Friday, June 25, 2021

FIGS: Focused, Intensive Goal Setting

Many traders that I work with involve me in their performance reviews.  Sometimes they create weekly reviews, sometimes monthly or quarterly.  Invariably these reviews summarize what they did wrong over this period and how they could improve.  They set lots of goals, but then that's often the last I hear about those goals until the next review period!

There are three big problems with the goal-setting of many (and perhaps most) traders:

1)  Too Many Goals - By setting a large number of goals, traders have difficulties prioritizing the changes they want to make, and they find it difficult to give each of the goals proper attention.  As a result, they chronically feel as though they are falling short in achieving their goals and lose motivation.  Goals should move us forward, not discourage us!

2)  Vague Goals - A trader may set a goal of trading with greater discipline, so that they stop overtrading.  Great!  How are they going to do that?  How will they monitor performance to know that they're making progress?  A vague goal is only a good intention; it's not likely to energize or shape performance.  My experience is that vague goals get the least follow-through.

3)  Goals Lacking Vision - The best goals are tied to a vision of what is possible.  We want goals to bring out the best in us.  We want goals to excite and challenge us.  Many of the goals set by traders are prioritized to-do lists.  That turns the pursuit of goals into chores, robbing us of energy and enthusiasm.  If there's no emotion and excitement associated with our goals, we're unlikely to put forth our best efforts toward change.

In short, we don't see things as they are; we see them as *we* are.  Our moods and energy level help shape our perceptions and actions.  If we are overloaded with too many goals, vague goals, and goals not tied to an inspiring vision of the future, we are likely to lose our passion for markets and trading.  

Consider the radically different alternative of FIGS:  Focused, Intensive Goal Setting.  What if, at any given time, we worked on one goal and one goal only.  Suppose we worked on it every single day and made it the focus on each day's efforts.  And suppose we made it an emotionally intensive goal, where we actively rehearse and *feel* the consequences of not reaching the goal and the joy and benefits of making progress on the goal.  Suppose we grow--as people and as traders--by working one goal at a time in FIGS fashion, rather than by creating laundry lists of changes that are "shoulds" rather than "musts".

We see FIGS at work among people who work on their recovery from drug and alcohol dependence and addiction.  At some point, they "hit bottom" and make recovery their number one life priority.  They attend AA meetings every day, connect with a sponsor who helps them through rough patches, and work on their sobriety one day at a time.  What makes such change efforts powerful is the emotional commitment to reaching goals.  After someone has hit bottom, they *hate* their old habits and ways.  They never want to go back to the consequences they created for themselves and others.  Their goals are focused, but also intensive, because the goals aren't mere items on a list or in a journal.  The goals carry emotional intensity.

We don't change because we want to.  We change because we must:  we *need* to.  Without urgency, we don't sustain change efforts and simply relapse into old ways.  When goal setting is focused and intensive, we more readily create the conditions of urgency that help us see ourselves and others in new ways.  

FIGS starts with a simple question: What changes do you need to make?

Further Reading:


Saturday, June 19, 2021

Finding Better Edges In Your Trading

I thought I would do something different with this blog and actually chronicle the development of new edges in my trading.  I'll post my successes and failures and learning lessons, with an eye toward trading psychology and also the psychology of the things I'm trading.

One lesson that I've learned from working with the traders at SMB Capital is that their success is as much about *what* they trade as *how* they trade.  Both are quite important, of course, but if one is trading directionally and the stock, index, or asset being traded simply isn't moving, there won't be a lot of opportunity.  During this recent period of "meme trading", I've also noticed that very high levels of movement are not necessarily very high opportunities for profit.  We don't just want things that move; we also need them to move in meaningful and predictable ways.

When we trade suboptimal trading vehicles, it has the same potential impact on our results as utilizing suboptimal trading methods.  Both lead to significant missed opportunities.

One tool that I will be employing in finding superior opportunity is the Market Charts site.  Long time readers know that I have made use of the Index Indicators site to identify promising breadth patterns in the overall market.  The Market Charts site is a much expanded version of Index Indicators, tracking more indicators, multiple indicators, and a variety of stocks and ETFs.  I respect Mo's work and so view this as a worthwhile platform to begin finding fresh sources of edge.  (Please note:  I have no commercial interest in these sites; as always, I only share resources that I have found to be useful and promising).

Please note the recent blog post on innovating in our trading.  An important theme from that post is that innovation begins by asking different and better questions.  I will be looking to the Market Charts platform to first generate better hypotheses and only then to come up with superior trade ideas.  For example, might it be possible to generate long/short trades and portfolios by finding related stocks that have greater and lesser edge?  By being long the stock with good upside edge and short the stock without such an edge and weighting the pair for relative volatility, one could make money whether the overall market goes up or down, as long as the edge plays out.  In other words, does the presence of a historical edge predict *relative* performance?  

Good trade ideas come from good questions.

Much more to come!


Further Resources:

Three Minute Trading Coach:  Drama Creates Trauma


Monday, June 14, 2021

How To Innovate In Your Trading


Very little has been written in trading psychology about innovation.  And yet, wherever I've encountered traders and portfolio managers with longstanding track records of success, I've seen evidence of innovation.  The innovator is the one who asks really good questions, really original questions.  The innovator is the one who sees changes in market behavior and wants to figure out what that's all about and how to take advantage of it.  

When we become completely P/L focused, there's little bandwidth left for innovation.  Superior trading requires an absorption in markets; superior good idea generation requires getting away from screens and seeing a bigger picture.

On a recent trip to Nashville, I had plenty of time away from screens and started asking simple questions, but questions I hadn't asked before.  For instance, I wondered if the best predictors of what happens in a given equity market index (such as SPX) might come from stocks outside that index (such as Russell 2000) or subsets of that index (such as the Dow).  In other words, do certain groups of stocks tend to lead momentum moves, trending moves, or reversal moves in a given index?  Oddly enough, I had always looked for data generated by an index to anticipate moves in that index.  But what if that's just playing the same game as everyone else?

Early days and we'll see what the research brings, but it's promising so far.  For example, it turns out that strength in the average RSI of small cap stocks is strongly correlated with future short-term strength in the SPX, accounting for almost all of the gains in SPY for the past two years.  Who knew?

But the great psychological benefit of innovation is that it leads to curiosity and discovery and fascination.  It rekindles our interest in markets when we could otherwise be ground down by choppy trading conditions and lackluster P/L.  Finding a new edge feels like becoming a new trader all over again, with all the new enthusiasm and excitement.  Come to think of it, that's also what leads to keeping relationships new and that's what leads to keeping life fresh and interesting.  When we innovate, look at new things, try new things, and learn new things, we are reborn--and that *gives* us energy.

Further Reading:


Wednesday, June 02, 2021

How We Sabotage Our Trading


Above you can see the floor of my office, where well over 30 books are in various stages of being read--simultaneously!  My technique for writing is to read and read and read different authors on a given topic and eventually something jumps out at me as an integrating idea.  It's really no different from looking at charts and market information from different time frames and suddenly picking up on a directional move in the making.  Analyzing, analyzing, analyzing: that takes focus.  The creativity comes from the synthesizing:  putting it together into a coherent picture.

One of the main topics of my reading is meditation.  It turns out that there are *many* different forms of meditation, many of which are quite unlike our common conception of the Eastern practice.  As I explain in the recent Forbes article, the most important function of meditation is to build focus and amplify our experience.  The problem is that the great majority of people who try meditation don't pursue it long enough to achieve that amplification.

The way in which we often sabotage our trading is through our automatic, negative thought patterns.  As the cognitive therapists emphasize, we typically learn negative habits of thinking, where automatic thoughts take over.  These can be self-critical thoughts, repetitive thoughts of being a victim, worry thoughts, etc.  What is not well appreciated is that such automatic thinking is meditation in reverse.  When we focus on our negative thoughts, we internalize negativity.  Ironically, we end up using our magnifying glass to accentuate the very thinking that sabotages us:  in trading, and in life.

We internalize what we focus on and that shapes who we become.  That can uplift us or it can sabotage us--

Further Reading:

Why We Fail To Reach Our Potential