hence limited participation of sophisticated funds.  An example would be certain commodities and companies, where detailed knowledge of the market and industry can still confer an edge in trading.  This is akin to a small business person finding a niche in a community he or she knows well, thus performing well in spite of the presence of large retail firms.  Specialization, uniqueness, and detailed product knowledge are likely to outperform generalist trading strategies as sophisticated market participants continue to claim the most liquid sources of alpha.

Further Reading:  Becoming an Evidence-Based Trader
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Behavioral Techniques for Mastering Your Trading Psychology: Relaxation

A recent blog post outlined the process of diagnosing the problems that may be leading to drawdowns and poor performance.  This post will be part of a series for the forthcoming trading psychology online encyclopedia on the specific approaches and techniques for addressing those problems when psychology is at their root.  

Behavioral approaches to the change process involve skills building and especially the formation of new, constructive habit patterns.  When we engage in behavioral methods, we are literally teaching ourselves new action patterns: replacing problem patterns with new, effective ones.

The first behavioral method that I have found to be helpful for trading problems is relaxation training. In relaxation training, you teach yourself skills to calm both mind and body.  My favorite relaxation exercise is to listen to absorbing music--I find instrumental music preferable to music with lyrics--while controlling the rate and depth of your breathing.  You perform this exercise seated in a comfortable position and in a quiet environment, free of distraction.  While focusing on the music, you breathe deeply and slowly from the diaphragm, but not in a strained or exaggerated way.  If you notice your mind wander, you simply refocus on the music, perhaps following a melody line or beat from a specific instrument.  During this time, you stay very still and make your breathing increasingly deep and slow.

It usually takes 15+ minutes for beginners to get themselves "in the zone" with the deep breathing and focus.  As you practice (mornings and evenings are great times for practice), you will find yourself quicker and quicker at entering the calm, focused mode.  It's not unusual for a trader experienced in relaxation methods to completely center themselves with just a few deep breaths.  My experience is that the longer the relaxation session, the deeper the state you can enter.  Sticking with the exercise for 30+ minutes can induce a very focused and clear state of awareness.

A variant of this relaxation method is known as "progressive muscle relaxation."  In this method, you start at one end of your body (your toes, for example) and--while listening to music and slowing and deepening your breathing--you slowly tense and relax those muscles.  So you might curl your toes gradually and tightly and slowly release them.  Once you've done that, you work your way up the body, lifting and releasing your feet, then tightening and releasing your calf muscles, etc.  Eventually you work your way to your head and tensing and relaxing your brow and forehead.  All of this typically takes 15+ minutes.

The progressive muscle relaxation works for two reasons.  It calms and focuses you, but it also turns your conscious awareness to your body and away from day-to-day and trading stresses.  This "gearshift"--the alteration of your state of consciousness--is common to all the major approaches to counseling and psychotherapy.  It's a very important principle: to change a behavior, you first have to shift your state.  Learning a new skill in a new state accelerates the process of internalizing that skill.

The key to success with relaxation methods is practice, practice, practice.  It's like any skill: mastery comes from repetition.

Relaxation methods are valuable as preventive tools.  You can practice getting "in the zone" before you start trading and during breaks in the trading day to ensure that you avoid overconfidence, frustration, and discouragement.  It is difficult to get worked up if mind and body are greatly slowed down.  Doing the muscle relaxation midday is a great way to get into your body and return to markets in a fresh state.

Relaxation methods are also valuable tools when you catch yourself overtrading or anxious and avoiding opportunities.  By temporarily pulling back from the screens, you can center yourself relatively quickly and return to markets far more calm and focused.  I often find myself regulating my breathing during trading, thereby sustaining the state practiced in the relaxation exercises.

Relaxation techniques are a first building block for other, more detailed behavioral skills and so they're a great place to start your skills building.  For more detail on relaxation and other behavioral methods, you can check out the behavioral chapter in The Daily Trading Coach.  In the next post in this series, I will illustrate how relaxation methods can be combined with self-hypnotic suggestion for targeted behavioral change.

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