Monday, June 17, 2019

Trading Psychology Techniques - 9: Conquering Negativity

The past three posts in this series have dealt with building self-awareness; facing trading fears and anxieties; and overcoming frustration and anger.  In this post, we will tackle negative thinking patterns and how these can be turned around.

The first principle and most important practice is to live a positive life outside of your trading.  It is impossible to sustain an optimistic and constructive mindset during trading if what you are reinforcing during your other hours is negative.  If you take a look at the recent Forbes posting, you'll notice a non-traditional take on the recent Father's Day holiday.  The idea is to turn the holiday into a positive emotional experience by widening its meaning.  This is something that can be done in many areas of life.  Spending time with friends, relationship partners, family, and colleagues is great, but how can we make this time truly fun, inspiring, and meaningful?  As I point out in the book that I am currently writing (due out during the summer), the key is avoiding routine and seeking experiences that are special.

How can we possibly turn our thoughts and behaviors around if we are stuck in a life of routine?

The cognitive approach to conquering negativity is especially powerful.  That requires building the self-awareness to recognize when you are talking to yourself in ways that are not helpful and constructive.  As I've mentioned in my books, a great way to reinforce that self-awareness is to regularly ask yourself, "Would I be talking to someone else I cared about who is in my situation the same way that I'm talking to myself?"  This is helpful, because it reframes our thought patterns as conversations.  Very often, if we view our thoughts as ways that we're talking to ourselves, we can see that the conversations are negative and serve no constructive function.

Once we can recognize the negative thinking patterns, we want to tune into their destructive consequences.  By reminding ourselves that this kind of thinking robs us of energy, takes away our focus, and causes us to be less productive and creative in generating ideas, we gain the ability to become angry at our own negativity.  This is a very important principle.  We are most likely to change a pattern when we view it as an adversary: as something that stands in the way of our happiness and success.  Reminding ourselves of the consequences of our negative self-talk helps us marshal the energy to engage in a much more helpful processing of our situation.

That sequence--recognize negativity, challenge negativity, replace negativity with more constructive self-talk--can become a positive habit pattern if repeated multiple times per day for many days.  Yes, of course, negative thoughts will pop into your head, but you'll be able to quickly smack them down if you immediate recognize their consequences and generate more helpful ways to view the situation.  In my own trading, I turn negative thoughts into learning thoughts.  If each of my losses and mistakes can teach me something--something about me, something about markets--then I can actually value my mistakes and stay positive in the face of temporary drawdown.

Negative things always happen in life.  The resilient person doesn't internalize those setbacks.  Setbacks exist for a reason, and we can turn them into fuel for our personal development and the development of our trading.


Thursday, June 13, 2019

Trading Psychology Techniques - 8: Overcoming Frustration

The last post in this series focused on ways of overcoming our trading fears.  Many times, it is frustration that can take a trader out of the zone and disrupt trading plans, including risk management.  When trades don't work out--or when we miss good opportunities--there is plenty of room for anger and frustration.  Frustration occurs when we have a strong set of desires or needs and those are thwarted.  Getting stuck in a traffic jam when we have to make an appointment is a great example.  

There are two types of methods that can help us overcome frustration:

1)  Behavioral - This would include relaxation/visualization exercises, biofeedback work, and meditation.  In these techniques, we learn to recognize the signs of frustration as they are occurring (angry thoughts, physiological arousal, pounding the table, etc.).  We then pull back from the frustrating situation and perform exercises that calm us and require us to sustain focus.  For example, in meditation we might slow and deepen our breathing, keeping it quite regular, while we maintain focus on a peaceful image.  By entering cognitive and physical states incompatible with frustration, we can short circuit the anger and prevent it from dominating our actions and decisions.  One powerful variation of the behavioral method is to engage in guided imagery when we are not trading and vividly imagine scenarios that normally might frustrate you.  While you are imagining the frustrating scenes in great detail, you are keeping yourself chilled:  slow, deep breathing, maintaining stillness, etc.  Doing this exercise repeatedly allows you to internalize the calm response when the frustrating situation occurs in real life.  The key is repetition, so that your calming becomes an automatic response to situations that don't work out.

2)  Cognitive - Cognitive methods look at our thoughts and mind states as triggers for our emotional responses.  As the above quote suggests, frustrations are generally preceded by strong expectations and needs.  If we strongly expect a trade to work out--and, even more, if we need it to work out--we set ourselves up for frustration when our scenario doesn't play out.  Such expectations and needs occur when we place too much ego into our trading, so that our feelings about ourselves rise and fall with our profits and losses.  One technique that works well for me is to size initial positions moderately and view the initial trade as a hypothesis.  If my hypothesis is disconfirmed, I can take a modest loss and use that information to potentially take a trade in the other direction.  By viewing my idea as a hypothesis rather than a conclusion, I am mentally prepared to be wrong and, indeed, am in a mindset where I can accept the loss as money well spent for market information.  Risk management is a powerful tool for keeping frustration manageable.  I never want to lose so much in one day that I can't come back over the course of the week.  I never want to lose so much in a week that I can't go green on the month.  When we can frame losses as challenges, they can energize us, not frustrate us.

Trading with too little capital and expecting unrealistic returns to make a wonderful living set us up for disappointment and frustration.  I know developing traders who view each day and week as a verdict on whether or not they'll succeed at what they're doing.  That is simply too stressful for the purpose of maintaining consistency in trading.  We are much more likely to be consistent in our trading if we sustain a consistent mindframe.  That means training ourselves to accept and learn from losses and treat them as learning opportunities, not as existential threats.  Practice in behavioral and cognitive methods can help us create positive habit patterns that defuse frustration and keep us in control of our trading.

Previous Posts in This Series:


Sunday, June 09, 2019

Three Key Mistakes Traders Make In Evaluating Their Trading

Ongoing evaluation of our trading enables us to learn from experience and guide ourselves toward improvements.  We cannot change what we do not observe and measure.  Successful traders study themselves--and their performance--every bit as diligently as they study markets.

On Monday, June 10th, I will participate in a webinar with the good folks at Bookmap, where we will discuss ways of evaluating and improving our trading.  The session will be at 11 AM Eastern Time and will include time for Q&A.  Registration is free and available here.

Traders make a number of mistakes when trying to evaluate themselves.  Here are three of the most common:

1)  Too general and subjective - The trader doesn't drill down to identify what he or she has done well or poorly in specific trades.  The evaluation simply notes general problems like fear of missing or traded too small.  The evaluation should not only identify specific mistakes, but also highlight specific ways of correcting those.  That turns the evaluation into goal setting and planning.

2)  Not enough information - The traders I work with at SMB utilize software that captures information on all trades all the time.  That way the traders know exactly how many winning and losing trades they've had; the average sizes of winners and losers; the win rate as a function of time of day; a breakdown of P/L by strategy; and much more.  All this information provides useful information about what the trader is doing well and what needs improvement.  Many, many times, the areas that stand out as needing work are ones that the trader was not focusing on.  In the webinar, I'll discuss the use of software to aid our evaluation.

3)  Not tailored to the trader - Some of the best evaluation comes from knowing what you do best and how you do it.  That way, you can evaluate yourself according to your best practices.  A generic evaluation sheet is probably better than none, but most helpful is an assessment that grades you on the dimensions most crucial to your success.  For example, if certain ways of managing your time and energy help your trading, those should be part of your evaluation.    

Many traders could be advancing much faster if they would only improve their learning processes.  In the Monday webinar and in future blog posts, I look forward to outlining ways in which we can become more effective learners.


Monday, June 03, 2019

Trading Psychology Techniques - 7: Facing Your Fears

A while back, I worked with a trader and reviewed his P/L statistics.  Keeping good statistics on your trading is a universal best practice.  The patterns of wins and losses--and the progress over time--reveals a great deal about your trading--and your trading psychology.

What made this trader unusual was a pattern of small wins and small losses.  He had a daily loss limit and never came near that number, either on the downside or the upside.  

When we examined his trading, it was clear that he had profit targets on his trades and he had stop loss levels.  These were appropriate, given his daily limits.  He gave himself room to be wrong with his stops and also gave room to trades to run if they worked out.

So what's the problem?

As we examined his trading, we quickly saw that he rarely let his trades stop out and he rarely hit his profit targets.  He stopped out of trades quickly when they went against him and he took profits quickly when trades went his way.

In short, his trading was an exercise in fear.  When he feared loss, he quickly exited.  When he feared losing gains, he quickly exited.  Over time, that had him playing small ball as a trader.  Psychologically, it meant that he was always acting on fear.

We reinforce what we act upon.  If we act on fear, we reinforce fear.  If we act out of frustration, we reinforce frustration.  Is it any wonder that, fearfully exiting one trade after another, this trader never developed confidence in what he was doing?

An important psychological rule is that we can only overcome our fears by directly facing them.  If I am afraid of going outdoors, I cannot develop confidence by staying indoors.  What I need is to experience the very thing that I'm afraid of and see--in my own experience--that nothing terrible happens if there is an adverse outcome.  In that sense, we don't gain confidence from success alone.  We gain confidence by failing--and seeing that we can bounce back.

This is where the use of imagery is tremendously helpful.  We can visualize, in great detail, having a winning trade reverse on us or having a trade hit its stop, and mentally rehearse how we would like to deal with that situation.  If we mentally rehearse these scenarios again and again, they become familiar to us and no longer so threatening.  That reinforces confidence, because we're telling ourselves that we can fail and bounce back.

Note that what we're doing with such imagery methods is sustaining a state of self-awareness while talking ourselves through the fearful episode.  With sufficient practice, we can become quite good at invoking the self-awareness in real time.  What we've rehearsed with imagery comes back to us during actual trading.

The trader I met with learned to redefine his fears.  Once he realized that playing small ball guaranteed he would never reach his goals, he became fearful of being fearful.  In other words, he changed his perspective.  The problem wasn't losing money; the problem became preventing himself from making money!  In the state of self-awareness, he now viewed his situation differently, and that enabled him to trade very differently.

Further Reading:


Friday, May 31, 2019

How to Handle Trading Setbacks

In the most recent blog post, we took a look at the yellow caution signals in the market.  My concern was that these were very similar to the signals we saw late in 2018.  In both cases, we saw waning breadth; in both cases we saw oversold levels that normally, historically lead to bounces fail to produce meaningful rallies.  When a historical edge doesn't play out, that often represents important information:  something idiosyncratic is at work in the present market.  In the case of the recent market, the dynamics of trade wars are one of those idiosyncratic factors.  Continuing lack of resolution and, indeed, escalation of the conflicts has led to a significant pullback in stocks.

I am hearing from a number of traders and investors who have drawn down during this period or who are frustrated over having underperformed the seeming opportunity set.  I've also heard from traders who have pretty much been on the sidelines during this time, unable to deal with the headline risk and increased volatility.  What I hear specifically is self-blame, feelings of hopelessness and discouragement, and fears of losing (more) money.

Those are not good mindsets for trading.

The tricky part of handling trading setbacks is that it is precisely the traders who take trading most seriously who are most vulnerable when things go wrong.  It's wonderful to make trading your passion when things go well, but it can feel pretty dark when all turns south.

I encourage readers to check out the most recent Forbes article dealing with the principle of diversification in markets and how that idea applies to our lives.

There will always be setbacks and disappointments in trading.  At best, it's a probabilistic endeavor.  The great baseball hitters fail to get on base more often than they get on base.  Even if they have a wonderful 50/50 on-base percentage, it's inevitable that they'll have games during the year where they fail to get to first base.

Diversification in markets means that we have investments that can perform well while others draw down.  Stocks have fallen considerably during May, but investment grade bonds have performed well as safe havens.  That balance keeps us in the game:  financially and emotionally.  In life, diversification means that we have activities and involvements that pay off, even when markets cannot give us hoped-for returns.

A great way to handle trading setbacks is to double down on our relationships and interests and spend meaningful time (time with meaning) away from markets.  The best way to sustain passion in one area of life is to have other things that renew you in times of disappointment.  Yes, we have to learn from our trading mistakes and turn that learning into goals and plans going forward.  Often, however, that can't occur until we've renewed our energy by immersing ourselves in the activities that bring us happiness and fulfillment.

Further Reading:


Tuesday, May 28, 2019

Aligning Our Expectations: More Caution Lights for the Market?

When we looked at the market in early April, a number of indications were favorable, confirming the bullish perspective from March.  The breadth had not deteriorated as we had seen at the prior market peak.  Since then, we've had challenging news coming out of the Middle East with increased conflict with Iran.  Most pointedly, we've had increased talk of trade wars, with the breakdown of talks with China.  How has that impacted the stock market and what could that mean going forward?

Breadth has decidedly deteriorated.  Although we are not far off the all-time highs in the SPX Index, new monthly and three-month lows across all stocks have outnumbered new highs for six consecutive sessions.  Indeed, in the past 14 sessions, only one day has seen more new three-month highs than lows.  On Thursday, for example we registered 103 new three-month highs across all indexes and 979 new lows.  (Data from  That is a rather broad correction.  For the past two trading sessions, we've seen fewer than 40% of SPX stocks trading above their 3, 5, 10, and 20-day moving averages.  (Data from  

Now here's the interesting thing.  I went back to 2014 and looked for all occasions in which fewer than 40% of stocks were trading above their short- and medium-term moving averages (as above) and yet over 50% were above their 100- and 200-day averages.  That represents a meaningful correction in a longer-term upward trend.  There were 44 occasions in which that occurred.  Twenty sessions later, SPY was up 35 times, down 9 for an average gain of 1.19%.

What's not to like?

The problem is that two of the downside occurrences were quite nasty and they were the occurrences in February and October of last year, where SPY dropped well over 5% in a week's time.  Since the setup on Thursday, the market bounce has been tepid at best.  

This is where I love to have quantitative analyses and where I love integrating those into my discretionary decision-making.  While the odds of a market bounce are good when we correct in an upward market, we also have to be aware of the exceptions to the pattern.  We have made market highs in early 2018, late 2018, and recently in 2019.  Many sectors (such as financials and small caps) have lagged in this recent rise.  Many international equity indexes (look at EEM for example) have lagged badly.  I want to be open to the possibility that these three tops are part of a larger late-cycle topping process exacerbated by international geopolitics and trade concerns.  If that is the case, a very significant decline could ensue.  I have positioned my portfolios accordingly.

The goal is to stay open-minded and continually update market behavior to see if historical tendencies are playing out or if we're seeing yet another exception.  It is helpful to trade with expectations.  It is also helpful to align those expectations with the objective reality of current market behavior.

Further Reading:


Friday, May 24, 2019

Trading Psychology Techniques - 6: Building Self-Awareness

The majority of psychological problems in trading occur "in the heat of battle", when we become so caught up in market action and our concerns about P/L that we become reactive rather than proactive.  At those moments, we become immersed in our thoughts and feelings and lose the broader awareness of what is going on and what we are meant to do in such situations.  That is why we can look back on our actions at a later occasion and wonder how we could have been so foolish.  Once we enter that "fight or flight" mode of stress, we activate parts of the brain that are geared for action, not reflection.  

Self-awareness is the capacity to think about our thinking and reflect on our actions before we react to situations.  The self-aware trader stands back from his or her reactions, notices his or her thoughts and feelings, observes the tendency to act upon these, and then steps back to decide the best course of action.

Notice that self-awareness does not mean being totally free of emotion and impulse.  Self-awareness means that we become observers to those so that they do not dominate and dictate our next actions.

For example, I can see the market drop on increased volume and notice that I'm frustrated that I'm not participating in the move.  I begin to think, "What if this is the start of a bear move?" and then I experience a fear of missing something even larger.  As the weakness continues, I quickly hit the bid and sell the lows, only to see the selling dry up, value buyers come in, shorts cover, and price zoom higher.

The self-aware trader learns to pull back from decision-making during times of "fight or flight".  Often that can mean a temporary pull back from the screens and a self-reminder that this is not a good time to act impulsively.  Here are some specific techniques I've found to be helpful in these situations:

*  Slowing Down - This is where meditation practice can be tremendously helpful.  By breathing slowly and deeply for a sustained period while keeping your focus on one thing, you can learn to quickly re-enter the zone.  It is difficult to be emotionally worked up when you're cognitively focused and physically relaxed.  The more you practice meditation and relaxation skills, the quicker you can access the calm, focused state during the heat of the moment.  Daily practice is essential for internalizing these skills.  The Headspace app is a popular tool for building meditation skill and self-awareness.

*  Coaching Self-Talk - Because I've worked with so many traders, it's easy for me to step back and ask myself what I would tell another trader in the same situation.  For example, I'll remind myself that there is a significant probability of a bounce following the market decline based upon my previous studies.  Instead of becoming fearful of missing further downside, I begin a slow, careful hunt for signs of bottoming and opportunity to benefit from trapped bears.  Combining the slowing down with coaching self-talk can be very helpful in avoiding problems but also using situations to find opportunities.  A good example of this is taking a loss in a good trade idea and using the information to find an opportunity in the opposite direction.

*  Journaling - Writing naturally slows us down.  When we write out what is happening in the situation (or talk it out in an audio journal), we become able to hear ourselves think and plan.  We also gain the ability to read what we've written or listen to what we've said.  This gives us a greater level of perspective by bringing a measure of objectivity to our processing.  Even a brief journaling can help us remember best practices in situations.  I find it helpful to remind myself that I'm in no mindset to trade and that the best thing I can do is use the occasion to refocus and find new opportunity.  That turns the journaling into a positive, putting us on the front foot.

*  Mental Rehearsal - It is helpful to have a basic self-awareness routine that you establish as a process.  You can then, as part of your preparation for the day, use imagery to conjure up situations in which you lose self-awareness and then visualize yourself going through your basic routine.  So, for example, you can visualize yourself becoming frustrated and then visualize yourself talking in a self-coaching way while pulling back and slowing your breathing.  The idea is to turn your self-awareness process into a habit pattern that eventually will kick in on its own.

There is no loss of discipline without a prior loss of self-awareness.  If you can sustain an awareness of what you're doing and why you're doing it, it becomes difficult to fall into reactive modes.  That is what helps us stay cool in the heat of battle, whether in athletics, military combat, or trading.

Further Reading:

Previous Posts in This Series:


Monday, May 20, 2019

Trading Psychology Techniques - 5: Relationships

An important theme of my recent Forbes article is that what we do in life becomes internalized.  Our actions shape our identities.  Can we live undisciplined lives and become disciplined traders?  Can we look at the same information as everyone else and generate unique ideas and returns?  Can we remain self-focused and self-absorbed and sustain close relationships with others?  What we do becomes who we are.

Nowhere is this more true than in our personal and professional relationships.  Who we spend time with is also internalized and becomes part of who we are.  I spend time every day taking care of my cats and providing them with a loving home.  That experiences exercises important capacities for empathy and caring, both of which are important in my personal relationships and in my professional work.

This is why our romantic choices are so important.  Our partners are part of our daily experience and become important parts of us.  In a very real sense, everyone finds their soulmate--sometimes for better, sometimes for worse.  An important way that we experience ourselves is through our relationships.  What is mirrored to you in your friendships, your family relationships, your relationship with your spouse/significant other?  Your partner in life becomes your soul.

How are relationships a "trading psychology technique"??  It's easy to lose sight of the fact that every trader experiences a relationship with the markets he or she trades.  For some, it is an adversarial relationship; for some, a challenging and difficult relationship; for others, it is a threatening relationship; for still others it is a stimulating and rewarding relationship.  Can we have static relationships in our personal lives and expect to dynamically keep up with changing markets?  Can we have conflicted relationships and frustrating relationships and hope to stay cool and calm in our relationships with markets?  

We are always practicing our trading, even when markets are closed and we're away from screens.  Who we are and what we do during non-trading hours shapes our trading experience.  The quality of our personal relationships (including our relationship with ourselves) shapes our relationships with markets.  We only focus on markets as well as we focus on others; we only follow market communications as well as we listen to others; we only understand markets as well as we understand the people in our lives.

A great way to work on our trading is to work on ourselves outside of trading.

Further Reading:


Wednesday, May 15, 2019

Trading Summit: Thursday, June 20th in New York City

Please note:  Unfortunately I had hoped to speak at this event, but I needed to pull out because of an issue with my speaking time.  I apologize for any inconvenience.  I will address the topic of quant edges that come from understanding the psychology of the marketplace soon.  Thanks for your understanding!


Benzinga, in partnership with Traders4ACause, is holding a trading summit in New York on June 20th.  I'll be there and will be presenting from 12:10 - 12:40 PM.  Here is a tentative agenda for the conference.  If you use the Promo Code DRBRETTVIP when you register, the ticket price will be half off.  A portion of conference proceeds will go to charitable causes.

In my presentation, I will be addressing the topic of finding quant edges in the market by understanding the psychology of other market participants.  This enables you to see which way traders and institutional participants are leaning and then use that information to your advantage in a rigorously backtested way.  Some of what I present will share edges that I have found in the market; some will draw upon the excellent work of Rob Hanna from Quantifiable Edges.

The topic of trading psychology usually addresses our emotions and thought patterns and how those impact our trading decisions.  That can be helpful, but it is also possible to take the topic to the next level and identify the edges in markets that come from understanding the psychology of those active in the marketplace.  As Rob's work makes clear, such edges *do* exist.  It's only a question of whether we trade with awareness of them or in ignorance of them.

Thanks for your interest; I hope to see you in the Big Apple!


Tuesday, May 14, 2019

Trading Psychology Techniques - 4: Developing Your Morning Routine

In the previous three posts in this series, we have taken a look at managing our energy for peak performance; testing our trading ideas to provide us with knowledge and confidence in our trading edge; and the do's and don'ts of constructing a trading journal.  To an important degree, these three elements of success can come together in well-crafted morning routines.

I have consistently found, personally as well as in my work with others, that how we live our mornings sets the tone for the entire day.  I've equally observed that how we start our mornings sets the tone for the entire morning.  In life, as on the racetrack, getting off to a good start does not guarantee a win, but getting off to a bad start puts the winning odds against you.

Here's a general rule for successful morning routines:  whatever you are trying to develop in your life overall, make sure it's an active part of your morning.  Whatever goals you have--personally and in your trading:  make those integral parts of your morning routine.  You want the morning to provide an emotionally impactful set of experiences that enables you to sustain the sense of moving forward.

Unfortunately, that's not what many of us do.

Too often, we roll out of bed, shake off the cobwebs, grab some food and coffee, and start our day, whether it's with a commute to work or time in front of screens.  In such a situation, we've gained nothing from our mornings, but we *have* internalized the habit of living life on auto-pilot.  If we live life in routine ways, can we really expect to excel?  If we start our mornings without direction and purpose, can we truly live the rest of our days productively and meaningfully?

Whatever functions you want to develop in your life, exercise them in the morning.  That internalizes the sense of living life intentionally, meaningfully, with purpose.

My mornings typically begin early (between 4 and 5 AM EST), as I follow markets and communicate with traders overseas and prepare either for a day of work at a trading firm or a day of trading and writing.  Here are the usual elements of my morning routine:

 1)  Prayer - In my tradition, there is a wake up prayer that begins Modeh Ani (I give thanks).  The idea is to begin the day on a note of gratitude and spiritual connection.  What I *don't* want to do is begin my day cluttering my head with ego concerns:  things to do, worries about markets, etc.

2)  Cats - If I don't get up early on my own, our four rescue cats pretty well ensure that I'm up to take care of them.  All our cats were either neglected, abandoned, abused, sickly, or some combination of those.  We have socialized them and they have become quite loving, toward us and toward each other.  Each morning I greet them, pet them, change their water, give them food, and clean out their litter.  I take care of them before I tackle any of my personal priorities.  In acting on our values, we cement those as active parts of ourselves.

3)  Quick Market Update and Look at Emails - The evening before, I've updated my market research and formulated tentative ideas and plans for the trading day.  I quickly review market activity during the overnight hours (in Asia and Europe) and, if necessary, do a quick update of my ideas and plans.  I scan emails to see if there is anything pressing and respond as needed.  This is also when I set goals for the day and enter them into my daily calendar.  The calendar ensures that I attend to the things most important, whether it is book writing, attending a class, or getting work done at home.  I often do this update while listening to inspiring music; this is the music I'm listening to at the moment.  

4)  Exercise - This includes time in a massage chair, stretching, weight lifting, and jogging on a treadmill.  The idea is to first warm up and then push my limits, both with strength and  aerobic conditioning.  I keep track of my reps at each station in the indoor gym and my treadmill measures my distance run, pace, heartrate, degree of incline, etc.  I also wear a Fitbit that records my exercise minutes as well as the quality of my sleep, my heartrate, etc.  This helps me be accountable for getting in shape.  I want to begin the day pushing myself, breaking a sweat.  We don't grow unless we push our limits, and we don't push our limits if we stay in our comfort zones and never break a sweat.

5)  Morning Prayer, Meditation, and Reading - Once I've worked out the body, it's time to engage mind and spirit.  It is during this time that I want to be connected to the meaning and significance of what life is all about.  In a very important sense, the prayer and study are to the mind and spirit what the exercise is to the body:  a way of building our capacities.  In the case of prayer and reading, I'm building the capacity for quiet focus and inspiration.  During this time, I engage in meditation exercises for the same purpose.  The goal is to be energy-filled from the exercise, but also centered and focused in tackling the rest of the day.  

6)  Family Time - A longstanding tradition is that I make coffee and bring a small breakfast in bed for Margie.  That is a nice time to connect and start our day.  Usually one or two of the cats will be clamoring for attention at this time, so we spend a little petting and purring time together.  

7)  Following Markets - Here is where I will dig in, update my research, and revise my ideas for the day's trading.  If I've been successful with the prior elements of the morning, I'm usually pretty good at staying open minded for the start of trading, framing my ideas as "if-then" scenarios that tell me what I'll do under various market conditions.  That scenario planning will also incorporate goals that I've formulated from the trading journal the evening before.

8)  Reassessing - Although most of my trades are intraday, I don't want to trade reactively, jumping from one trade to another.  I reassess my plans and scenarios based upon the outcomes of the initial trades I placed.  This enables me to adapt to market conditions (if they are slower or busier than usual; if there has been a breakout or important news), but it also tells me if I need to re-evaluate my views or perhaps double down on them.  Very often, the first trade is smaller, as a kind of feeler in the market, leading me to reassess and place more significant trades based on that learning.  I always want the current trade to benefit from the trades placed most recently.

How you construct your morning routines will of course differ from what I do.  The important thing is to be the person in the morning that you want to be during your trading--and during the rest of the day.  Notice how much of my morning routine has little to do directly with trading, but everything to do with being in the right state of mind, body, and spirit for good trading.  We want to live our mornings with purpose and meaning, and that helps us carry significance to the rest of our day and from day to day.  Inspiration doesn't just come to us.  We create it and recreate it until it becomes a regular and energizing part of what we do and who we are.

The right morning routine connects us with--and strengthens--everything in life that is more important to us than P/L.  It is difficult to get caught up in frustration over missed trades and losses if we are truly grounded in the things that matter most to us.  And it is difficult to get rich in markets if we're living impoverished lives.

Further Reading:


Thursday, May 09, 2019

Trading Psychology Techniques - 3: Managing Your Energy

In the first post in this series, we took a look at the do's and don'ts of creating an effective trading journal.  The second post examined the importance of testing our trading ideas and truly understanding our edge in markets.  When you are on a productive learning curve and when you trade with an edge you understand, you are able to trade with energy and enthusiasm.  Yes, it's important to manage our risk and it's important to manage positions.  In our personal lives, it's important to manage our time and manage our homes and our savings.  Few of these things, however, provide us with energy and inspiration.  It's surprising how few people have reliable processes for managing and growing their energy.

Why is this important?

Energy is one of four key components of positive emotional experience.  The other three are happiness (doing what we enjoy); fulfillment (doing what we find meaningful); and relationships (doing things that bond us to those we care about).  It is difficult to imagine experiencing well-being without a good measure of energy and enthusiasm.  Indeed, research suggests that we are most likely to succeed at work and experience good health if we enjoy a high degree of well-being.

Energy comes from multiple sources:  intellectual stimulation; physical exercise; optimism and inspiration; novel experience; and more.  In a very important sense, energy comes from those other dimensions of joy, fulfillment, and connectedness.  When we are energized, we are most alert, most mentally switched-on, and most able to process information broadly, quickly, and deeply.  It is very difficult to be at our cognitive peak if we are run-down, bored, or otherwise in low energy states.

Perhaps most important of all, it is when we are energized that we have greatest access to our strengths in all areas of life.  Can we truly expect to succeed at trading if we are operating in less than fully energized states?

And yet that is often what I observe:  Traders become so concerned about not losing money, about poor performance, and about trading mistakes that their self-talk becomes profoundly de-energizing.  Think about it:  how often does your trading journal inspire and energize you?  How often is your self-talk during trading breaks optimistic and enthusiastic?  How often are you trading in states of high mental energy (concentration, focus) and high physical energy (aerobic fitness)?  Many times we have processes that guide us in risk management and trade entries/exits, but not in processes that keep us in the right state for peak performance.

A process that manages and maximizes our energy would include at least five components:

*  Ways of taking breaks from trading that keep us alert and renewed;
*  Ways of preparing for trading that keep us positively and constructively focused;
*  Ways of interacting with other traders that keep us informed and inspired;
*  Ways of using our time outside trading to do things that excite and interest us;
*  Ways of using our time outside trading to stay physically fit and energized.

How many of these five cylinders are you firing on from day-to-day, week-to-week?

If re-reading your trading journals and re-viewing your trading day doesn't energize you, you know you're operating outside your peak performance zone.

Further Reading:


Sunday, May 05, 2019

Trading Psychology Techniques 2: Testing Your Trading Ideas

In the first post in this series, we took a look at the do's and don'ts of keeping a trading journal.  This post tackles a very different skill essential to trading success:  testing your trading ideas.

You might be asking WTF?!.  How is testing trading ideas a trading psychology technique?

The sad truth is that a substantial portion of trading (and trading psychology) problems stems from trading sheer randomness.  Traders convince themselves they see a pattern in price action, earnings, macroeconomic data releases, indicators, etc. and they act upon that pattern without testing its validity in any fashion whatsoever.

I recently met with a trader who was frustrated over losing money.  The trader described a trade where one price bar made a lower high and lower low than the bar previous on increased volume.  He inferred that a decline was underway, waited for an uptick to enter, and then stopped out when his entry bar took out the highs of the previous two bars.  He complimented himself on his risk management (i.e., honoring his stop out level), but said he was frustrated because his "setup" didn't work.  He concluded that he needed to be more "patient" with his entry and wait for weakness within the current bar before entering his position.

My approach to helping the trader was a bit unorthodox.  I downloaded data for his symbol and created a database in Excel.  I coded with 1's versus 0's all instances in which the current bar made a lower high and lower low than the bar previous on increased volume.  I then assessed the forward returns (over the next 1-10 bars) for the "setup" group versus all other occasions.

There was no difference whatsoever.

The pattern being traded was not predictive.

So here we have a situation where the trader is diligently working on his trading psychology (keeping a journal, observing his losing trades, making plans for improvement), but his psychology is not the primary problem.  His  frustration and discouragement stem from the fact that the ideas he is trading lack a foundation in objective reality.  Imagine if a person played roulette at a casino and placed bets on numbers corresponding to the birth dates of family members.  That person then becomes frustrated and stressed because his system is not working!

(To take the analogy further, imagine a "gambling coach" who emphasizes to the roulette player that he needs to maintain a calm focus and stick with his system in a disciplined manner.)

How many traders trade sheer randomness, only to have mentors and coaches insist that there is an "edge" and that the key to success is faithfully following the system?

That is not just bad trading.  It is a clear waste of time, energy, and resources.  When someone trades randomness and can't obtain results, they *should* get upset!  What is delusional is continually getting one's hopes and confidence up and "working on trading" by tweaking utter randomness.

There is, however, a more subtle problem associated with the lack of testing for ideas.  The great majority of traders aren't really crazy, though I may occasionally question their sanity.  They realize that their ideas are untested, and they can't truly explain *why* the patterns they trade should produce an objective edge in the marketplace.  As a result, they never develop confidence in what they do, even when the ideas are seemingly working out.  It is the cognitive grasp of why trading signals are valid that leads to the development of true conviction.

There are two ways of testing trading ideas:  1)  backtesting over multiple independent data samples (to make sure any single backtest isn't spurious) and 2)  establishing an objective track record in simulated and real-time trading that demonstrates, over multiple time periods and market conditions, results significantly better than random.  Ideally, the first way of establishing the value of an edge leads to the second, so that backtests are validated in real time.  

The bottom line is trading ideas that you've worked with and tested provides an unparalleled--and reality-based--foundation for your trading psychology.  Testing also tells you what doesn't work--and that can lead to a deeper understanding of hidden edges.  Sadly, there are many traders who insist that they will succeed in their trading through sheer passion and willpower, when in fact they display all the signs of a trading addiction.  You would never purchase a car without giving it a test drive; your trading deserves nothing less.  It is not enough to rely on the promises and claims of peddlers offering the next best trading scheme.  Test before you invest your precious time and money.

Further Reading:


Thursday, May 02, 2019

Trading Psychology Techniques - 1: Keeping a Trading Journal

As mentioned in the previous post and the recent Forbes article, I will be posting a series dealing with research-backed methods for improving both our psychology and our trading performance.  I am doing this because so much of the writing I see in the area of trading psychology is long on what to do and short on how to do it.  This series will focus on the how-to's, to help traders better coach themselves.

The focus of this post is on the proper construction and use of trading journals.  Several evidence-based approaches to psychological change make substantial use of journaling, including cognitive therapy.  Like many cognitive-behavioral methods, journaling can improve our self-awareness, making us more mindful both of what we are doing well and what needs improvement.

Traders often keep journals, but in ways that are not especially helpful.  A few common journaling mistakes are:

1)  Inconsistency - Journal entries are sometimes detailed, sometimes sketchy.  They are sometimes more frequent, sometimes less frequent.  The trader lacks a consistent journaling process.  The frequency of the journal is often out of line with the frequency of trading.  If traders are making multiple decisions per week, for example, it makes sense to keep a weekly journal.  If the trader is making multiple decisions daily, a daily journal will be useful.

2)  Isolation of Entries - A trader writes a journal entry one day, then the next day, then the next.  Very often, the entries do not reference one another:  they are written in isolation.  As a result, the trader gets little cumulative benefit from the journal process.  It is very common that traders never look over journal entries from a week or a month ago, and thus don't fully learn from experience.

3)  Focus on Reporting - The trader's journal entries report what happened during the day--sometimes in detail--but spend relatively little time analyzing why these things happened and what they can learn from them.  The journal ends up being more descriptive than prescriptive.  The journal as a reporting tool is not necessarily a performance-building tool.

4)  Focus on Venting - The trader's journal expresses frustrations and focuses on things that went wrong, mistakes made, etc.  There is little time spent on what the trader did well, and there is little constructive writing about how the trader could correct the mistakes.  A useful journal is a constructive journal; it isn't mired in negativity.

5)  Narrowness of Focus - The journal focuses mainly in one or two areas, not with trading overall.  For example, the journal may focus on psychology and not actual trading decisions.  The journal might focus on entries and exits, but not position and risk management.  It is uncanny that the areas left out of journals are often those most important to work on!

So, what are some best practices regarding the keeping of journals?

1)  Frequency - Note that, in cognitive therapy, people keep journals daily and make multiple entries per day.  They write in the journal as soon after significant events occur.  That allows them to observe what happened, how they processed the event, how that processing impacted them emotionally, and how they might process the occurrence differently and more constructively.  By journaling often, the person becomes very aware of their thinking and grows in the ability to address problem patterns before they occur.  The frequent journaling becomes a tool for building positive habit patterns.  

2)  Backward and Forward Looking - The ideal journal entry notes something distinctive that was done right or something distinctive that needs improvement.  In both cases, the focus in on clearly identifying what was done right or wrong and why it was desirable or undesirable.  Then the journal entry looks forward to identify a concrete goal based on the observation and a specific plan for implementing that plan going forward.  For example, the journal entry might identify a way of scaling into a position that was very effective in several trades.  This becomes a concrete goal to implement going forward, perhaps with a position management checklist to be used in coming trading sessions.

3)  Reviewing as Well as Viewing - If the journal entry sets a goal and a plan for reaching that goal, the next entry should spend some time reviewing how well the goal was reached.  If the goal wasn't fully met, modifications in plans can be made going forward.  If the goal was reached, there might be some reflection on how to make the improved practice part of an ongoing process.  If a goal is worth setting, it's worth implementing and reviewing!

4)  Keeping it Doable - Focused goal-setting and review is more effective than scattershot approaches to change.  You might want to work on one main goal per week or month, depending upon the frequency of your trading.  You don't want journaling to become unduly burdensome, and you don't want to be setting different goals every day, never truly building changes into robust habit patterns.

I like keeping journals in apps that allow you to share the entries with teammates and colleagues and that allow you to tag entries and sort through them during your reviews.  As I mentioned in a previous post, an app like Evernote allows your journal to become truly multimedia and interactive.  Pulling up all your entries on a given topic, such as risk management, is a great way to track your progress and learning.  At SMB, for example, trading journals structured as daily report cards are routinely shared with mentors to facilitate feedback and learning.

The bottom line is that the focus should be on journaling as an ongoing learning and performance-enhancement process.  Keeping a journal has minimal value unless it is part of a cumulative process of assessment and deliberate practice.

Further Reading:


Monday, April 29, 2019

Trading Psychology: How to Improve Your Trading Results

Many traders focus on their results--their P/L--and never make the process changes that could lead to sustained results.  A great deal of writings in the area of trading psychology emphasize the changes that traders should make--not actual techniques traders could employ to make those changes.  When I wrote The Daily Trading Coach, the idea was to create a "cookbook" that would help traders coach themselves, using established, proven techniques from applied psychology.

It's time, however, to update those "how-to's".  In the most recent Forbes article, I explain how evidence-based approaches to short-term therapy can be adapted to help us achieve peak performance in our trading--and in our personal lives.  This is a major development in psychology.  Until recently, change techniques have been used to help troubled people reduce their problems.  They have equal value, however, in achieving positives as "therapies for the mentally well."

In future posts and presentations to trading groups, I will be elaborating the how-to's of trading psychology, drawing upon techniques proven in their effectiveness based upon outcome research.  (This book, which I wrote/edited with two colleagues at the medical school where I teach, reviews the research going into each of the methods.)  Three of the specific approaches are covered in the Forbes article and will be a starting point for future posts:  behavioral techniques; cognitive exercises; and solution-focused methods.  As always, thanks for your interest and support!

Further Reading: