Wednesday, August 29, 2018

Tapping Our Inner Resources

In this post, allow me to pose a few questions that strike me as terribly important:

  • What if the depth and breadth of our learning can be magnified many times over by maintaining optimal mindstates?
  • What if our performance--in trading and in life more broadly--could be expanded many times over by sustaining optimal well-being?
  • What if the normal human mindstate is itself pathological and suboptimal, far from the potential of joy, fulfillment, and energy that we're capable of?
  • What if the ways in which we approach each day, designed to get tasks done, are some of the very ways in which we sustain our suboptimal mindstates?
  • What if the usual ways we think about trading psychology are simply shufflings of deck chairs on the Titanic and not ways that can bring about positive transformation of learning and performance?
My most recent Forbes post expands on these questions and offers one technique for maximizing our experience--and our performance.  The important implication is that, to maximize our trading, we need to optimally develop ourselves.  Expanding our experience is like providing our brains with faster, more powerful processors.  The problem is not that we fail to live up to our dreams, but that we dream too feebly and hence never truly awaken to turn dreams into visions and realities.

In coming posts, I will address powerful strategies for expanding our selves as a gateway to making the most of what we pursue in relationships, in careers, and in markets.

Further Reading:


Friday, August 24, 2018

A Powerful Strategy For Feeding Your Head--And Your Trading Results

Mike Bellafiore at SMB recently wrote about the value of expanding your trading network as a way to accelerate learning and performance.  When traders team up and share ideas and review performance, they turn learning into a social process, which can become enjoyable and motivating in itself.  Most importantly, teaming up increases our sources of learning.  If I take away one valuable lesson from my trading each week, that compounds impressively over the course of a year.  If I take away multiple lessons from colleagues each week, I'm now on an exponential path of growth.

I notice a promising mentoring group for day traders that has formed recently:  My Investing Club.  Another with a long history of success is Investors Underground.  Hedge fund managers have a long history of networking over dinners and drinks, sharing ideas and performance improvements.  What Mike is describing takes networking to another level, where traders become an active, ongoing part of each other's processes.  That occurs regularly on the NYC trading floor and has been an important source of learning and growth for developing traders.

I would like to suggest a deeper reason why this networking works, and it's related to the Sweller quote above.  When we team with others, we gain access to their modes of information processing.  Each of us processes information in different ways, with different strengths.  I may be excellent at processing market information analytically, but I can benefit from others who are well connected and sensitive to shifts in investor/trader sentiment.  Perhaps I'm good at pattern recognition and reading short-term market behavior.  I might benefit from another trader who is excellent at identifying bigger picture market themes.

When we network with others, we process information actively and we typically do so via multiple modalities.  That leads not only to broader learning, but a deeper processing of the material we learn.

This works because it takes advantage of an evolutionary dynamic.  We create many variations when we look at markets in multiple ways through multiple lenses.  We can look at many markets and their interconnection; we can analyze markets quantitatively; we can look for repeating patterns in markets; we can look at the same markets over varying time frames.  All of this expands the number of hypotheses we generate and sets us up to critically sift through these hypotheses, resulting in a greater likelihood of one good idea coming to mind.  By looking at more things in more ways, we activate a kind of intellectual natural selection that results in the few great ideas, the few great trades that can make our week, our month, our year.

One implication of this line of reasoning is that, as traders, we can do a much better job of networking with ourselves.  This means tapping into *our* variety of modes of processing and actively engaging market information in multiple ways:  seeing it, talking it aloud, writing it, studying it.  Networking works, because it literally feeds our brains, creating better cognitive networks.  An underappreciated source of trader failure is impoverished information processing.  In so many areas of life, feeding our heads can feed our bottom lines.

Further Reading:


Monday, August 20, 2018

Failing With Enthusiasm

Thanks to a savvy performance/trading coach for forwarding an excellent NY Times article on "Talking About Failure".  

Talk about our failures?  For most of us, that's the *last* thing we feel like doing!

The idea makes sense, however.  Not only does talking about our failed ideas and failed trades help us put them in perspective; it also enables us to accept them, learn from them, and put them into perspective.

One exercise I strongly suggest to developing traders is the following:

On your flat or down days/weeks, reach out to other, similar traders who made money on the day/week and learn what they did and how they did it.  Let them talk about their success and see what you can take away as ideas, learning lessons, and goals going forward.  Having one or more trading "buddies" who can openly talk about mistakes and successes helps everyone cement what they did right and learn from what didn't go right.

And if you have no trading buddies?

It's worth reviewing your trading and looking for the plausible opportunities you may have missed.  In other words, if you had been trading your way, at your best, what might you have done differently?  In that situation, you are looking to the ideal trader within you to act as your "trading buddy".  By openly facing your "failure" and using it to prod your ideal trader, you turn setback into learning and opportunity.

The psychology of having flat or down periods is determined by whether you view them as setbacks and defeats versus inspirations, prods, and opportunities for growth.  Churchill had it right:  it's all about failing enthusiastically.

Further Reading:


Thursday, August 16, 2018

Changing How We See The World

One of the most important findings in psychology is that people make important changes in their lives when they are in the midst of deep emotional experience.  Simply talking with a coach, counselor, or therapist doesn't in itself lead to profound change.  Rather, it's when we experience things strongly that our existing views of the world are shaken up.  That shake up opens us to new ways to view ourselves, others, markets, and the future.

This is one of the reasons important change can occur when people "hit bottom".  It's when everything has gone wrong and we're in despair that we're willing to make a complete overhaul in what we do.  Therapists refer to this as "corrective emotional experiences."

But it's not just negative experience and setbacks that can help us see and do things differently.  Sometimes powerful positive experiences have the same impact.  One example is the experience of awe:  when we are so inspired by something positive that it becomes a part of us and changes our perspectives going forward.  In a new article, I describe recent research into awe and how experiences of awe literally renew our energy and help us become more successful.

A theme I have never heard expressed in conventional trading psychology is that markets--and participation in markets--can become sources of awe.  That is, they can be awe-inspiring.  When we perceive the vast complexity of markets and so immerse ourselves that we perceive a meaningful pattern, it's as if we're catching a glimpse of the universe.  It's not an ego thing at all, strutting about and proclaiming your "conviction" in an idea.  Rather, it's standing back and absorbing all that is happening and allowing ideas and themes to come to you.

Trading with your ego ultimately depletes our energy, as we take too many P/L dings.  Trading with a sense of openness and awe can give us energy.  It can be inspiring.  And that inspiration and awe can help us change how we see the world--it becomes a *positive* corrective emotional experience.  Many traders become frustrated with markets and fight what is happening.  How different it is to experience markets as awe-some!

Further Reading:


Saturday, August 11, 2018

From Discipline To Professionalism In Trading

In sports, as in trading, performance often begins as an ego-driven activity.  The boxer is all about knockouts; the basketball player focuses on scoring; the golfer looks to ace each hole.  The novice trader wants to make money, and so trades, trades, and overtrades.  This ego focus is not entirely negative; it's a big part of the initial attraction to the performance arena.  But it is not enough.  When we perform out of ego motivations our personal needs overwhelm the requirements of each performance situation.

Many thanks to Mark Meadows and the Top Step Trader team for posting my recent webinar on trading performance.  One of the key points that I make in that session is that a passion for trading is actually a predictor of failure.  That is because the need to trade comes from that ego place where we need to prove ourselves right and need to make money.

More predictive of success is a passion for markets themselves--and especially the passion to understand what is going on in markets.  When we prioritize understanding, the focus shifts from ourselves to what is happening in front of us.  Sometimes not much is happening.  Good trading in those situations can mean not trading.  Mike Bellafiore recently made this point when describing the development of a trader who developed rules for when to not trade.  Discipline--rule following--takes the place of ego:  it's not about trading, but about trading successfully.

Across performance activities we can see that disciplined performance is a necessary phase of development.  The basketball or football player learns to follow a game plan, not just do what they feel like doing.  The poker player learns to fold when the cards aren't right.  It's common for developing psychologists to learn their craft from manuals that are research-validated and that give them a game plan for helping people with various problems.  Discipline is all about sublimating the ego to sound rules and principles.

Later phases of development find that disciplined rule-following turns into positive habit patterns.  Calling the right plays, making the right moves, becomes second nature.  Through repetition, the rules are internalized.  Discipline is no longer needed to do the right thing.  In this later phase of expertise, we see professionals able to read unique situations and make conscious decisions to veer from rules or modify them to the situation.  Instead of following the therapy manual, a sensitive therapist may reach out to a distraught client and offer support.  Instead of backing off trading in the afternoon hours, the index trader recognizes that relative volume has picked up and finds a great place to go short when buyers can't retrace much of the morning's losses.  A football quarterback learns when to call an audible; a poker player learns when to bluff.

That is what professionalism is all about:  Having so much experience that you not only follow good rules and processes, but you know how to adapt to unique situations as they present themselves.  It takes discipline to become a good trader; it takes expertise to know when to veer from that discipline.  It's all about putting our own needs on a back burner and becoming ever more sensitive to what we are trading.

Further Reading:


Thursday, August 09, 2018

Trading With Patience

You've no doubt noticed that many markets have slowed down with the summer trade, creating narrow daily ranges and little follow-through on directional moves.  The word I most often encounter in trading journals is "patience".  In slower markets, there may only be occasional opportunities worth pursuing.  That means that a good, disciplined trader is often not trading.

What happens during these patient periods--the times of *not* trading--plays a huge role in trading success and failure.  The successful traders I work with use the down time to work on generating new ideas,building new analytical tools, and reviewing their performance.  The less successful traders cannot abide patience and turn trading into overtrading.  They have to have something to do and so they trade, even when an edge is not apparent.

The best traders turn the patient periods into alternative forms of stimulation.

The worst traders experience patience as boredom and find something to trade.

With the VIX below 11 and my "true volatility" measure (movement per unit of volume) at multi-month lows, I'm finding a lot of movement within ranges and then false breakouts from those ranges.  This makes trading very difficult for a momentum style.  A value-based style--buying short-term oversold and selling overbought conditions that break out of a range--has worked much better--especially when directional moves of the index are not accompanied by similar moves across major sectors.  Buying strength and selling weakness on average fail in the slower environment.

In a future post, I'll be reviewing Larry Connors' forthcoming book Buy the Fear, Sell the Greed.  It's an unusually practical trading book, with each chapter describing a specific source of edge and a backtested way of implementing that edge.  One of his tools is a short-term variation of the RSI measure originally developed by Wells Wilder.  During slow market times, I've been experimenting with the measure to exploit the behavioral biases Larry discusses in the book.  Such research is a great way to turn patient times into productive ones.  

Years ago I did an experiment where I showed people a chart and asked them to predict where the market would go from there.  The charts were identical, but half of the subjects saw a chart with a nice green up bar as the most recent bar and the other half of subjects saw the last bar as a good red, down bar.  Not surprisingly, those seeing the most recent green bar expected the market to rise and vice versa.

It's a great example of recency bias.  We overweight recent experience.  In slow, low volatility markets, there is a worthwhile edge in fading that bias.  That's a great lesson I learned during my patient period of not trading:  markets don't have to trend to provide opportunity.

Further Reading:


Sunday, August 05, 2018

Trading With Energy

One thing I've noticed among traders is that success breeds optimism and energy and optimism and energy breed success.  It's not difficult to walk onto a trading floor and see who is active, interactive, and inquisitive and who is glumly staring at screens and pacing the floor.

I've written in the past about the ratio of activities that give energy to activities that drain our energy and why it's so important to have a positive balance.  It is very difficult to sustain effort--whether it's concentration in following markets or researching trade ideas--without feeling energized.  This is why quantity and quality of sleep are so important to performance; it's why being in good physical shape is helpful.  It's also why clinging to moment to moment, day to day P/L can be so deadly, draining us of willpower resources.

In a recent article, I set out three keys to thriving in any work we perform, including trading.  The common element among these is positive energy.  When we say something has expired, we mean it is no longer fresh, no longer potent.  When we say we are inspired, we mean that we have gained vitality.  There is a world of difference between expired traders and inspired ones.

So here's a quick self-assessment to identify if you are trading with energy:

1)  Does your morning routine give you energy or rob you of vitality?

2)  Do your conversations and interactions with other traders distract you and interfere with your best trading, or do they inform and inspire your best trading?

3)  When you research trading ideas, do you feel inspired and energized?

4)  Do your trading reviews lead you to constructive, energy-giving goals or do they discourage you?

5)  Does your self-talk move you forward and motivate you, or does it discourage you?

If working for someone who managed you the way you manage yourself would lead you to quit your job, you know you have a problem.  All of us are managers of our lives and careers, and--for better or for worse--we are coaches to our own trading.

Is your self-coaching giving you energy or is it holding you back from your best performance?

Further Reading: