Sunday, September 29, 2019

Building Our Emotional Fitness

In the most recent Forbes posting, I outline two strategies that traders can employ to be more resilient in the face of market setbacks.

Why is this important?

Positive psychology researcher Martin Seligman describes resilience as a kind of emotional fitness.  Like physical fitness, we can train to be more emotionally fit by learning to respond constructively to adversity.  An important part of that training is the cultivation of optimism: the ability to see setbacks, not as final, but as stepping stones toward success.  We can think of a trading journal as structured training in processing adverse performance outcomes.  The journal can be used either to help us use losses as learning experiences or as personal threats.  As Seligman points out, the alternative to resilience and bouncing back is learned helplessness.  A big part of getting through our learning curves is using failure as a source of empowerment and inspiration, not as a personal defeat.

How do we become physically fit?  By engaging in regular exercise that challenges a variety of functions, from our strength and balance to our aerobic conditioning.  We become more fit by pushing past our boundaries and lifting more weight, running faster and more distance.

Similarly, we become emotionally fit when we challenge our various trading functions, from our ability to stay level headed after periods of winning to our capacity for using losses as sources of learning.  When we bump up our risk-taking as a trader, we give ourselves a workout in emotional fitness, pushing ourselves to tolerate greater profit and loss volatility.  One exercise I've used with the traders at SMB is to compute the average number of trades per day for the past few weeks and then, going forward, only allow themselves to take half that number.  That, too, is a workout in emotional fitness, requiring us to truly hone in on our conviction and focus on the best trading opportunities.

A great way to review your trading journals is to ask, at the end of each entry, how you used that day or week to build your emotional fitness.  What did you do to make yourself a more confident trader, a more resilient trader, a more disciplined trader?  Every day of trading can be a workout; how are you making yourself more fit?

Further Reading:


Thursday, September 26, 2019

A Simple Technique for Overcoming Reactive Trading

In my recent podcast with Optimus Futures, I talk about the relevance of psychology to trading for both developing and experienced traders.  Many of the best traders are highly competitive.  Their drive to win can drive them to make decisions based upon the need for P/L and not because of what is actually happening in markets.  Instead of trading proactively, they can find themselves making decisions that are reactive to the latest market move.  Such reactive trading, over time, is rarely profitable trading.

In the Radical Renewal blog book, I make the point that music or speech would be incoherent without pauses.  If we strung together word after word with no pauses whatsoever, our speech would turn into noise.  Similarly, if we make one decision after another without pause, our behavior becomes random.  It is during pauses that we can reflect, and it is reflection that enables us to make sense of markets and adapt our trading accordingly.

One simple technique for overcoming reactive trading is something I did with the traders I worked with in Chicago.  They set alarms every 20-40 minutes through the trading day, with the understanding that, as soon as possible after the alarm, they had to pause and fill out a brief checklist.  The form simply asked them to rate their emotional state (calm or worked up) and their cognitive state (focused or distracted).  The act of checking the scales on the questionnaire required them to become mindful of their state.  It was an act of self-awareness.

If the trader found that they were distracted, emotional, and not in their proper zone, they took a few minutes away from the screens, engaging in deep, slow breathing and visualizing something peaceful and calming.  Once they felt centered, they could return to following markets--until the next alarm.

What this accomplished was quite important:  It turned mindfulness into a daily habitOver time, the traders realized that they were more at risk missing opportunity because of being in the wrong mindset than being temporarily away from screens.  Once they realized that their mindset would sabotage their trading, their FOMO led them to do the right things to get calm and focused!

One way to view the situation is that, if you're not training yourself to sustain mindfulness, then you're actually reinforcing mindlessness.  The simple alarm can wake us up to put ourselves in the right state for success.

Further Reading:


Tuesday, September 24, 2019

Two Best Practices I'm Observing Among Active Traders

One of the joys of working with traders at different kinds of hedge funds and trading firms is the opportunity to see common threads among those finding success.  Here are two best practices that I'm observing across a range of talented money managers and traders:

1)  The smart use of options to express views - A very common problem that I observe is that traders see the opportunity for medium-to-longer term market moves, but cannot tolerate the volatility of price movement over such a time horizon.  Often, this leads them to exit sound ideas at inopportune times.  A different way to participate over longer time horizons is to express some or all of a view as an options position.  In purchasing a limited number of puts or calls, you define up front the amount of money you're willing to lose in the trade; stops become far less relevant.  I notice that Ivanhoff has a recent book available on using options to capture swing trading moves, with a number of examples.  Among experienced options users, I find a savvy ability to use options structures (such as spreads) to capture market movement while limiting the premium paid and the impact of decay.  Even more experienced traders use options to express volatility views, profiting from price breakouts without the need to define which way that breakout will occur.  This provides an entirely different edge from the usual directional trading.  A valuable overview of options and their practical use can be found on the Investopedia site in an article edited by James Chen, head of research at  The smart use of options gives a trader multiple ways to win, and it can provide superior risk/reward expressions of trading ideas.

2)  Quick adaptation to market conditions - A few savvy traders talk about different instruments having their own "personalities" and also talk about the "personality" of a given trading day.  The best traders quickly size up the environment we're in and adapt their trading accordingly.  Some of the things they focus on is volatility and the relative volume of the instrument they're trading, to size up the potential for moves to extend.  They are quick to notice when volume dries up in a move, when volume expands at key price levels, etc.  As Jim Dalton's work has found for years, it's not enough to track price changes on charts.  Understanding who is in the market and what they are doing is key to anticipating extensions and reversals of moves.  This can change from day to day, week to week, and indeed even within the day.  Smart hedge fund managers track themes that cut across markets and that often frame specific trading opportunities.  For example, the chase for yield due to falling interest rates around the world has created underlying demand for stocks, especially sectors offering sound, high dividends, such as utility shares.  Many times, we can detect themes to market movement even during a trading day, giving us an opportunity to quickly adapt and add to positions, limit losses, and find fresh opportunities.  In the stock market, such themes can occur as sector rotation moves, where the opportunities can't be found in the broad market but do show up as trends in the relative strength of one sector versus another.  The same occurs when we see movement in calendar spreads in commodities and flattening or steepening curve moves in rates.  We limit ourselves when we view trends solely in terms of flat price.  The relative movements of assets often define the opportunities in otherwise flat market environments.

The common thread here is thinking multidimensionally about opportunity.  Many traders focus on playing the game better when they should be stepping back and asking which game they should be playing.

Further Reading:


Friday, September 20, 2019

Finding Unique Trading Opportunities

Now that I have finished the new book, it's time for a very different project.

The most recent Forbes article outlines a few of the reasons I believe we may be headed for meaningful opportunity in the stock market in the fourth quarter of this year.

Supporting that view is a method for identifying trading opportunities that looks at markets in a unique way.

First, we're looking for opportunity across time frames:  everything from intraday to multiple weeks.  It turns out that traders and investors typically lock themselves into opportunities on a limited range of time frames.  That is very different from asking the question of which time frames, for the current market, offer the greatest opportunity and how can we trade those.

In other words, we're trading where markets offer opportunity, not where our preferences lead us to trade.

Next, we don't look for universal "setups" that will provide trading signals across markets.  Rather, we will break markets into meaningful categories based upon features that differentiate one kind of market from another.  We can think of these categories as "regimes", so that we can categorize rising markets and falling markets; busy and slow markets; markets in high and low interest rate environments; etc.  

This means that, instead of trading the patterns *we* prefer to trade, we identify the patterns that appear in different market conditions/regimes and trade those.

The bottom line is that sometimes we're meant to be shorter-term traders and sometimes longer-term investors.  Sometimes we're meant to trade momentum patterns and sometimes we'll seek value.

The categorization method I'm using is related to k-NN modeling, where we can both classify market types and create regression-based models specific to the classes we identify.  It's important to not get intimidated by the math:  all we're doing is finding market dimensions that matter and identifying the k number of "nearest neighbors" that represent past occasions similar to the current one.  Forecasts are based upon these nearest neighbors only, not upon all days in a backtest.

Backtesting historical periods is not helpful, because we're comparing markets under unlike conditions.  Meaningful patterns in the data are lost if we average all days together.

Interestingly, in the first model I've created (and this is a work in progress, to be sure), we find that markets trading in narrow ranges following strong rises tend to follow through with continued strength over a next 20-30 day period.  That is a similar finding as the one outlined in the Forbes article.

The important takeaway is that we can find value in looking at markets in new ways.  Doing what everyone else is doing and looking at the same things they are looking at is unlikely to offer any meaningful edge over time.  The great problem for many traders is that they keep doing the same things even after markets change.  There are ways of identifying these changes in real time--and the opportunities that spring from them--and I hope to share more as the project unfolds.

Further Reading:


Tuesday, September 17, 2019

Trading Psychology Advice for Struggling Traders

Recently, I've received a number of emails from traders who describe themselves as "struggling".  There is a sense in which all developing traders are struggling traders, as we struggle to make sense of markets, and we struggle to master ourselves.  Here are several pieces of advice that might be helpful to traders who are struggling with their development.

1)  Make sure you structure your learning process properly - Starting with trading in simulation mode (many platforms allow this and help you keep track of your performance) and practicing your research; entries; trade management; and risk management allows you to make your mistakes without doing harm to your account.  In every sport, players spend more time on the practice field than on the playing field.  Practicing and keeping score allows you to *see* your progress and gives you the confidence to go live.  Reviewing your trading enables you to see your mistakes and successes and learn from both.  Focus especially on your progress and what you do well...these often point the way to your eventual trading niche.

2)  Get the best mentoring you can find - It is difficult to find a performance field in which teaching/mentoring is not an important part of development.  In many arenas, such as the medical school where I teach, every student has multiple mentors over the course of their education and training, allowing them to absorb many sources of learning.  This is an important reason for joining a trading firm that assists in training, and it's an important reason to be part of online communities and resources.  The Appendix to my new book contains a large list of resources that can offer great education and mentoring.  It's worth the time to examine many of these and see which ones offer the kind of assistance that will speed your learning curve.  

3)  Give yourself time to explore different trading niches - To go back to the medical school analogy, students try out various specialties, such as surgery, internal medicine, and pediatrics, before they focus on a single direction for their training and career.  Sometimes, struggling in the learning process suggests that the niche you're trying out might not be the one for you.  Like the various medical specialties, different forms of trading require different skills and interests:  "scalping" short-term movement is very different from trading longer time frames; trading volatile stocks "in play" is very different from trading the broad market; quant trading is very different from discretionary.  Among the traders I work with at SMB, many are successful at one kind of trading but really struggle with others.  Among portfolio managers I work with at hedge funds, many are successful at one kind of strategy (directional macro) and not so much another (relative value or single name long/short equities).  Think of track and field and how many events there are:  from pole vaulting to sprinting to distance racing to shot putting.  So much of success is finding the niche that speaks to your talents and interests.  

One last piece of perspective.  If I were mining for gold or oil, I would not necessarily start digging where everyone else has been.  I would try to conduct or commission my own geological studies and dig where others have not explored.  Similarly, it is toughest to make money doing what everyone else is doing.  A great deal of success consists of looking at new market data (and old data in new ways) and defining strategies that exploit the herd.  Many of the best active trading edges consist of catching bulls and bears trapped, unable to move the market higher or lower, and needing to get out.  Some of the most valuable tools for trading allow you to detect such opportunities in real time.

Further Reading


Sunday, September 15, 2019

Key Perspectives in Trading Psychology - 3: The Power of Passion and Purpose

In the first post in this series, we took a look at two information processing systems and how those interact to create trading opportunities and problems.  The second post explored what we need to do to process market information more effectively.  This third and final post will also draw upon the Radical Renewal book to propose a fresh idea with powerful implications for trading psychology.

As the book notes, the single most powerful influence on our information processing is trauma.  When people are traumatized, the disruption to their safety and security is enough to overwhelm their ability to perceive self, others, and situations normally and objectively.  The victim of post-traumatic stress disorder, for example, will perceive threats in normal situations, simply because those might remind him of experiences during wartime.  

Normal emotional experience enables us to process information normally.

Traumatic (non-normal) emotional experience disrupts our normal information processing, sometimes permanently.

Traders who do not manage risk properly and lose all their money generally cannot come back and take normal risk.  Even modest drawdowns can feel threatening and unbearable.  The information that markets provide is lost, overwhelmed by the internal, threat-based processing.  Quite simply, to use the terms introduced in the first post from this series, trauma keeps us mired in self-focused processing, so that we cannot understand the "other", whether the other is a market, a person, or a life situation.

With that in mind, here's the big idea:

What if extreme positive emotional experience, such as profound joy and inner peace, creates a form of positive trauma in which we become rooted in other-focused processing?  In other words, what if very meaningful experiences that draw upon our sense of passion and purpose have just a profound impact on our information processing as traumatic stress?  In such a situation, what we would be capable of in terms of meaningfully processing the world would be as far from our normal daily experience as is our functioning under post-traumatic stress.  

When I conduct webinars and talk with traders, very often their questions focus on how they can reduce or eliminate their negative emotions, such as fear, greed, overconfidence, and frustration.  What they miss is that there are ways of cultivating extreme positive experience that can provide us with much more powerful market antennae.  

By consistently tapping into what we are passionate about--what gives us meaning, purpose, and fulfillment--we become consistently able to process the world in terms of what is meaningful.  We exit our self-focused internal chatter and become more sensitive to the nuances of the world around us.

Reducing negative emotions will help you process markets normally.  That's not a bad thing.  But what if your aspiration is to function beyond normal?  To perceive what is actually meaningful in markets, we need to be attuned to meaning--and all that lies on the far positive side of normality.  In Maslow's terms, the goal is to cultivate our capacity for the peak experience.  That keeps us grounded in the flow state, from which we draw both inspiration and creativity.

Further Reading (Free Blog Book):  


Friday, September 13, 2019

Key Perspectives in Trading Psychology - 2: How We Can Process Market Information More Effectively

In the first post in this series, we took a look at our two distinct information processing systems and how those interact to either assist or interfere with our trading.  Drawing on the recent blog book that I released, Radical Renewal, now let's take a look at two specific strategies that can help us process market information more effectively:

1)  Strategies that build our joy and happiness - Fascinating research from Dr. Barbara Fredrickson suggests that psychological well-being (happiness, fulfillment, energy, closeness to others) not only makes us more productive and physically healthier; it actually broadens our field of vision.  When we are stressed, it is as if our perception becomes tunnel-visioned.  Under conditions of well-being, we broaden our vision and perceive more at the periphery.  A simple example of this is, when positions move against us, we can become fixed on screens, hanging on every tick.  When we experience well-being, we can sit back and more easily explore various pieces of information to detect patterns.  A different way of stating this is that, when we have greater well-being, we have greater access to intuition and our capacities for pattern recognition.  What we do to build our well-being (inside and outside of trading) helps us generate better trade ideas.  A great exercise is to review your trading journal entries and identify the ratio of positive, happy, fulfilled sentences to upset, frustrated, negative sentences.  None of us like to lose, but it's the trader who can extract joy from learning from losses that is most likely to rebound.

2)  Strategies that build our quiet - As the first post emphasized, when we get into the fight or flight stress mode, our bodies speed up.  When we eliminate our inner chatter, we are most likely to achieve our flow state and absorb the patterns that markets present.  This is why meditation has been effective as a way of accessing those pattern recognition skills and achieving greater clarity of perception.  Research has found that the mindfulness created by meditation is helpful in treating such problems as anxiety and depression.  Similarly, meditation can help traders exit their self-relevant/fight and flight processing and become more aware of what is happening around them.  Research also finds that meditation can also help us reduce stress, improve focus, and increase the quality of our sleep.  Other strategies, including physical exercise, yoga, and prayer, can similarly contribute to a clearing of our minds and improved energy and focus.

In sum, we can see that the traditional advice that traders should control their emotions and be more disciplined is limited.  What we want is a set of tools--and indeed a lifestyle--that allow us to better access our capacities for insight and understanding.  By increasing our focus and broadening our perception, we can become better idea generators and better equipped to detect meaningful changes in market behavior.

Further Reading:


Monday, September 09, 2019

Key Perspectives in Trading Psychology - 1: Our Two Modes of Processing

In this series of posts, I will present key ideas from the new book, Radical Renewal.  That book is written as a series of blog posts and so can be accessed without registration and free of charge.  

As I described in the recent webinar, we have two ways of processing our experience, including markets:

1)  The self-focused mode - This is a rapid mode in which we assess events for their relevance to ourselves:  whether they are good or bad for us, whether we like or dislike them, whether they excite or bore us.  Much of our moment-to-moment emotional experience reflects these self-relevant assessments:  what makes us happy, fearful, frustrated, eager, etc.

2)  The other-focused mode - This is a slower mode in which we experience the world around us based on our connections to what is outside ourselves:  our closeness to other people, our understanding of the world, our beliefs and values, etc.  The emotional experience from the other-focused mode is different in quality from that stemming from our self-focused processing.  For example, in place of happiness, we experience joy and fulfillment; in place of relaxation and calm, we experience peace.

What we call ego is the sum of our self-focused processing.  It shows up as our self-talk:  our continuous inner dialogue about our experience.

The sum of our other-focused processing is what we call soul.  It shows up as our inner experiences of meaningfulness and significance.

The ego--our self-relevant mode of processing--is necessary for survival.  It mediates our fight and flight responses and steers us toward what we deem good for us and away from what we see as harmful.  That self-relevant mode has real survival value.

To thrive, however, and not just survive, we need those connections to realities outside ourselves.  Close personal relationships, a sense of community, a mission or calling in life:  these provide life with something more than fun and enjoyment.  They are what provide us with purpose and meaning.

One challenge we face in life is that, while we are in our self-focused mode, it is difficult to be other-focused.  If I'm preoccupied with my problems at work, I won't be a very good listener to my spouse.  If I'm caught up in the minutiae of my daily calendar, I can lose sight of my broader goals in life.  

To succeed at discretionary trading, we need to be able to maintain a feel for markets and understand what they are doing.  When we are self-focused about P/L, catching or missing moves, making right or wrong market calls, we lose our ability to read markets accurately.  We respond to our fight/flight mandates, not to the broader meaning of the situation.

It is very important to understand this:  It is our self-focused internal dialogue--our self-chatter--that gets in the way of trading solely based upon our insight and understanding.  This is why I emphasize in the book that good trading comes from the soul, not the ego.

When we cultivate our other-focused processing modes, we increase our capacity to detect meaning from markets.  

In the next post, we'll take a look at techniques that help us stay soul-full in our trading.



Saturday, September 07, 2019

Sunday Evening Live Webinar: New Trading Psychology Techniques

This Sunday evening at 8 PM EST, I'll be joining BubbleHead for a live webinar that will discuss new ideas and practical techniques coming from my new blog book, Radical Renewal.

Registration for the free webinar is available here; please bring questions about how to get the most from your trading and how to best use your non-trading time to develop yourself as a trader!


Friday, September 06, 2019

The New Book Is Now Available

I'm pleased to announce that the new book that I recently described is now available for download, free of charge.

The book is written as a blog, with each chapter being a separate post.  At the bottom of each page are links for navigation to the next chapter and to the table of contents.

In coming days, I'll be writing blog posts summarizing each chapter and its relevance for trading.

To my knowledge, this is the first book covering the topic of trading and spirituality.  My goal is to expand the field of trading psychology to show how we can use tools from various spiritual traditions to overcome the needs and demands of ego and truly open our minds to what markets are trying to tell us.

Because of the blog format, you'll find many links, as well as opportunities to comment on the text.  The format will also allow me to add material to the book over time, so that it is continually evolving.

Thanks for your interest in this project.  I especially thank the many excellent sources of insight that I link in the Appendix.  My hope is that the ideas in the book will help not only with your trading, but in leading a fuller, enriched life!


Thursday, September 05, 2019

Communicating With The Market We Are Trading

One of the topics I take up in the new book is how we interact with the markets we trade.

As the above quote suggests, too often people engage in conversations in order to make their points and say what *they* want to say.  In that mode, it is difficult to listen in a truly open-minded way.  Most of us have had the frustrating experience of trying to carry on a conversation with people who talk at us, rather than with us.

Traders are among the worst culprits in this regard.  They don't truly look at what the market is doing; they look for their next trades.  In their relationship to their markets, they aren't good listeners.  They are too busy getting ready to "reply".

A great way to listen to the stock market is to track the various sectors within the market and see what they are doing.  Are they moving predominantly in one direction (a trending market), or are they doing very different things (a rotational market).  A nice tool in this respect are the technical rankings of individual stocks and sectors on the Stock Charts site.  When we see sectors with very different rankings and charts, it's tougher to make the case that we're in a bull or bear market.

Recently we've seen great strength and new highs from utilities stocks; consumer staples issues; and real estate shares.  Lagging have been international equities; regional banks; small and mid cap shares; and many energy-related funds.  Dividend and large cap names--traditionally defensive havens--have been strong; perhaps not surprisingly in a world of rapidly falling yields.  This rotational environment has frustrated many traders attempting to trade the overall market directionally.

An excellent exercise is to look at the market from the ground up, sector by sector, and *then* formulate an overall market impression.  When we operate top-down, it's all too easy to impose our predictions and expectations on the market.

Further Reading:


Monday, September 02, 2019

What Makes a Trader Successful

In the recent Forbes article, I took a look at what I called the "real reason" why traders don't succeed.  No, it's not having the wrong "setups" and it's not having the wrong mindset.  What sinks traders is what sinks most startup businesses.  Indeed, if you view trading as a startup business and evaluate it on the four criteria in the article, you might wonder how, possibly, the average trader could succeed.

The building blocks of success start with talent, but of course all of us know talented people who don't go on to become successful.  As Goethe suggests above, it is when talent is expressed and exercised that we experience our greatest fulfillment.  The opposite of fulfillment is frustration.  If frustration is our dominant emotion, in trading or in any other endeavor, we know that we aren't making optimal use of our talents.  As a psychologist, I feel fulfilled.  As a mechanic, I would be frustrated.  It's all about being what I'm good at.  

When our talents find expression, work energizes and inspires us, and that helps us build unusual skill.  What makes traders successful is finding an approach to markets that so engages their strengths that it supercharges their learning curves.  When work is frustrating, it drains us of energy.  When work is fulfilling, it invigorates us.  

A career is something we choose to do.  A calling is what no one can keep us from doing.  What the average trader calls a "passion for trading" is merely a set of ego needs to make money and find success.  That passion dies down quickly when the challenge of the learning curve is faced head-on.  When trading taps into our talents, that is when we find a calling in markets.  It is the sense of calling that accelerates our learning, creating unusual skill.  

Unusual skill married to great talent creates world-class performance.

This is why we can often identify great traders by observing what they do outside of market hours.  If trading truly expresses talent and embraces a calling, it doesn't really matter that markets aren't open.  They love working on their game.  They love the challenge of finding opportunity and learning from experience.  What makes a trader successful is not a passion for trading; it's a passion for all that goes into profitable trading.

Further Reading: