Tuesday, June 30, 2020

Reprocessing Emotions For A New Trading Psychology

Our losses, our mistakes are part of who we are.  We cannot eliminate all emotion around our setbacks, nor do we want to.  Self esteem means embracing the experiences that shape us, including the bad and the good.  All are potential fuel for learning.

Imagine vividly mentally rehearsing making various trading mistakes and, during the visualizations, filling yourself with excitement over learning from these or gratitude for the opportunity to learn or peacefulness over the realization that you can embrace the losses and move forward.  Again, again, again, you conduct the visualizations while keeping yourself in an eager mindset, a learning mindset, a grateful mindset, a peaceful mindset.  With that repetition, we reprocess our emotions, so that, in real time, what we rehearse will become our experience, because it has become part of us.  

This Forbes article explains how we can develop an enhanced mindset: one that we can rehearse as part of reprocessing.  This short video introduces the mindset concept.

Experiencing our problems in a fresh mindset: this is a powerful avenue for creating a new trading psychology.


Saturday, June 27, 2020

Valuable Trading Psychology Lessons From My Cats

Well, at present we have four rescue cats and that makes for a full house.  Every morning they wake me up (around 4 AM), and I start every morning by petting them, feeding them, and cleaning up their litter.  I'm a firm believer that we set the tone for our day by what we do at the start of the day.  I don't start by looking at market quotes, news, emails, or chats.  I start by loving and serving those I love.

Actions, repeated, transform us: We become what we do.

Here are three trading lessons I've learned from our cats over the years:

*  We can overcome even the greatest adversity by making use of the strengths we have and finding something in our environment that engages us:  The story of Mali

*  If we want to change a negative pattern in our thinking, feeling, or acting, we need to tap into a motivation greater than the one that underlies our problems:  The story of Naomi

*  We don't create our opportunities.  We put everything of ourselves out there, and opportunity finds us:  The story of Mia

Once we can put our egos aside, we can learn from everything in life--even humble cats.


Thursday, June 25, 2020

The Key To Becoming Your Own Trading Coach

There are many techniques in psychology that can help us overcome negative emotions and thought patterns, and also ones that help us build positive patterns.  The Three Minute Trading Coach series of short videos is an introduction to these techniques.  Each video focuses on a different exercise that can help you improve the consistency of your trading by working on the consistency of your mindset.

There is a secret to making each of these methods work:  practice.  Most of our negative patterns have been with us long enough that they have become habits.  To break a habit pattern, we need to work at recognizing what triggers it, work on interrupting it, and work on replacing the old habit pattern with a new, positive one.  The goal is to create new ways of thinking, feeling, and acting that are so well rehearsed that they become a natural part of us.  That takes daily (and sometimes more than daily) practice.

A rule I've found helpful is to rehearse these techniques religiously for 90 days and they will become a natural part of you.  If you want consistency of trading mindset and consistency of trading, you need to work on those things consistently.  Once you do that, you don't need to hire an expensive professional.  You've become your own best trading coach.


Tuesday, June 23, 2020

Two Best Practices I See Among Successful Developing Traders

I've worked over a period of years with two proprietary trading firms:  Kingstree in Chicago and SMB Capital/Kershner Trading in New York.  The advantage of working inside such trading firms is that I get to see what is really going on and, most important, I get to see the P/L of each trader.  Putting these experiences together, I can identify two best practices that have been associated with success among developing traders:

1)  A rigorous planning and review process - Winning basketball and football teams prepare intensively for each opponent.  They stay in shape with drills, review game film to find weaknesses in the opponent and correct their own weaknesses, and practice plays over and over again before game day. Similarly, successful developing traders review in detail what happened over the past day and week, plan for potential opportunity, and track their performance so that they are actively working on goals that enable them to get better.  One practice I've seen that works especially well is recording the market day and then replaying the video, stopping at key points, and seeing--frame by frame--how opportunity set up.  Think of how many more reps those traders are getting than the average noob.  SMB provides a nice example of a "monster trade review", in which the trader studies ways in which good trades could have become great trades.  Note how that reinforces--every single day--the idea of becoming a great trader.

2)  Developing multiple ways to win - To use Mike Bellafiore's phrase, successful traders work on developing a playbook outlining patterns associated with opportunity and how those set up in real time.  Like a good football team, the successful trader has a deep playbook that allows for an adaptation to many different conditions.  So, for example, any football team has a diverse set of running plays and passing plays that can exploit a wide range of defensive setups, field conditions, and game clock constraints.  Knowing which plays to run under particular situations is a key strength of any coach and quarterback.  Successful traders have studied opportunities in various kinds of markets and that set up at various times of day and over various time frames.  That means that, like the star quarterback, they can run the right plays given the conditions they face.  Successful traders are anything but one-trick ponies.

As I emphasized in the trading performance book, success in any performance domain is a function of talents we're born with and skills we cultivate through deliberate practice.  The traders I see succeeding are ones spending an unusual amount of time working on their trading outside of market hours.  They are getting feedback from coaches, mentors, and peer traders, and they keep score of their trading with detailed statistics.  The great traders love markets, love learning, and love growing.  To use Ellen Winner's phrase, they display a "rage to master".  It's not P/L that motivates them.  It's the process of mastering a field that speaks to their greatest talents and interests--and that is what brings the P/L.

Further Reading:


Wednesday, June 17, 2020

Your Self-Talk Shapes Your Trading Psychology

Self-talk is our ongoing processing of life events.  Most often, this processing reflects whether events are good or bad for us, what we would like to happen, etc.  This is why I emphasize in the Radical Renewal book that self-talk is our ego.  To the extent that our egos intrude upon our trading, we cannot be fully market focused.  One way of dealing with this problem is meditation, which quiets self-talk and takes us out of ego mode. Another way of dealing with disruptive self-talk is to learn to step back from negative processing and interrupt its damaging effects, as described in the recent Three Minute Trading Coach video.

The meditation approach attempts to exit us from ego.  The cognitive approach keeps us in ego mode, but shifts the focus from negative to constructive.  From the cognitive perspective, the problem is not self-talk, but disruptive self-talk.  If we talk to ourselves in constructive, encouraging ways, we can maintain a positive mindset--and that is associated with superior learning and performance.  The key question is whether our self-talk is helpful to our subsequent processing of market information or whether it distorts our plans and intentions.  

One of my favorite forms of self-talk following a losing trade or missed opportunity is, "What can I learn from this?"  I don't continue trading until I have a concrete takeaway either in terms of the market or in terms of how I'm trading the market.  For example, I recently shorted the market in early morning trade and then watched as the market initially went my way and then rebounded sharply on higher-than-expected TICK readings.  I immediately said to myself that the buying support was significant and that I should be alert for a pullback to a higher low.  Sure enough, that scenario materialized and I was able to take the long side and profit from a move to overnight highs.

This form of self-talk is more about processing what *is* happening, rather than what is happening to me and my P/L.  Talking what is happening out loud is a kind of real-time journaling.  We talk it, we hear it, we internalize it.  A great goal for traders is to become better and better at constructive self-talk.  



Saturday, June 13, 2020

An Important Takeaway From The Recent Market

This past Monday, we had roughly 92% of all stocks in the Standard and Poors 500 Index trading above their ten-day moving averages.  That is very broad strength.  Just three days later, the percentage trading above their ten-day averages was a touch over 2%.  That is very broad weakness.  All within one week!  (Data from the excellent Index Indicators site).

What we are seeing is a market with an unusual amount of herd behavior.  Many of the market participants that I speak with simply cannot take a lot of heat.  On Thursday alone, the market went down about 6%.  At many hedge funds, that kind of drawdown could knock one out of the game.  When risk limits are tight, traders have to pile into trades and have to run for exits, and that contributes to volatility and market extremes.

A key tell for the market is relative volume (RVol).  When volume expands significantly day over day, that tells us that the herd is active.  For example, volume in SPY on Monday and Tuesday was between 70 and 80 million shares.  On Thursday, we traded over 200 million shares!  When we see volume elevated in the first hour and negative extremes in the advance-decline ratio and the NYSE TICK, we want to think about front-running the herd and we want to think about the possibility of a downside trend day.  Conversely, low relative volume tells us that the herd is not active and that we could see sector rotation.  Volume shapes the opportunity set:  that's an important takeaway from the recent market.

Further Reading:


Wednesday, June 10, 2020

Why I Am Proud To Be A Trader

I recently received the above note from a young, enterprising trader.  It's the opportunity to have positive impacts on people's lives that keeps me working long hours.  When we believe in what we're doing, work doesn't feel like work.  It feels like a privilege.

For years, I've heard all the cliches:  Traders are money-hungry and selfish; traders rape the public; traders are egotistical a**holes; traders take advantage of the public; etc. etc. etc.

For years, I've let it pass.  How do you respond to people who don't know what they don't know?

They don't see the young people I work with who are learning skills from the ground up, working every single day to master complexity, to master themselves.

They don't see that two-thirds of the investors in the hedge funds where I work are pension funds, dedicated to preserving and growing the life savings of hard working Americans.

They don't see the teamwork that goes into success; they don't see the hours spent staying up at night wrestling with ideas and positions; they don't see the daily mentoring, the daily preparation, the daily dedication to improvement.

And if portfolio managers and traders combine their talents, skills, and efforts to become successful, they are labeled by certain politicians as "looters", as part of the "one percent" that preys upon the public.

For years I've let it pass, but now it has to be said:  

The successful people I work with have earned every penny of their success.  I work with them, I see their efforts, and I see the dedication they bring to trading and investing the capital of those who trust them.

I am proud to be a trader.

I am proud to work with traders.

Ayn Rand said it best:

The symbol of all relationships among [rational] men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws.

As this post explains, success in financial markets requires that we become our best selves.  Trading pushes us to evolve.  When we make the most of ourselves, we have more to bring to the world.  

There will always be envy.  There will always be resentment and negativity.  Illegitimi Non Carborundum.  Don't let the bastards grind you down.  Be all you can be as a trader and you will have made a great investment in life, one that rewards you and others for years to come.


Sunday, June 07, 2020

Ask The Doc: Shifting Your Trading Mindset In Real Time

And that which consumes our minds, controls our trading!

Trader J recently wrote to me to explain something that has greatly helped his trading.  He rescued a kitten that had been abandoned and the cat has become a loving friend and companion.  As many readers know, my wife and I have rescued a number of cats and currently have four friends hanging out with us.

Trader J's observation is profound:  He notices that, when he is frustrated or upset with his trading, spending time with his kitten calms him down and enables him to return to good trading.  What is going on here?

There is a form of meditation called loving-kindness meditation in which we fill ourselves with feelings of love, gratitude, and closeness while sustaining a mindful state.  Regular practice of loving-kindness meditation enables us to anchor the positive feelings to the mindful state, so that we can access those emotional strengths whenever we become self-aware. 

What Trader J is doing is a kind of loving-kindness meditation, anchoring his closeness to the kitten to his mindful state.  While he is experiencing that bond, it's very difficult to stay frustrated, angry, or upset.  Focusing on the kitten enables Trader J to shift his mindset in real time.  Indeed, because of the power of anchoring, he can shift away from frustration any time he focuses on his little friend.

Your most powerful emotional bond can anchor your ability to exit tilt states in trading.  This is a very promising trading psychology method that anyone can learn for themselves.  With practice, you can access the love and closeness you feel for someone or something special, you can access powerful life experiences, or you can access favorite fulfilling memories and completely shift your mindstate.  The problem is not that we become frustrated in trading; the problem is that we have trouble exiting that frustrated state.  Trader J's experience points the way toward greater self-control.



Saturday, June 06, 2020

Three Research-Backed Ways To Change Your Trading Psychology

The problems that affect our lives--and that interfere with our trading--are patterned.  All of us have patterns of thought, behavior, and/or feeling that disrupt our work, our relationships, and our activities in markets.  Most often, those patterns are triggered by emotional events.  Once triggered, they can control us.  That loss of control can be devastating for our trading.

We change our trading psychology by: a) becoming aware of our patterns and triggers; b) interrupting those; and c) teaching ourselves to do something different in those situations.  If we can practice identifying, interrupting, and shifting our patterns, we can regain control over our lives and trading.

Recent videos from the Three Minute Trading Coach series highlight specific, research-based ways of changing our patterns and shifting our trading psychology:

This video teaches a technique to change your mental and physical state when you notice a trigger situation, so that you can focus yourself and regain control in real time.

This video shows how the technique can be used during your preparation for trading, so that you can anticipate triggers and defuse them before they occur!

This video shows how you can use the technique during your mental rehearsals of good trading, so that you literally train your mindset to be at its best when you're trading your best.

The beauty of this is that, by practicing these techniques regularly, you can become your own trading coach.  Those are skills you will have for life, and they will help you in many areas of life.  Once we gain control over our repetitive problem patterns, we open a whole new world of freedom and performance.

Further Reading:


Tuesday, June 02, 2020

Ask The Doc: Talking Aloud As A Trading Psychology Strategy

With this post, I'm starting a new feature that I'm calling "Ask The Doc".  This gives traders the opportunity to ask any trading psychology question that they're wrestling with.  When I see questions on related topics, I'll respond to those questions with a blog post here on TraderFeed.  To ask your question, you can use the comment section for the videos that are part of The Three Minute Trading Coach series or you can use the email address listed on the TraderFeed site.  

Trader Z referred to the section of The Daily Trading Coach where it discusses talking aloud as a strategy, and he asks how to best implement his talking aloud.  

The key idea here is that, when we talk an idea out loud--whether it's to ourselves or to a friend or fellow trader--we force ourselves to put the idea into clear words and make the idea understandable.  That allows us to not only speak the idea, but also hear it as we're talking.  Many times, hearing ourselves put thoughts, perceptions, and ideas into words, we gain a fresh perspective on what we're thinking.  We become an observer to our thinking...we become more mindful of our intentions.

Many times, we will hear ourselves talk aloud and realize that the idea is not a well-formed one.  Other times, we may surprise ourselves with the conviction we have in the idea.

Good advice for Trader Z is to pretend that he has been hired by a famous Market Wizard to serve as an analyst.  His job is to uncover and explain great ideas for the famous trader.  His job is also to follow the market in real time and identify good spots for entering trades based on the idea.  Of course, our trader won't want to let the Market Wizard down and won't want to get fired, so only the best ideas and best thinking will be talked aloud.  In other words, imagining that you're the analyst and are reporting to someone you look up to forces you to think about your thinking, focus on your best ideas, and be clear about your plans.

Talking aloud with another trader you respect is powerful because it allows for the possibility of feedback and keeps you actively--and interactively--engaged in your trading process.  Finding a trading partner for talking out loud and reviewing trading is one of the best strategies available for building mindful awareness of your thoughts and actions.  It's amazing how bad our worst ideas sound when we actually put them into words!

Further Reading: