Sunday, November 29, 2020

Tackling Your Problems Will Never Optimize Your Life--Or Your Trading

Note from Brett:  While going through my old trading journals, I came across this piece of writing that I had typed out (pre-computer days!) in 1997, seven years before I began working with traders in financial markets.  Reading through it today, I'm struck by how my concerns about traditional psychology are now mirrored by my concerns about traditional trading psychology.  Below is a segment from what I wrote in 1997; see what you think!

Traditional psychology offers relatively little to the average person.  It contents itself with solving problems, unlearning and relearning behaviors, remediating childhood conflicts, and ameliorating disorders.  It has little to say regarding the development of supernormal states of consciousness, creativity, and greatness.

To be sure, there is nothing wrong with developing insight into one's past, getting in touch with disowned experience, or learning coping skills.  These can be quite valuable and enriching.  But the remediation of a deficit will never produce the achievement of an asset.  Reducing unhappiness will not achieve joy, challenging negative self-talk will never generate greatness, and all the coping skills in the world will not yield the sustained focus, drive, and passion that are the hallmarks of extraordinary achievement.

A "psychology for the mentally well" begins with the realization, articulated by writers as diverse as G. I. Gurdjieff, Colin Wilson, William James, and Carlos Casteneda, that change is impossible while we remain in our habitual states of consciousness.  Talking about "issues" or working on changing behavior while remaining in our characteristic states is like trying to improve the reception on a TV by switching channels.  "What can one do in sleep?", Ouspensky asks his students.  "One can only have different dreams--bad dreams, good dreams, but in the same bed.  The dreams may be different, but the bed is the same."

Such is the state of most applied psychology.  It changes the content of our thoughts, but we remain in the same "bed".  An enhanced psychology would be one that wakens us, takes us from our bed.  That is because, when we can access different states of consciousness, we become able to process self-relevant information in qualitatively different, creative, and constructive ways.

Several days ago I found myself running late for a morning meeting.  In a frenzy, I attempted to beat the clock by getting myself dressed, checking on overnight trading in the financial markets, and getting my children to school.  I went to the closet to get my jacket, but it was nowhere to be found.  Twice I scanned the rack and could not find the jacket.  Meanwhile, the clock was ticking and I was growing frustrated with my mounting lateness.  Suddenly, without premeditation, I closed my eyes and evoked a piece of music that I have come to equate with a clear and calm state of mind.  I calmly walked back to the closet and began looking for the jacket between the hanging garments.  Sure enough, it had fallen off its hanger and was caught between to other articles of clothing.
What is important in this is that, in my ordinary state of consciousness, I was incapable of seeing between the garments.  The jacket was lost as long as I remained in my normal mode.  Only once I had shifted to another state was I able to see.  How much else lies "between the garments", unseen, while we fuss and fume through the racks of life?

My only addition to the above, now in 2020, is that the most important edges in trading lie "between the garments".


Further Resources


Sunday, November 22, 2020

Finding Unique Edges In Your Trading

One enduring observation I've made in years of trading and working with traders is that no one achieves distinctive results in markets without approaching trading in a distinctive manner.  The great traders are either looking at something different from the herd or they're looking at the same thing in a very different manner.  Another way of saying this is that, over time, intellectual independence and creativity win and conformity and stasis lose.  Come to think of it, that 's true in any entrepreneurial activity.

So here's a great frame for your next trading review:

1)  Am I trading something different from the majority of others around me, or am I in the same stocks, the same ideas, the same themes, etc.?

2)  Am I trading differently from the majority of others around me, or do I express my views in the same vehicles, the same strategies?

Don't get me wrong.  You might make money trading the hot stocks or consensus themes of the moment.  You just won't be building a business for the long term.

Every great business devotes significant resources to research and development.  Even if they're selling lots of products today, they are investing in the products that will win tomorrow.  That's true of car companies; that's true of pharmaceutical firms; it's true of restaurant chains.  Success is a combination on working rigorously in implementing today's edge while searching for and developing the opportunities for tomorrow.

So here's another great frame for your next trading review:

1)  How deep is your research and development pipeline?  What new edges in trading are you pursuing?

2)  How much progress have you made on your R&D goals in the past month?  What will make you a new/different trader by the end of 2021?

Listen up:  The enemy of great trading is not emotionality, going on tilt, or failing at the "mental game".  The enemy of sustained successful trading is mediocrity.

One trader I worked with traded breakout patterns, but the time series he looked at consisted of the relative relationships among stocks and stock sectors.  In other words, he would buy upside breakouts in the relative strength of one thing versus another thing.  Moreover, he would find options structures for capturing his relative views that gave him unusually good reward relative to risk.  He was consistently profitable, not by playing the game better than his peers, but by finding a different game that played to his strengths.

In my next Three Minute Trading Coach video, I'll describe one of the edges I pursue in the stock market and what makes it distinctive.  (Spoiler alert:  It's currently giving a signal).  

Life is too short to be mediocre.  Whatever you embrace as a career or as a romantic partner or as a lifestyle, make it an expression of your unique strengths, your distinctive interests and skills.  There are no prizes for "me too".

Further Resources:


Sunday, November 15, 2020

Three Essentials For Your Trading Reviews

On Wednesday (11/18/20), Mike Bellafiore of SMB Capital and I will hold a trading review meeting with SMB trader Max Ganik as part of the Money Show program.  (Free registration here).  Max has come a long way in his short trading career, so it will be an interesting opportunity to see how a successful developing trader reviews his trading--and how he makes use of mentoring and coaching to make best use of his reviews.

There are three elements that I find essential in my own trading reviews:

1)  Did I have a sound trade idea? - I make a firm distinction between the idea that I am trading and the actual trade that expresses that idea.  For example, I have talked about how I view markets as expressions of linear, trending movements and multiple cyclical elements.  A big part of the ideas I generate consist of locating dominant cycles within trends and then buying cycle lows during rising markets and selling cycle highs in falling markets.  (See here and here for examples).  What makes a good trade idea in my trading is the lining up of directional and cyclical elements across time frames.  For other traders, a sound trade idea may come from fundamental analysis or from insight into an event that is likely to be a market catalyst.  In my review, I ask myself whether the idea I traded was sound or whether I allowed extraneous influences to bias my view.  If, indeed, I was biased, then eliminating that bias becomes a very explicit goal for the next trading session by requiring myself to verbalize the idea and rationale for the idea prior to placing trades based upon the idea.

2)  Did I trade the idea well? - It's not enough to have a good idea to succeed in markets.  We need to translate that idea into a sound risk/reward proposition.  Because the presence of cycles and trends occurs at all time frames, I can zoom in to very short-term price action and use shorter-term cycles to locate good places to enter longer-term trends.  I also monitor relative volume in real time to obtain a sense for how far the market might move during the course of a day.  (In SPY, for example, daily volume and trading range has been running a correlation of about .80).  How much volume we're doing today relative to recent days provides me with an estimate of price targets that we are likely to hit.  The shorter-term cycles also tell me levels that we should not break if the trend indeed continues as I expect.  My sizing of the position is designed to make that downside tolerable.  A portion of the position will be taken as relatively quick profits if the short-term cycles are extended in my favor; a smaller portion of the position will be left to run to the daily price target if volume continues to be supportive.  If I identify a rotational market, I may express my trade idea by buying the strongest sector of the market or selling the weakest one.  All these elements are part of reviews that note where I could make improvements in the implementation of my ideas--and those improvements become part of goals for the next trading day.

3)  Did I manage myself well? - I've learned that I need to have my life in order if I am to trade well.  That means being rested with quality sleep and energized with exercise; it also means that I have dealt with personal issues well and am not carrying frustrations and unfinished business into my trading.  Flexible focus and concentration are important to my developing and implementing sound trade ideas, which means that I need to actively work on staying calm and open-minded.  My ideal mindset when trading is similar to the ideal mindset for a surgeon.  I don't want to be fatigued or distracted, and I also don't want to be pumped up and overeager.  I've learned from hard-earned experience that using trading to get emotional needs met is a path to disaster.  For the surgeon, it's all about following the right protocol and making decisions with a clear mind.  The right mindset is process-focused, not caught up in recent or future outcomes.

Everyone's trading is different, so what goes into your three categories will be unique to your  best trading.  But if you're tracking the quality of the ideas you're generating, the quality of the ways in which you're trading those ideas, and the effectiveness of your self-management, you will have established a powerful framework for deliberate practice and self-improvement:  things your future self will thank you for!

Further Resources:


Sunday, November 08, 2020

Grading Your Trading

At SMB Capital, the first week of every month includes team meetings, where traders share with the group their performance statistics, their progress on the goals they had set for the month, and their goals and plans going forward.  Reviewing the good, bad, and ugly about your trading in front of your peers is a great way of staying accountable, and it's also a powerful practice that enables every trader to learn from the experience of their teammates.  You don't need to belong to a trading firm or a team in order to benefit from this dynamic.  All you need is one or two partners that you meet online that trade similar markets and strategies to you and that show a similar dedication to learning and performance.  (A listing of trading communities and mentoring resources appears in the Appendix to my free blog book and can provide an excellent place to start in identifying potential trading partners.)

When risk manager Carlton Bryan kicks off the team meetings at SMB, what's the first thing he asks of each trader?  He asks them to give themselves a grade for the recent month's trading and then explain why they gave themselves that grade.

Why is it helpful to grade our trading?

Most of us who participate in financial markets are achievement oriented.  We seek mastery and success, as in any sport or competitive game.  When we publicly give ourselves a grade for our trading, we engage that competitive instinct.  Once we have a grade, we want to improve upon that grade, and once we get good grades in one area of trading, we look to master another.  Over time, the sequence of our grades provides a different kind of P/L:  a learning P/L.  Indeed, if we can focus on steadily improving our learning P/L, we create a powerful path toward a consistently profitable financial P/L.

Giving yourself a grade makes you face yourself:  your successes and your shortcomings.  Sharing that grade with others can create a teamwork where everyone helps everyone else improve their grades.

One trader I work with grades his trading every single day and sends that report card to me daily!  It's no surprise that he is profitable month after month, year after year.  Good traders look to improve when they fall short.  Great traders look to improve when they do well.  They learn from successes and continually find new areas to master.

Can we truly expect to improve if we don't actively keep score?


Further Resources:


Sunday, November 01, 2020

Using The Body As A Gateway To The Mind


As traders, we expect to sustain various mindsets, but what are our bodies doing?

*  We want to be focused, but we jump from screen to screen and activity to activity, not wanting to miss any information.

*  We want to be confident, but our greatest emotional expressions occur when things go wrong.

*  We want to be energized and opportunity-seeking, but we are sedentary a good portion of the day.

*  We want to generate novel ideas, but rarely do we experience novel emotional or physical states.

*  We want to be peak performers, but our exercise routines rarely challenge us in significant ways.

The great, unacknowledged challenge in trading psychology is that our bodies betray our minds:  what we internalize is much more of a function of what we do than what we say.

So we write about accomplishment, achievement, and improvement in our journals, but how we eat, how we exercise, how we recover and renew ourselves, how we access and express a wide range of emotions, and how we develop our bodies remain entirely mediocre.  Can we achieve greatness if we are not actually doing things greatly?

The most recent Forbes article draws upon research regarding dance to illustrate how the movement of our bodies can shape our mindsets.  There is a very important idea captured in that article: that the best way to shape our minds is to activate corresponding expressions of the body.    

Traders and psychologists love the idea of visualization.  If you want to be more confident and trade with greater conviction, then visualize yourself trading from the front foot.  That's all well and good, but is keeping your body sedentary and performing safe, comfortable exercises really going to help you challenge yourself?  What if you performed those visualizations while pushing your comfort zones during exercise or during radically prolonged periods of meditation?

When we pair physical activity with a desired mindset, that alignment of mind and body is what provides us with access to spirit--and spirited performance.  That provides a deeper form of anchoring, where entering physical states activates the thoughts and behaviors that define us at our best.

The bottom line is that we internalize what we do.  Who we become is not what we intend, but what we enact.

Further Resources:

Radical Renewal - Free Blog Book on the Spirituality of Trading