Sunday, December 27, 2020

What Distinguishes Professionals From Amateurs

I see some traders tackle markets for years and never achieve even basic competence.  Then I work with others that achieve unusual success in their first years.  What makes the difference?  Yes, work ethic and skill/talent sets matter quite a bit, but what increasingly hits me between the eyes is the difference in the learning process between amateurs and developing pros.  Here are two of those differences that make a difference:

1)  Professionals keep score - Can you imagine a weightlifter who doesn't track how much they're lifting, how many reps they're doing, which muscle groups they're working, how much body mass they're adding?  Conversely, consider the golfer who uses sensors and apps to track their golf swings, identifying details of what they're doing right and wrong on various courses and holes.  Pro basketball teams review game film in agonizing detail; amateurs leave the game behind once they leave the court.  In trading, we can easily keep score, with performance stats ranging from how much heat we take on a trade to how much we make and lose for various types of trades.  What amazes me is that, when traders keep score, they learn about strengths and weaknesses in ways that they do not when they just review their weekly or monthly P/L.  As I recently shared in my article on building your personal process, I have been using the Fitbit Sense and MuseS units to track my sleep, exercise, stress levels, focus, and much more.  To my surprise, I might think that I'm calm and focused, but all the data sometimes tell me otherwise!  By constructing daily exercises and keeping score, I'm getting better and better at my own trading psychology.  If a psychologist needs to keep score to improve mindset, the odds are pretty good that most of us could benefit.  :)

A couple of tools for tracking performance and keeping score are TraderVue and Edgewonk.  What I find with the successful developing SMB traders is that how they use such tools makes all the difference.  When the score keeping leads to small, steady, consistent improvements in trading, the result is an amazing improvement in trading consistency.  Once that consistency is achieved, sizing can be increased without undue downside exposure.  The traders that simply track P/L and state global goals ("I need to eliminate my overtrading") simply do not make the detailed improvements that lead to consistency.

2)  Professionals emphasize logistics - An amateur plans a surprise attack on the enemy; a pro works out the details of how troop movements will be hidden, how to deliver timely air support, where to achieve quickest exit from the battle area, etc.  Similarly, amateurs talk about "setups".  Professionals identify precise ways to gauge real time price movement shiftsorder flow and sentiment to achieve superior reward relative to risk.  Professionals have different ways to trade different kinds of markets; amateurs approach the market with a one-size-fits-all mentality.  Tools such as Market Profile (volume traded at each price level and the distribution over time); Delta (volume traded at market offer and bid prices through the day); and anchored Volume-Weighted Average Price enable traders to take good ideas and turn them into great trades.  Brian Shannon's work on tracking opportunity across multiple time frames is an excellent example of how logistics make the difference between a successful tactic and an unsuccessful one.  Mike Bellafiore's work on "playbooks" also illustrates how work on trading logistics can become part of a robust trading process.

There will always be "gurus" who want to tell you that there are easy ways to make money in markets or that success can be found in chart patterns or mindsets.  The simple truth is that if the majority of traders pursued *any* performance field without keeping score and building logistics, they would fail.  Every professional starts as an amateur.  It's how they work on their craft that makes all the difference.

As we count down the wild year of 2020, I would like to wish all readers a happy, healthy, and successful 2021.  With fewer but more in-depth blog posts and Forbes articles and trading coach videos to support the ideas, my hope is to provide traders with the largest repository of free trading psychology materials in the world.  The great traders don't have a passion for trading; they have a deep and sustained passion for self-improvement.  Markets are simply the canvas upon which they paint their masterpiece.

Further Resources:


Sunday, December 20, 2020

How To Sustain A Peak Performance Mindset

This week's Three Minute Trading Coach video tackles the topic of "personal process" and what it takes to become more consistent at managing ourselves and keeping ourselves in peak performing condition. So what goes into a personal process?  The most recent Forbes article introduces the idea of "holistic development", in which our self-management pursues multiple areas of growth, creating powerful synergies.  Instead of setting different goals each day and never really working on any areas in a deep, ongoing way, we can turn personal development into a true personal process, where we work on key areas of growth day after day.

The idea here is that we can develop a peak performance mindset the same way we develop peak performance in trading.  Working with traders at SMB Capital, I've been impressed by the pace of trading success among developing traders who consistently keep score in their trading, track what's working and what's not, and make small but steady improvements in what and how they trade. These traders consistently review which trading ideas are working and which aren't; which times of day are most and least profitable; which ways of managing positions are working best; and so much more.  It's in collecting all this information through platforms such as Tradervue that traders can develop by making consistent efforts to do more of what works and change what's not working. 

When we make these steady, successful efforts at improvement, we generate a positive mindset based on growth.  In that peak mindset, we are energized and most likely to see and act upon opportunity.  I recently spoke with a trader who perceived opportunity in the late-day trading when TSLA was added to the S&P 500, but did not act on the opportunity because of fatigue and fear of loss.  When we are in peak performance mode, the sense of impossible becomes a mindset of "I'm possible", helping us take advantage of current opportunities and perceive emerging ones.

The same scorekeeping that works for developing traders can also anchor our personal processes.  In the coming year, I will be working intensively with Fitbit and Muse to collect data on my stress levels, focus, fitness, sleep quality, and much more.  That information will help me tailor eating, sleeping, exercise, work routines, and social activity to maximize positive emotional experience, energy, and productivity.  My hypothesis is that the resulting increased well-being will spill over to a variety of life areas, from trading to personal relationships and professional ones.

Many traders want to work on their psychology by reducing negative emotional experience.  There is an entire horizon of development that they miss by not maximizing their mindsets and creating a peak performance lifestyle.  The process that creates trading success is the same one that fuels life success.  We have the tools available to turn excellence into a lifestyle.

Further Resources:


Sunday, December 13, 2020

What Are Your Goals For 2021?

I recently offered a Three Minute Trading Coach video on the topic of setting effective trading goals.  Now that we're wrapping up the challenging 2020 year, it's only natural to think about goals for the year to come.  Here are several pitfalls that I'm observing among the traders I'm speaking with:

1)  Exhaustion - A number of traders understandably just want this year to be over with.  After the pandemic, crazy political gyrations, and shifts in market themes, many traders simply want a break.  Indeed, taking time off at the end of the year and renewing energy and focus is itself a worthwhile goal.  The risk, however, is that we so focus on the needs of here and now that we don't formulate powerful visions and goals for the coming year.  Once we've rejuvenated, it's important to perform a thorough review of the year, identify clearly what you did well and what needs improvement, and then set specific plans for growth in 2021.  Perhaps you want to expand the opportunities that you pursue in markets; perhaps you want to refine your network of colleagues to generate better discussions and ideas; perhaps you want to grow your risk-taking:  defining specific goals that excite and scare you will provide you with energy to tackle the new year.  The right goals and goal-setting *gives* energy.

2)  Setting Narrow P/L Goals - While 2020 was a difficult year for many people personally, it in fact has been a profitable year for many traders, especially shorter-term traders that benefit from expanded volatility and the speculative flows that have entered the stock market.  I'm working with quite a few traders who have had record years in 2020 and phenomenal monthly returns in November, as SMB recently shared.  It is only competitive human nature to want to build upon such performance and define even more lofty performance goals.  This can be a trap, however.  We don't know what the market environment for 2021 will be.  Could we have known in December, 2019 what 2020 would bring?  If we increase our risk-taking in the wrong environment, we could expose ourselves to quite a setback.  This is why setting process goals is more important than setting absolute P/L goals.  (See the upcoming Three Minute Trading Coach video on setting process goals). 

3)  Setting Goals Without Setting Up Plans and Procedures - As the saying goes, a goal without a plan is merely a wish.  I see many traders setting lofty goals--and then providing no detail about how, specifically, they will pursue those goals.  Here's an important principle:  if you are really serious about your goals, you are doing something *every day* to pursue those goals.  If our goals aren't alive daily, then they are nothing more than good intentions.  If your goals are worth pursuing, they should be alive and active every single day.  That is true for your personal goals just as much as your trading goals.  Many traders are great at setting goals and not so great and keeping those alive day to day.  It's the daily work on goals that helps us internalize new attitudes, behaviors, and skills.

One more observation, this also based on my observation of the traders at SMBI'm seeing huge growth in trading skills, experience, and profits when the right traders team up with one another.  When traders with different skills and perspectives but similar trading styles share ideas, everyone makes everyone else better.  Proof of that has been that some of these team efforts have led to joint trading books among the SMB traders, where the positions come from the independent thinking of two or more collaborating traders.  When multiple smart people who do good research come up with the same idea independently, the odds of them all being wrong are pretty small.  Those joint books have been phenomenally consistent and profitable.  In 2021, you might ask the question:  Who can I team up with to make them better and to make me better?  Great things can happen when we approach trading as a team sport!            

Further Resources:


Sunday, December 06, 2020

How To Overcome Self-Critical Thinking and Tilt Trading

For many traders, their greatest enemy is the harsh self-criticism they heap upon themselves after losing money or missing opportunity.  Self-criticism occurs when we channel normal and natural frustration (which any competitive trader is apt to feel from time to time) as anger directed toward ourselves.  When we turn our frustrations against ourselves as anger--telling ourselves that we're no good or not good enough, that we'll never succeed, that others are doing so much better than us--we create emotional distractions and a loss of focus that can only lead to subsequent poor trading.

If you read through the most recent Forbes article, you'll notice an interesting set of findings:  Leadership and management work best when they are expressed through positive people skills.  Being a caring leader or manager is just as important as being a tough and challenging one.  Tapping into the goals and visions of others is just as important as projecting organizational goals.  Caring about people brings out the best in people.  That is true at work, and it's certainly true in our home lives.

So why should it be different in managing ourselves and our trading careers?

We channel frustration as anger when we make losing unacceptable.  If losing is a threat and a failure, then the aggressive, competitive parts of ourselves will turn against us.  It's a great example of how we can take a strength too far and turn it into a vulnerability.  The only way we can balance that aggressive and competitive strength is to balance it with a very different strength:  self compassion.  Just as we would empathize with another trader who goes through a difficult trading period, we want to be able to empathize with our own situation during inevitable periods of drawdown.  

This is why I emphasize the importance of treating losses as potential learning lessons and actually *embracing* them in our reviews.  From the vantage point of deliberate practice, setbacks are the very fuel of growth.  If we are coaching ourselves, we want to be our greatest support systems--especially during difficult times.  It works in the management of organizations, and it works in our self-management.  We can overcome self-critical thinking by replacing it with constructive thinking--and we can turn constructive thinking into a positive habit pattern by developing sound review processes.    

In my upcoming Three Minute Trading Coach video, I will describe a centuries-old technique for cultivating self-compassion and defusing self-directed frustration.  

One more thought, however:

Trading on tilt is often not a primary trading problem, but a reaction to a deeper, underlying problem.

We typically go on tilt after a setback in our trading ignites our frustration and our frustration ignites anger and a very negative sense of ourselves.  We go into overtrading/tilt mode to try to make the money back, and we try to make the money back to try to restore our emotional equilibrium and feel better about ourselves.  

In psychodynamic terms, tilt trading is a defense.  It's a way of attempting to ward off damaging self-criticism triggered by losses and missed opportunity.  Of course, such trading on tilt only deepens the losses, leading to serious emotional setbacks.  

If we want to eradicate tilt trading, we need to balance that aggressive drive to win with an equally assertive sense of self compassion.  Once in balance, we can channel frustration in ways that enhance us and further our learning in markets.  It sounds strange, but drawdowns can be gifts, teaching us something about markets, something about ourselves, something about our trading ideas, something about how we trade those ideas.  The goal is not to avoid loss; the goal is to keep learning and get better and better and better.

Further Resources:


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


Sunday, October 25, 2020

Are You Taking Enough Risk In Your Trading?

This is going to be a little technical, but please bear with me.  It is super important to your trading.

Imagine a variable that captures danger at one end of the spectrum and opportunity at the other.  Now imagine that life offers most of us a relatively normal distribution of dangers and opportunities, such that we mostly experience small risk and small opportunities in day-to-day life, but once in a great while encounter very large dangers and very large opportunities.  Such a normal distribution of outcomes looks like this when we plot it:

In such an idealized model, we encounter really large dangers roughly 2% of the time and really large opportunities similarly.  Over two-thirds of the time, we're dealing with modest opportunities and dangers.

Odds of 2% seem quite low, but over an annual period, we're likely to encounter a handful of really big risks and really big rewards.  On over 240 of those days, there will be no truly great opportunities or dangers.

Sounds a lot like trading, doesn't it?  

The personality trait of extroversion tends to be associated with risk-seeking.  To some degree, the trait of openness to experience also plays into risk appetite.  Think of a skier who goes after the largest mountains and steepest slopes.  That person is focused at the far right end of the continuum, seeking to capture the greatest opportunities.  Of course, in extreme sports as in trading, seeking those rare huge opportunities can also entail taking significant risks. 

The personality trait of conscientiousness is associated with risk-prudence.  The highly conscientious driver will not exceed the speed limit on highways and will only ski the safest slopes.  That person will generally never have the thrills of extreme sports, but will rarely have bone-crushing accidents.

OK, now we get to the juicy part:

Early in our development as traders, risk-prudence is paramount.  We cannot win the game unless we stay in the game.  At firms where I work, such as SMB Capital, the initial goal is not to become a hugely profitable trader.  The goal is to become a consistently profitable trader.  In skiing terms, the consistently profitable trader is one who can master small hills, then somewhat larger hills, then small mountains, etc.  It is the repetition of success--the consistency of successful experience--that builds confidence and inner security.

Imagine if we were simply risk-seeking and began our trading career by placing large bets.  Inevitably we would also encounter large losses and that would shatter our development of confidence and inner security.  (Recognize that, in trading, risk is relative to the size of our portfolios.  If I limit my daily losses to $1000, that may seem like modest risk-taking, but not if I'm trading a $10,000 account!)

The path toward becoming a highly profitable trader is first becoming a consistently profitable traderIt is consistency of process, mindset, and selection of opportunity that provides us with the emotional capital to go after larger rewards.  I cannot emphasize this too highly.

However, there is a danger that the comfort and security of being consistently profitable can lead us to never go after those larger rewards.  Think of an entrepreneur.  The successful new enterprise requires consistent profitability, but what if the entrepreneur never takes the larger risks of opening new stores, developing new products, or forming new partnerships?  The entrepreneur might end up as a profitable local businessperson, and that might be fine for them, but they will never grow the kind of business that they could eventually take public.

In becoming that consistent trader, we can so emphasize conscientiousness that we never take the greater risks that are associated with larger rewards.  In poker, it would be like being dealt three aces and still placing modest bets.  Once in a while, life--and markets--present us with those 2+ standard deviation opportunities that come along 2% of the time.  When we stand aside on those occasions, we ensure that we will never reap great rewards.

So there it is:  greatness, in any endeavor, is a distinctive blending of general risk-prudence and selective risk-seeking.  Greatness is staying in the game, adapting, and winning--and then pouncing on occasional unique opportunitiesThe mindset of consistent winning is what provides the resilience of big winning.

Now you see why I emphasize trading psychology methods that increase our access to intuition and implicit knowing.  Very, very often, it is that intuitive knowing that alerts us to the larger opportunities, those 2% of occasions when we're meant to take larger swings.  Consistent trading will not help us if we do not also cultivate consistent openness of mind.  Most of the time, the military sniper lies in the weeds and takes little to no risk.  But once in a while, the high value target appears and it's worth taking the shot that may alert the enemy.  The mindset while in the weeds is calm focus and patience, but also extreme openness to and readiness for the high value opportunity.  

So much of the challenge of trading psychology is the challenge of sniping:  blending consistency of shooting and the patience of waiting with the aggressiveness of taking the risks associated with special opportunities.  Once you have learned and mastered the patterns associated with consistently profitable trading, it's time to master the intuitive knowing that alerts us to the greatest rewards.  In my next video, I'll outline a method for cultivating and acting upon this knowing.

Further Resources:


Sunday, October 18, 2020

Turning Your Talents Into Trading Edges

This is a somewhat  long academic paper about the development of confidence and talent among elite swimming champions, but it is well worth studying.  The key point made by the author is that excellence is mundane.  Greatness is not necessarily a function of unique talent or special opportunity.  We achieve excellence step by step, through intensive deliberate practice, where we perform a skill, monitor our performance, make small but steady improvements, and gradually perform at elite levels.  The example I used in my recent presentation for Traders4ACause was the meter that I use to measure my blood glucose levels through the day.  Each day I learn what contributes to high and low readings: the foods I eat, the types of exercise I do, my sleep patterns, etc.  By tweaking each of these, I've been able to stay in my target zone range well over 95% of the time.  Prior to the use of the meter, I never came close to that control. 

When I was a student in college, I would read each professor carefully to see which points were emphasized, what was written on the blackboard, what was included in handouts, etc.  This would guide me in what to study.  When I missed items on a test, I went back to my notes and figured out what I had missed and how I could have included it in my studying.  That then guided my preparation for the next test.  By the end of the course, I was unusually good at figuring out what would be on my exams:  my overall GPA was 3.87.  That wasn't because I was so much brighter than other students.  I simply learned how to play the game.

Great traders learn how to play the game, only there are many potential games to play.  Your edge doesn't come from the game itself, but from the process of mastery that allows you to win at the game.  This is why trading journals have to incorporate detailed analyses of trades and how those trades could have been conceptualized, structured, and managed better, so that you constantly refine what you do.  Many traders simply summarize their day or their feelings in a journal and wonder why they don't achieve mastery.  Mastery comes from the mundane practice of taking one skill after another and honing them until consistency is achieved.

Talent is inborn, but it develops through exercise.  What builds our trading performance is what builds us up in the gym:  the steady tackling of challenges performed the right way.  This is why there can be no trading edge without our pursuit of discomfort.  Honing performance means embracing our shortcomings and turning those into learning and development.  When that honing becomes an ongoing process, great things can happen.

Further Resources:

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Sunday, October 11, 2020

Making Friends With Discomfort

Life is a gym.

Every day is an opportunity for a workout, to make ourselves stronger, more fit.

We can exercise our relationships, our patience, our focus, our persistence, our discipline, our learning, our trading--or we can go through the motions and never build ourselves up.

A good workout on the treadmill has us breaking a sweat.

A good workout on the weight machines has us straining to finish that final set of reps.

If a workout doesn't challenge us, we don't grow.  If we don't experience discomfort, we don't change.  Indeed, if we don't use a capacity, we lose it.  

Successful people are always working out, always growing their capacities.  That means that they make friends with discomfort.

No one has ever grown by remaining in their comfort zones.

Trading success is so much more than "following your process."  Your premarket preparation, your trading activities, your reviews and goal-setting for the next day's trading--all must be workouts, not rote processes.  

Those who don't workout are quickly out of work.

Further Resources: