Sunday, December 25, 2022

Evidence-Based Spirituality: Finding Personal Peace


I'd like to call attention to a most interesting and valuable recent book, Mindful Cognitive Behavioral Therapy by Seth Gillihan, Ph.D.  CBT is a popular framework for addressing psychological issues by teaching techniques for changing our thought and action patterns.  What is unique in the Gillihan text is the use of CBT to enhance mindful awareness and spiritual development.  According to Gillihan, "The practice of listening for the call of our inner voice, or spirit, is what many call mindfulness, and effective therapy is a way of answering that call."  Rather than employ CBT to replace negative thoughts with constructive, positive ones, mindful cognitive-behavioral therapy quiets all that self-talk and replaces it "with thoughts, actions, and mindful awareness that nourish our whole beings".  

In other words, when we still the mind and look inside, the result is in-sight.  Or, in the terms of Radical Renewal, in quieting the ego, we tap into the soul.  Gillihan's insight is that the same methods that help us change our thought patterns can also help us still them.

More broadly, we are witnessing a revolution in psychology.  Spirituality, once the domain of philosophy and religion, is finding evidence-based support in research.  We are finding that spiritual growth furthers our personal growth; that a key to performance psychology can be found in spirituality; that we can train the mind for transcendence.  We're discovering that gratitude changes the brain; that spiritual strengths are also keys to psychological well-being; and that spirituality impacts our well-being through health-related behaviors.  Through spirituality, we find stress reduction and so many other mental health benefits that there have been calls for the mental health professions to embrace insights and practices from religion.

What if all the major approaches to psychological helping can be directed toward our finding personal peace and self-awareness?  Perhaps psychology is just as effective at self-transcendence as self-actualization.  And perhaps performance--in life and in financial markets--is less a function of the ego's "conviction" and more related to the in-sight that comes to minds at peace.

Further Reading:


Sunday, December 18, 2022

Your Mental Sharpe Ratio


We are all familiar with the Sharpe Ratio, which calculates the amount of risk that we incur (drawdown) for a given amount of profit.  A positive, but low Sharpe means that we've made money over the relevant time period, but that we incurred quite a bit of drawdown along the way.  A high, positive Sharpe means that we have made money with a relatively smooth equity curve:  a steady trend rather than a choppy one.

Consider what I call the Mental Sharpe Ratio.  How much mental capital do we expend per unit of profit made?  If we make money, but find ourselves emotionally drained, frustrated, or anxious along the way, that would be a positive Sharpe Ratio but a negative Mental Sharpe.  If we lose money while learning a new strategy, but find the process intellectually stimulating, competitively challenging, and positively engaging in terms of teamwork, then we have a negative Sharpe Ratio, but a high and positive Mental Sharpe.

Too much of trading psychology is focused on reducing drains on mental capital.  That's helpful but will only make a negative Mental Sharpe less negative.  If we are approaching markets in ways that make use of our greatest strengths, interests, and values, then our trading should be *giving* us energy.  It's like a romantic relationship.  A good life partner inspires us and brings out the best in us.  A job is often draining, not a calling. 

If you're finding yourself working on your trading psychology day after day, it's like being in a marriage that you constantly have to work on.  Something isn't right.  The fit might not be there; what you're doing is most likely not your calling.  Review your most positive periods of Mental Sharpe:  that is very likely what you're meant to be doing in your trading.  Review your highest periods of Mental Sharpe outside of trading:  that is what you're meant to be doing with your life.

Further Reading:

Is Your Trading Purpose-Full?

Radical Renewal - A blog book on the spirituality of trading


Tuesday, December 06, 2022

The Three Essential Sources of Your Trading Edge


Few concepts in trading are as poorly understood as that of having an "edge".  In a literal sense, the idea of edge--in trading, as in poker--means that you have a skill and strategy that provides you with a non-random, probabilistic advantage over other players.  Often, however, traders refer to an "edge" if they believe they have unique insights into markets, if a strategy has worked recently, or if a strategy is copied from someone believed to be successful.

Based on successful traders and portfolio managers I have worked with,  I would argue that "edge" comes at the intersection of three factors:

1)  What You Are Good At - A true edge, in finance as in sports, has to be grounded in your unique talent.  Having a talent may not, in itself, provide an edge, but it is difficult to imagine possessing an edge without a distinctive talent.  One trader I've worked with is unusually social and outgoing and is quite good at reading other people.  He talks with many market participants all day long and obtains an unusually good feel for how people are positioned, what they are thinking, etc.  He can also sense changes in their tones of voice and levels of conviction.  Many times, he can identify when they are shifting views before the shift has even occurred.  That social talent has also helped him build an effective team of analysts, who he has also learned to read quite well.

2)  Who You Are Making Money From - A genuine edge has to make conceptual sense.  It can't just be a pattern ("setup") that has recurred in the recent past.  Anyone can backtest 20 patterns and find the one that tests as statistically significant at the p=.05 level!  A true edge comes from understanding other market participants and how they behave, so that you can profit from their activity.  For instance, perhaps you're trading a meme stock and understand how retail traders identify and trade with momentum.  Perhaps you're trading earnings news for a stock and understand how investors respond to beats and misses.  Perhaps you're trading reversals in markets and understand how trend-followers behave.  The edge, in markets as at the poker table, comes from knowing who is at the table and how they behave.

3)  How You Develop Your Skills - The reality is that someone could have a talent and could learn about tendencies of other market participants and still not make money if they haven't developed the trading skills needed to implement the conceptual edge.  Skill development comes from repeated experience guided by corrective feedback, a process known as deliberate practice.  Even after you identify valid patterns in markets, how do you size trades based on those patterns?  How do you structure the trades to maximize reward relative to risk?  These are skills that need to be honed.  Many traders fail because they do not follow a systematic process of skill development.

If you understand the three components of edge in trading, you'll appreciate how silly it is for market gurus to tout "setups" that make money.  It's like someone telling you successful pass plays on a football field.  Unless you actually develop the skills of a quarterback, understand your opponent, and implement those plays in ways that utilize your team's strengths, those "successful plays" will fail miserably.  It's not as easy as simply trading with discipline or trading your personality.  Success in the trading business is like any entrepreneurial success:  it requires talent, passion, objective opportunity, and the ability to learn from experience.  

Further Reading: