Sunday, July 30, 2023

Why Do I Blow Up My Trading?

The recent blog post presented ways in which we can listen to our intuitive inner voice as traders.  Sometimes, we not only fail to listen to our inner voice, but actively do what we know to be harmful to our trading and our success.  We trade well week after week and suddenly oversize a position, refuse to act on a stop, add to the losing position, and then blow up.  Or, on the other hand, we become so concerned about losses that we quickly exit winning positions before they reach their targets, leaving significant money on the table and blowing up our chances for real success.  

Why does this happen?  What can we do to keep ourselves aligned with sound practices and processes? 

A reader recently reached out, explaining that he once in a while experiences losses that wipe out a large share of his monthly profits.  It is frustrating to trade well most of the time, only to lose discipline and seemingly sabotage all we've accomplished.  As the graphic above suggests, the root of self-sabotage is self-abandonment.  We temporarily lose sight of what we're meant to do and instead act on impulse.  In the terms of the Radical Renewal online book, we abandon the soul of what we do and allow our trading to become ego-driven.  

I have never been convinced that the root of such self-sabotage is a deep-seated, inner desire to hurt oneself.  It is usually not an absence of self-esteem that causes us to become reactive.  Rather, we experience "triggers" that set off automatic and often harmful actions.  The problem is a temporary loss of free will.  Under a certain set of emotional and physical conditions, we behave in pre-programmed ways and become reactive rather than active.  Quite literally, it is a loss of self-awareness that allows us to behave in ways that harm our best interests.

Consider the many situations in which we *never* go on tilt and behave reactively and self-destructively.  We're not careful in crossing busy streets 99% of the time, only to occasionally walk directly in front of traffic.  We don't operate machinery (lawn mowers, ovens) safely most of the time, only to occasionally cut or burn ourselves severely.  Why don't we go on tilt in those situations?  Reason one is that our egos are not involved, and reason two is that we are supremely aware of the dangers at hand.  If I don't *need* to cross the road quickly and I'm mindful of the busy traffic, I am perfectly able to wait for a break in the flow of cars to cross safely.  If I'm clearly aware of danger, I will act with caution.  Always.

This is where it's helpful to engage in a "check up from the neck up" prior to any risk taking.  If a surgeon is scheduled for a procedure, but is in an agitated state because of a personal circumstance, that surgeon will delay the operation.  "Above all else do no harm" is the operative principle.  If a pilot is about to take off for a flight, they reach out to the co-pilot and--together--go through the pre-flight checklist to make sure the plane is truly air-worthy.  If something is wrong mechanically, the flight will be delayed.  Above all else, do no harm.

The opposite of self-abandonment is self-awareness.  If we approach each session of trading--each trade!--the way a surgeon approaches an operation or the way in which a pilot preps for a flight, then we are in the state we're normally in when we're crossing a busy street.  The awareness of risk and danger enables us to do no harm.  It isn't discipline or "process" orientation that enables us to not go on tilt when we're handling a carving knife in the kitchen.  It's the immediate, acute awareness of danger.  The key is self-awareness:  knowing when we're in the wrong mindset for risk-taking.  Like the surgeon, like the pilot, we must take danger so seriously that we're willing to postpone our performance until we're assured that we will "do no harm".  If we've performed our own checkup from the neck up, we're not going to trade on impulse.  

Further Readings:

Understanding Trading Tilt

How to Overcome Tilt

Video on Tilt Trading

Advice on Tilt to SMB Traders

Radical Renewal and the Spirituality of Trading


Monday, July 17, 2023

Finding and Following Your Inner Voice

The recent post took a look at developing uniqueness as a trader, focusing on developing new sources of data and fresh ways of viewing markets.  In point of fact, however, there are many ways in which we can approach markets uniquely.  One successful money manager recently shared with me ways in which AI can improve the risk/reward of trading.  Another trader is making use of complex options structures to ride out market noise and take advantage of longer-term trends.  But one trader who wrote to me asked a unique question about uniqueness:  Can we find unique edge in how we approach our trading psychology?  Specifically, he asks, are there ways we could become better at listening to our inner voice?

This is a very tricky question and issue.  On one hand, we could view our negative self-talk as an inner voice and allow our worst emotional patterns to control our trading.  On the other hand, we know that the pattern recognition of intuition often manifests itself as an inner voice.  When do we listen to that voice?  When do we challenge that voice and replace it with one that is more helpful?  Consider the example of regret.  Is that a helpful prod that enables us to learn from our mistakes, or is it driving by the rear view mirror and interfering with what is happening here and now?

How can we innovate in tackling our trading psychology?

Consider the above quote from Craig Revel Horwood, choreographer and dance show judge.  What he is saying is not simply to follow your inner voice, but to listen to that voice if it comes while you are following your passion.  In other words, it is the absorption of being in the flow state during an activity we're passionate about that leads to the intuitions of the inner voice.  If we don't have a passion for something, we will not arrive at any meaningful intuitions about that thing.  Plumbing?  Growing watermelons?  Racing horses?  I've never been involved in any of those and guess what?  I have no intuitions whatsoever about how to do them well.

When we are absorbed in a passion, we experience things in new ways and generate fresh perspectives.  It is the depth of involvement that generates the breadth of vision.  Anything we do to more completely absorb ourselves in markets will enable us to see new things and innovate.  As the Radical Renewal online book suggests, we find our inner voice, not by listening to the chatter and self-talk of the ego, but by fully engaging what speaks to our soul.  The self talk of the ego is something we do on auto-pilot.  True intuition comes to us.

And feelings of regret?  When we're fully immersed in markets and feel regret, the odds are good that we can turn what we did wrong into a learning lesson and true growth.  Regret may not feel good, but, as Radical Renewal points out, it is a path to growth in just about every spiritual tradition.  The process of falling short and repenting is quite different from automatic, mindless self-criticism.  One is a path to growth; the other interferes with our performance.

We can find and follow our authentic inner voice only in the full involvement of an activity we're passionate about.  We find our uniqueness as traders when we are most absorbed in--and fascinated by--markets.

Additional Reading:

How We Can Improve Our Access to Intuition

The Role of Intuition in Trading Decisions


Sunday, July 09, 2023

Developing Your Uniqueness as a Trader

We commonly hear that a key to trading success is being disciplined and remaining grounded in a robust process.  That is true, but it is only part of the truth.  If we're disciplined in doing the same things as other people, we will simply be more consistent in achieving mediocre returns.  Having worked with many traders and trading firms over the years--and especially having participated in the recruitment of traders at those firms--I can say with confidence that distinctively successful traders view markets in distinctively unique ways.  They don't just have better answers; they ask better questions.  Unusually successful traders simply look at different things than average traders and look at markets in different and distinctive ways.

An important start toward cultivating our uniqueness is acquiring fresh data sets.  In trading the overall stock market, one data set that I have found to be promising is the percentage of stocks within each sector trading above various moving averages.  (Data from the excellent site).  So, for example, I track the percentage of stocks within the energy sector (XLE), consumer discretionary sector (XLY), consumer staples sector (XLP), health care sector (XLV), etc. that are above their respective 20-day moving averages.  This information tells us, not just if the overall market has been strong or weak, but which parts of markets have been particularly strong or weak.

Collecting new data enables us to ask new--and sometimes much better--questions.

So, for example, what have we seen going forward in the overall market (SPY) when consumer discretionary stocks greatly outperform or underperform consumer staples stocks?  Is there unique information in relative breadth strength and weakness?

Sure enough, when the percentage of consumer discretionary stocks above their moving averages has been much greater than the percentage of consumer staples stocks over the past three years, we see notably weak returns over the next five trading days in SPY, but particularly strong returns over the next 20 days.  Interestingly, this is a pattern we also see following unusually strong breadth thrust moves in the overall market:  a tendency to consolidate/pullback in the next few days, followed by upside momentum.  It makes sense that a relative breadth thrust among consumer discretionary stocks would display such momentum, as investors are counting on the kind of economic growth that sustains discretionary spending.

By contrast, when a large percentage of utility company stocks have been trading above their 20-day moving averages, the next 20-day returns in SPY have been negative, compared with solidly positive returns when few utility company stocks have been trading above their 20-day averages.  The flight to the safety of yields has not been a promising medium-term indicator of returns for the overall market.     

How about when traders aggressively move into small cap stocks?  When the number of stocks in the SP 600 small cap index trading above their 20-day moving averages has been quite high, next 5-10 day returns in SPY have been negative, before subsequently going significantly higher.  Once again, this is a pattern similar to that observed with general breadth thrusts.

And the current market?  We've seen solid breadth among the industrial stocks (XLI) with the great majority of shares trading above their 20-day moving averages.  Interestingly, over the past three years, that has led to short-term follow-through in SPY, but relatively weak returns over a next 20-day period.  And recent breadth strength among real estate stocks (XLRE)?  That, too, has been associated with relative weak SPY returns over a next 20-day horizon.  Those developments, on top of recent narrowing of outperformance by XLY over XLP has me cautious on the market.  Notice how the patterning of strength and weakness across sectors provides multiple perspectives on overall market performance as well as the performance of each sector.  When the weight of historical evidence lines up with what we're seeing in current price action, we have the makings of a promising trade.

This is but one example of how we can develop distinctive returns by studying distinctive market information.  I also collect databases of stocks making new highs and lows on a one- and three-month basis; stocks displaying buy and sell signals on various technical market indicators; etc.  All are ways of understanding when moves tend to reverse and when they tend to continue.  Trading success starts with looking at unique things, asking unique questions, and relying on objective data for answers.

Further Reading:

Trading With Breadth, Strength, and Momentum


Sunday, July 02, 2023

Is Your Trading Truly Meaningful?


A while back, I wrote a post about research that shows how living a purposeful life is a key to happiness and life satisfaction.  That applies to our trading, as well.  If we are purposeful about our development as traders, we are most likely to be successful *and* we are most likely to be fulfilled in our efforts.  My article for Forbes several years ago summarized research regarding the amazing psychological benefits of living purposefully.  It's when our life is inspired by a why that we are most likely to succeed in the quest for how.  

As the John Maxwell quote above points out, having a genuine and meaningful purpose is a vital part of what gives our lives significance.  The ego might look for more strokes, but what feeds the soul is the opportunity to make a "contribution" by doing something "noble".  This is why spirituality is vital to trading careers and why so many of our trading psychology challenges occur when we place ego needs ahead of what enables us to thrive.

For many traders, the concept of trading spirituality is an oxymoron.  Trading is all about making money; spirituality is not.  But any activity can be pursued in a manner that is more or less soul-full.  When we have an overarching life mission that improves us and our world, any activity can become a meaning-full path.  We overreact to gains and losses--and we overtrade--when trading is simply about P/L.  When we approach trading as a path for self-improvement, and when we work in teams where everyone is improving everyone else, suddenly we become part of "something noble and purposeful".  

So let's step back and ask ourselves a few questions.  Self-assessment can be uncomfortable, but no change ever comes from staying locked in our comfort zones:

What is your path to greatness?  How does your development as a trader move you forward on that path?  If you're not doing something meaningful and purposeful each day, how can you possibly hope to live a purposeful life?  What meaningful and purposeful thing are you doing with your trading today?  We are most likely to pour ourselves into activities that capture our strengths and our interests.  How will today's trading be fulfilling and rewarding for you regardless of the ultimate profits and losses?  

Great trading, like all things great that we do, comes from the soul.  Perhaps the best thing for your trading psychology is to stand back from profits and losses and cultivate the spirituality of your trading.  The key to mastering trading psychology is to always tap into what is more important to you than the profits and losses of trading.