When Doing More Means Achieving Less

The research of Ed Diener is spot on:  happiness and fulfillment are not simply states of being, but ongoing life processes.

What I refer to as "personal process" is the life equivalent of a trading process.  A sound trading process consists of activities and procedures that align us with opportunity and optimal performance.  A sound personal process aligns us with our values and strengths, so that we're not only doing things right, but doing the right things.

My template for personal process involves making sure, each day, I am dedicating quality time to:

1)  Engaging in fun activity, and sharing joy and happiness with others;

2)  Engaging in meaningful activity, doing things that have a valuable purpose;

3)  Engaging in stimulating activity, doing things that energize body and mind;

4)  Engaging in connectedness activity, doing things that build significant relationships.

All too often, the reaction to such a template is:  I don't have time for that!  We make busy-ness our business and, day by day, we lose the sense of fun, meaningful purpose, stimulation, and connectedness.  

Many years ago, I was coordinating a student counseling program and had a number of students seeking help.  I did not want students to have to deal with a waiting list, so I moved from 45 minute meeting times to 25 minute sessions.  My counseling office became an assembly line of meetings.  In the 25 minutes, however, we could not go into depth and detail into each student's challenges.  Nor did I have time between meetings to take proper notes and process all that we had discussed.  For the first time that I could recall, I found myself hoping that someone would fail to show for their meeting, just so that I would have time to catch my breath, take my notes, research counseling approaches that could help each student, etc.

In short, the faster pace took away fun, made the work less meaningful, left no time for stimulation, and interfered with the true relationship-building of my work.  In trying to do more, I achieved less. 

Fast forward to today and traders talk with me about their trading.  They raise problems and concerns and usually their answer to the challenges is to do more:  write more in a journal; meet more with other traders; spend more time in preparation; follow more markets and generate more ideas; etc. etc.  They speed up their efforts, they get further from what they love in trading, and eventually the assembly line breaks down.

Imagine decorating your living room.  You acquire attractive furniture and wall hangings and the room looks good.  Then you decide it can look even better and you buy more furniture, display pieces, and pictures for the walls.  At some point, the items clash with one another:  one style of furniture doesn't go with another, one type of decoration does not fit with the style of others.  With each addition to the room, tasteful decoration gives way to chaos and clutter.

So with our trading, so with our lives:  More can bring less.

Sometimes the answer, for traders as for me when I was doing the student counseling, is to do less and focus more on the parts of the work that bring true joy, fulfillment, stimulation, and connectedness.  Those facets of work yield positivity precisely because they draw upon our strengths.  When we focus on what speaks to us, we turn happiness from a transient state into an ongoing process.  That energizes our trading--and our lives.

Further Reading:

  A Powerful Technique For Changing Your Trading Psychology

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Truly *Leading* Our Lives

All of us lead lives of one sort or another, but how many of us are truly leading our lives?

When you are a leader, you not only have a vision and direction: you communicate and implement it.  How visionary is your life?  How well you do communicate that to yourself and implement daily?

What isn't well recognized is that true leadership transforms us, cognitively as well as emotionally.  It brings us in more consistent touch with our strengths, with the activities that energize us.

A great exercise is to read this new article on leadership from the perspective of how you lead your life.  It's a view from a Special Operations military commander who has seen leadership up close and under pressure.  It raises a great question for all of us:  How well am I energizing my life?

We push ourselves to move at a faster life pace when instead we should make sure we're traveling the right path.  Truly leading our lives sets us on the right paths.

Key Reading:

Cultivating Our Energy

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Resources for Developing Your Trading Playbook

Mike Bellafiore makes frequent reference to traders' "playbooks".  For a basketball or football team, a playbook is a set of plays that the team runs in various situations.  The playbook guides practices, so that each team member knows their role in each play and executes it perfectly.  The playbook also provides ways for the team to exploit vulnerabilities in the other team's defense.  Every team has multiple plays in their playbook to find ways of scoring.  Much of the skill of a coach is knowing which plays to call when.

Having worked with developing traders for many years, I've come to appreciate the paths that lead to success and those that fall short.  Successful traders, I find, start with small, focused playbooks and work at becoming proficient in just a few types of trades.  They document their plays in journals, trade them in real time, and review action at the end of the day to see what they might have missed.  Only when they become proficient at a few basic plays do they move on to exploit other ways of making money.

I consistently find that the intensity of the learning process--the cycles of viewing, doing, and reviewing--is associated with greater trader success.  We develop expertise by internalizing what we learn.  In every performance endeavor, the greats spend more time practicing skills and rehearsing performance than in actually performing.

It's common among active traders to think of playbook trades as "setups", as in chart patterns, but this is shortsighted.  A playbook trade consists of several components:

*  A pattern of market behavior that has led to favorable market returns over a defined time horizon;

*  A set of rules for identifying this pattern in real time and entering the trade at a point that provides favorable reward relative to risk;

*  A set of rules for sizing the trade, so that the trader can achieve meaningful returns without running the risk of ruin when, by chance, a series of losing trades occurs;

*  A set of rules for establishing target prices and adding to positions/scaling out of positions/exiting positions;

*  A set of rules for establishing the stocks or instruments best able to exploit the patterns being traded.

When the trader merely views the playbook trade as a set of entry criteria, they leave themselves no guidance for sizing the trade and managing the risk/reward of the position.  How trades are sized and managed is every bit as important as the trade ideas themselves.  When we rehearse playbook trades, we work on all the components of the trade.  That includes what we're trading.  So often, I find that the most successful traders are those that find the best vehicles for trading their playbooks.  At the end of 2017, I saw traders succeed phenomenally trading the crypto-related stocks.  Had they traded exactly the same patterns in the large cap universe, they would have made far less money.

So how does a trader know what should go into his or her playbook?  In every performance domain, from athletics to chess to medicine, we see mentoring as a key resource for development.  We learn what to do and how to do it from people who are already successfully involved as performers.  This is why so many trade occupations are structured as apprenticeships.  Learning by trial and error alone is too inefficient--and costly.

Fortunately, there are many vehicles for apprenticeship, from the training programs at investment banks to junior analyst positions on hedge fund trading desks to the training offered at proprietary trading firms.  Thanks to the online medium, we're seeing quite a few chat rooms serve the developmental function.  Several of these appear below:

*  The Art of Trading - Education and live trading with Stewie, including a blog site;

*  Asenna Capital - Training and trading, including chat room, with perspectives from Assad Tannous.

*  Dan Zanger - Chat room and real time education based upon chart patterns of promising stocks, with tweets by Dan on opportunities they're tracking.

*  EminiPlayer - Large archive of videos and live chat room with focus on the e-minis and trade planning around Market Profile, hosted by Awais Bokhari.

*  Investors Underground - A team of traders offer real-time training and support in a chat room format coordinated by Nate Michaud. They sponsor the excellent Traders4ACause events.

*  SMB Capital - Merritt Black runs a futures based chat room; Seth Freudberg runs a training program for options traders; and SMB holds training classes and events based upon the patterns traded at their prop firm, including a large archive of videos.

There are many other great services out there; check out this review; this post on resources for traders; and this post on technical analysis resources.

Note that each of these services comes at a cost, both of money and time/effort.  Considerable due diligence is needed to ensure that what they are teaching is what you want to learn.  The right sites will role model playbooks and how to trade those.  What you add is the review and practice that helps make those patterns and rules your own.  The best services accelerate your learning curve; none of them can substitute for that learning curve.

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When Trading Psychology Is NOT The Problem

I recently spoke with an active trader of the S&P 500 Index market who had been experiencing difficulty in his trading.  He had sought coaching and the coach worked with him on mindfulness strategies to help him tune out market and emotional noise and more clearly implement his ideas.  The trader felt he made good strides in gaining self-awareness, but his profitability still wasn't there.

As part of our conversation, I had the trader present me with his metrics.  We took a look at his number of winning and losing trades and the average sizes of these.  We examined the P/L specific to his long trades and short trades, and we examined profitability as a function of holding period and time of day.  Finally, I took a look at serial correlations in his daily profitability: whether there were distinct patterns of winning/losing periods being followed by winning/losing periods.

Nothing uncovers trading problems better than a hard look at trading metrics.  

Well, it turns out that two metrics stood out:  the average size of losing trades was greater than winners and most the losing trades were on the short side.  Surprise, surprise.

So I walked the trader through a little exercise.  I explained that it only made sense to look for patterns to trade if you were operating in a stable market regime.  That is, if recent market history is unstable, with widely varying means and standard deviations of price changes, then there is no basis for using the past to guide the future.  On the other hand, if you have a stable regime, it's possible that patterns occur during that period that can guide trading decisions in the near future.

I showed the trader how there has indeed been a stable regime since September of 2017 and I illustrated how several variables displayed short-term trading promise in that regime, including the percent of stocks trading above their short-term moving averages and VIX.  When these variables lined up, the next two days in SPY averaged a nice gain of +.41%.  All other occasions displayed an average price change of +.21%.

Wait a minute, I noted!  When the variables line up, you get better near-term returns.  When the variables don't line up, you still have had positive returns during this regime.  In other words, the linear (trend) component of the regime is so strong that the indicators provide some upside  advantage on the short term, but no downside advantage.  In a more cyclical regime, we would see the indicators anticipate both positive *and* negative returns.

Bottom line, I explained, is that, even trading the best indicators I can find, I can't objectively identify any sell signals.  Going short only makes sense if you assume you have a crystal ball and can figure out to the day when the regime will shift.  That has not been a good bet for the trader.

The big takeaway is that if the patterns you're trading don't fit the patterns existing in the marketplace, you are not going to make money.  All the emotional awareness, discipline, mindfulness, and motivation in the world won't make a losing strategy win.  We are much too quick to assume that trading problems are psychological in nature and much too slow to truly drill down into the metrics and the markets and see if our strategies make sense.

Imposing your trading "style" on markets regardless of regime can be hazardous to your wealth.  Assuming that all you need to do to make money is double down on your "style" and work on your mindset only compounds the problem.  Sometimes markets are not stable; sometimes markets are stable, but display no predictive patterns within their regime.  Does it really make sense to actively trade during those occasions?  A passion for markets is best channeled through a clarity of vision.

Further Reading:  The Challenge of Changing Market Regimes

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One Easy Way to Enhance Your Market Vision

I've spent some time this morning reviewing websites and Twitter feeds that are market related.  There are some really good things out there, and there are some really bad ones.

The broadest generalization I can make is that the awful sites are ego based.  They focus on the calls made by the guru, the services offered by the expert, etc.  Generally there are one or two pet ideas that are offered as the solution to trading and, of course, the writer just happens to be the go-to person for those key skills.

The valuable sites are truly idea based.  They don't just make market calls; they illustrate reasoning that goes behind the views.  A good word for these sites is that they are evidence-based.  They educate and illuminate.  They are not primarily pitching the writer.

Consider the Market Anthropology site.  You don't have to go too far into your reading to find interesting perspectives on interest rates and the big moves in a few asset classes.

Or how about Jeff Miller's Dash of Insight site, with well-documented perspectives on market sentiment and changes in economic conditions?

Take a look at Chris Ciovacco's site and its insights on market valuation and taking an evidence-based approach to charts and market views.

Note that these are not the most trafficked Twitter feeds and trading sites.  The most trafficked restaurants are fast-food joints, not gourmet eateries; shopping mall retailers, not designer boutiques.  Those who seek quality are generally not part of the traffic jams.

Which sets up a great way to enhance your market vision!

Find Market Anthropology, Jeff Miller, and Chris Ciovacco (or your favorite source of ideas) on Twitter or StockTwits and then look up their followers.  See who follows quality people who are relevant to your trading--and you're likely to discover quality people relevant to your trading!  The chances are good that, in tapping into the networks of people you respect and admire, you'll discover others who are worthy--and who can feel your head.

Imagine adding just two fresh sources a week from the networks of people you respect.  Over the course of a year, you will have greatly enhanced your vision.  Building the right network online is a great way of cultivating a rich cognitive network--and that's a great way of finding the creative ideas that go beyond consensus views.

Further Reading:  Worthwhile Resources for Continuing Trader Education

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When Your Passion Becomes Your Poison

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

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

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

The risk prudent trader can become risk averse.

The active trader can become overactive and distracted.

The competitive trader can become frustrated and unfocused.

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

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

In all these cases, strengths can become vulnerabilities.

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

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

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

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

Further Reading:  How to Identify Your Greatest Strengths and Virtues

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How to Get the Most From Your Trading Practice

An excellent post from NewTraderU and written by Colibri Trader explains how 10,000 hours of practice typically goes into the creation of expertise.  As the post makes clear, there is a world of difference between repeated experience and practice.  Practice, in the sense of deliberate practice, means that we actively reflect on our experience, examine where we've fallen short, and then institute efforts at improvement.  The trader who trades for a month and merely jots notes in a journal is repeating one day of trading 22 times over.  The trader who makes daily efforts at improvement, using trading results as feedback to guide future efforts, compounds learning 22 times over.

This is how expertise is created.  We learn with each practice session, feed that information to the next practice session, and continually make incremental improvements.  If we simply target our one biggest mistake each day and figure out why it occurred and how we can prevent the occurrence going forward, we turn trading into a series of performance drills.  Practice can make perfect when we perfect the process of practicing.

One of the reasons the report card has become a major tool in trader development is that it anchors the process of deliberate practice.  When we grade ourselves on aspects of trading that matter, we create a framework for reflecting on performance and systematically pursuing improvement.  When we share the report card within a community of traders, the practice of others provides lessons for us.

In the spirit of my recent New Year's goal of using the blog to highlight the good work being done in the trading community, allow me to add one thought to the post from Steve and Colibri.

The worst, as well as the best, trading is the result of practice.

When we trade poorly and then go over and over and over our mistakes, blame ourselves for them, become frustrated with them, talk incessantly about them, and vent about them in our journals, we are engaging in a kind of reverse deliberate practice.  Just as reviewing our trading constructively can aid our development, reviewing our trading destructively actively builds and reinforces our worst habits.  

This reverse practice effect explains many downward trading spirals.  We ultimately live out the image of ourselves that is reinforced in our thoughts, feelings, and actions.  Everything we do--from how we talk to ourselves to what we read to who we associate with--is a mirror, reflecting an image of ourselves.  Successful people create positive, constructive mirrors and thereby internalize that positivity and constructive attitude.  Unsuccessful people often practice just as hard as the successful ones, but with all the wrong mirrors.  

Take a look at your trading practice.  Reflect on how you end up feeling after a day or week of trading.  You're most likely practicing something.  Are you practicing the right things, and is your practice the kind of practice that will make perfect?

Further Reading:  Fighting for Tomorrow, Living in it Today

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How You Make a Change is as Important as the Change You Make

One of my 2018 initiatives is to find good trading websites, blog posts, podcasts, etc.; highlight those as resources for readers; and hopefully add a few nuggets of wisdom and experience along the way.

So let's start with SMB's training blog, which captures many of the lessons that prop firm has learned in the course of growing successful traders.  This one is easy for me to highlight, because I've been working with many of those traders and have witnessed their development first hand.

In his recent post, Mike Bellafiore explains that the greatest spark for trader development in 2017 has been keeping report cards of performance.  The report card has been a daily routine that has anchored review of performance, goal setting, and efforts at improvement.  It's been a great way for traders to become more accountable to themselves.

Interestingly, Nate Michaud from the Investors Underground training network also cites the report card as a major contributor to performance in 2017.  My own observation is that it's not just the report card that furthers learning, but sharing the report cards within teams or trading communities.  This is a very important idea.  When everyone shares their grades, lessons learned, goals, and plans, each trader's learning expands exponentially.  This is called social learning.  We develop, in part, by learning from the experience of others.  This gives us multiple role models.

In one case, it has been particularly effective when the team leader has shared his report cards with all team members.  That way, the feedback that Mike and I provide goes out to the team, not just the trader.  Before long, all the team members began sharing their report cards in this fashion.  The static report card now became dynamic dialogues about improvement--every single day.

At Investors Underground and especially at their Traders4ACause conferences, shared report cards can anchor group-wide education.  It's nice to give back each year, but when traders share their learning each day and fuel each other's development, they are giving back every single day.  Before long, that giving reinforces traders' experiences of themselves:  they see themselves as possessing true value to give, not merely as empty vessels to be filled.

The big idea here is that how you implement a change in your trading is every bit as important as the change you're making.  A report card is great, but it's how you put it into practice--creating dynamic, social learning--that makes it a true difference maker in your trading.

Further Reading:  What Are Your Favorite Sources of Trading Information?