Sunday, March 31, 2024

Investing in Your Trading Psychology

There is a very important difference between acting on desire and acting on commitment, as anyone in a successful long-term romantic relationship can attest.  If a relationship is only about desire, it quickly burns out and fails when circumstances call for commitment.  Successful relationships translate desire into commitment:  it is because someone is incredibly emotionally special to me that I am committed to them.

Many traders begin with a desire for market success, but never get to the point of commitment to the practices and processes that lead to ongoing profitability.  They love trading, but are not in love with markets.  As a result, they never put the time into truly understanding markets and their dynamics, which is a vital component of trading success.

In a recent Economic Times article, Anupam Nagar reviews ideas from my books and stresses the importance of achieving trading success by building upon one's strengths.  It is not enough to correct one's mistakes; a true edge in financial markets requires that we find *our* edge in those markets.  It is not enough to mimic the trading style and edges of others.  Our mission is to figure out what *we* see uniquely in markets and then translate that it into durable trading practices.  

For that reason, a successful approach to trading psychology requires an investment in ourselves.  We need to figure out what we see uniquely and distinctively in markets and then invest in that.  Success lies at the intersection between our particular strengths and the patterns that exist in markets.

There's an old saying that, "If you meet the Buddha on the road, kill him".  The idea is that the genuine Buddha is not a guru who knows all the answers.  The path to genuine enlightenment is found within, not in following someone else.  We can never find our own, personal conviction in ideas peddled by others.  If we find the market guru, we're meant to "kill" them.  

That takes time, and it takes an open mind.  In recent years, I've developed quite a personal interest in the topic of rotation within equity markets and how to trace that through breadth and relative strength statistics.  Many markets are not bull markets (investing more capital in stocks) or bear markets (pulling more capital from stocks), but rather are rotational.  In those rotational markets, money comes out of sectors that are not in favor and go into stocks that promise better earnings and returns.  For example, in an environment of economic growth, money might go into technology and consumer discretionary shares and out of more defensive sectors.  From this perspective, asking whether we are bearish or bullish on stocks is the wrong question.  Rather, the challenge is to find where there is relative strength and relative weakness and profit from both.

When we pursue what fascinates us, we make unique discoveries and find our particular edge.  It is when we see things clearly that we can take the kind of risk that leads to meaningful returns.  What I like about a training program such as that at SMB Capital is that there is exposure to many team leaders and mentors.  They recognize that there is no genuine conviction to be found by mimicking the trading of others.  As Garrett Drinon observes, the challenge is to identify what *we* see clearly in markets and then put on the appropriate risk.

We learn from others, then make that learning our own.  

So, so many market Buddhas out there.  

Kill them.

Further Reading:

Finding Your Niche In Life and Trading


Sunday, March 24, 2024

My Big Takeaway From The SMB Annual Event

It was great getting back to SMB Capital and being part of their first ever annual trading event.  I was especially impressed with the expanded mentoring being offered to developing traders.  This includes virtual "office hours" meetings to discuss trading in real time; intensive step-by-step teaching of successful trades from Lance Breitstein; and detailed modeling of winning options strategies from Seth Freudberg.  It was especially rewarding to see traders I knew as developing professionals who are now successful and offering mentoring to the newbies, including Garrett Drinon, Justin Spero, Carlton Bryan, Jeff Holden, and Max Ganik.  Congrats to Steve Spencer and Mike Bellafiore for their work in building an impressive learning culture. 

My greatest takeaway from the event, however, was the tremendous enthusiasm and interest in learning among the participants.  There was an electricity in the group, as traders were eager to network, learn from each other, and absorb lessons from the presentations.  The experience reminded me that every developing trader is an entrepreneur building a startup business.  It was great to see the drive and sense of quest among these aspiring professionals.

As we become experienced and successful, the challenge is to maintain our spirit of quest.  The longer we do something, the more we have to work to sustain the fire of the startup mode:  learning and doing new things.  That is not only true in our trading, but in our personal lives.  Life is meant to be an adventure.  What I loved at the SMB event was that the traders I knew as beginners had developed a fresh fire in the belly, drawing on their passion for growing talent within the community.  

A few years ago, Margie and I took our first trip to Israel and loved seeing historical and cultural sites.  On our last day, we visited the Holocaust Remembrance Center, Yad Vashem, and there I experienced something that powerfully remains with me to this day.  Seeing the display of all those killed in concentration camps around the world, I (quite uncharacteristically) broke down in tears and felt the very strong sense:  "These are my people".  My equally strong sense was that this is what we mean by God speaking to us:  an intense clarity coming from the soul.  

Since then, understanding that clarity and its significance has become my quest.  I've read easily 150-200 books on religion and spirituality; wrote the blog-based book about the spirituality of trading, Radical Renewal; and recently finished a 450-page manuscript about spiritual development from a Jewish perspective that includes a website and blog.  The next project will be an equally detailed review of Christianity and Islam and the lessons they teach us about spiritual development.  Eventually those lessons will find their way into my work with traders, building on the insight that true clarity and conviction comes from quieting the ego and listening to the soul.

The larger point is that I'm just like those developing traders at SMB.  I've found a mountain to climb and a worthy quest.  And I've learned that what brings us passion is what truly--and sometimes quite literally--speaks to us.  

Thanks to those at SMB who affirmed what is important in life.

Further Reading:  

Radical Renewal:  Tools for Leading a Meaningful Life


Wednesday, March 20, 2024

Trading Psychology Links: Finding Your Edge


*  Setting just one goal for change and working on it consistently for at least a month:  it doesn't lead to revolutionary change, but it creates the evolutionary change that lasts.

Very interesting research from Concretum Research regarding time of day when SPX tends to make intraday highs and lows.  Not too surprising that highs and lows for the day are made when market participants are most active.  This sets up valuable research on relative volume, intraday trends, and probability of trend days.  Would be interesting to see how these stats look for individual stocks, particularly ones with lower institutional participation.

*  Following the observation of Mike Bellafiore, it's so, so, so important to experiment, experiment, experiment when learning trading and see what makes sense, what grabs your interest, and especially what you do well.  Too often, traders are so eager (and needy) to make money that they cut their learning processes short and never develop their strengths.

*  I like Crede Sheehy-Kelly's advice to practice each day being the person you want to become.  Per Ayn Rand, those who fight for tomorrow live in it today.

Have a great week!

Sunday, March 17, 2024

How to Change Your Psychology


We internalize what we do consistently.

If we consistently avoid effort, we will internalize lack of initiative.  If we consistently reach out to others with love, we will internalize warmth and caring.  Change begins with doing.  Simply shifting goals or mindsets will not produce lasting change.

Notice how athletes work out in structured routines.  Surgeons learn their craft by following evidence-based procedures and following these faithfully.  Performing artists master their craft through feedback and repetition.  When practice and performance are process-based, something important happens psychologically:  We internalize a sense of discipline and self-control.  Consistency of preparation and practice creates consistency of performance.

To change ourselves psychologically, we can start with just one improvement we wish to make and create a routine for implementing that shift every single day.  If I want to internalize a sense of physical fitness, I can go to the gym daily and challenge my limits in terms of flexibility, aerobics, and strength.  If I want to internalize discipline in my trading, I can use backtests and performance reviews to create rules for when to take trades, where to enter/exit, etc.  Following rules each day leads me to internalize a sense of control.  Pushing my limits each day reinforces a sense of growth and achievement.

Choose one goal and do one thing to achieve that goal daily for a month.  Then take on a second goal for a month, etc. and add that to the first.  Then a third goal, a fourth--and soon you internalize a sense of progress, achievement, and self-control.

We don't change by thinking new things.  We do new things and shift how we think and feel.  

What one thing will you do consistently this week to be your best version of yourself?

Further Reading:


Thursday, March 14, 2024

Trading Psychology Links: Developing Yourself by Developing Your Self

*  Every trade plan is an opportunity to work on our psychology, training us to act on opportunity and not react to fear; 

Lance Breitstein does a great job of explaining why success in trading requires investment in ourselves;

*  Such a valuable point from Adam Fiske:  What indicators/signals do you track regularly to tell you *not* to trade?

*  Jeff Holden from SMB Capital observes that we need to work on proper bet sizing--and understand the relative degrees of edge we have in trades--before we start betting big;

Have a great finish to the week!


Sunday, March 10, 2024

How to Deal With the Fear of Not Being Right

It's one of the great paradoxes of psychology that when we run from something we fear, we are most likely to encounter it.  The important principle here is that we internalize what we do.  When we act on a particular premise, we reinforce that premise in our minds.  Thus, when we run from a feared outcome, we end up reinforcing that fear.

An experienced trader recently reached out to me regarding the fear of not being right when in a trade.  Psychologically, that means we're taking being wrong as a threat.  The threat of being wrong can become so strong in our minds that we take off the position before it has a chance to be right!

Every trade plan is an opportunity to work on our psychology.  When we set a stop loss for a position, we want to use that stop to intensively mentally rehearse what we want to be doing if the order is triggered.  Very often, we can get stopped out of a trade, but nothing happens to invalidate the idea behind the trade.  For example, I might get long a stock on an earnings beat in the premarket.  The stock stalls out and begins to retrace some of its initial gain.  I become so afraid of not being right that I take the position off--only to see the stock roar higher at the NYSE open when large volume hits the tape.  

If I have set a stop on the trade, however, I can--at that time-- mentally rehearse the conditions that would get me back into the position.  Just because a premarket flow took me out of an initial position doesn't mean that the fundamental strength of the company won't support a higher share price.  

So, so often the trade doesn't work out, but the idea--and the work we have put into generating the idea--is still valid.  We lose sight of the good work that goes into a trade when we focus on the fear of not being right.  What makes the trade not right is not the same as what makes the trade idea not right.  It's when we can embrace the possibility of any trade being wrong that we open ourselves up to re-entering positions and profiting from being right.

Further Reading:

How FOMO Can Actually Help Your Trading


Wednesday, March 06, 2024

Trading Psychology Links: Finding Our Optimal Performance Mindset


The right mindset won't substitute for a rigorously developed edge in the markets, but the wrong one can certainly undo all our training and experience.  Here are some valuable trading psychology perspectives that can help you make the most out of your experience:

*  It's not enough to control our emotions and stick to time-tested processes.  We have to actively develop a positive mindset if we're going to maximize our creativity, productivity, and performance.

Akil Stokes offers a diverse trading psychology podcast for developing traders.

*  Here are two valuable books on trading psychology:  The Mental Game of Trading by Jared Tendler and Mastering the Mental Game of Trading by Steven Goldstein.

*  This is the focus needed for successful trading.  If we need to make money, markets control us.

Have  a great finish to the week! - Brett

Sunday, March 03, 2024

Mastering the Positive Psychology of Trading

Working on mastering the psychology of trading is different for beginning/developing traders and for experienced traders.  I have worked with rookies at proprietary trading firms, and I have worked with experienced money managers who guide large teams.  The psychological challenges faced by the two groups are entirely different.  What you need to do to master your trading psychology very much depends upon where you are at in your learning curve.

Here is an analogy that might clarify things.  Freud's revolutionary contribution to psychology can be found in his dictum, "Where id was, there ego shall be".  The id represents our basic, primal instincts: our flight and fight tendencies.  When we are triggered by past, unresolved conflicts, we tend to regress to our instinctual mode.  The purpose of psychotherapy is to help a person process their issues and feelings in the medium of a helping relationship.  This enables them to gain perspective on what is truly a threat in the present versus a leftover response from our past.  The heart of Freud's therapy is that we first confront and resolve our conflicts in the here and now context of the helping relationship.  Once we can begin to constructively handle our issues within therapy, we're ready to tackle them in our day to day lives.  Therapy thus replaces the id with the ego:  we replace our flight/fight triggers with rational thought and planning.

The field that has come to be known as positive psychology takes Freud's work to a new direction.  Instead of working on resolving past conflicts and painful repressed experiences, positive psychology has us identifying and building our unique, distinctive strengths.  For example, I might experience a loss of motivation at work and my performance might suffer.  A traditional therapist might have me explore conflicts about my work and with my colleagues.  Resolving hidden problems in the workplace could help me regain my motivation.  The therapist addressing my situation from the perspective of positive psychology might help me understand the positives that I need in my life and that might be missing on the job.  For example, if one of my basic strengths is intellectual curiosity, I might need to address my situation by changing how I interact with my team at work--or perhaps I need to find different work.

So now we can appreciate the difference in psychology between beginning and advanced traders.  Beginning traders, unaccustomed to ever-changing, volatile markets, find themselves coping with their flight/fight stress responses and the ways in which those color trading decisions.  Experienced traders, on the other hand, find that their greatest challenges occur when they do not adequately cultivate and utilize their strengths.  For example, where the rookie might respond to volatile action in a stock with decisions based on FOMO, the experienced trader might be challenged by finding the best risk/reward expressions of their trade ideas.  

For the experienced trader, a key to trading success is knowing what speaks to you and what you're truly good at.  You cannot play to your strengths if you aren't intimately familiar with what those strengths are.  Working on correcting weaknesses only gets you so far.  Eventually, if you're going to progress from competency to expertise, you need to master your own positive psychology.  

An obstacle I've faced in my own trading is that I simply become bored with following markets and I stop trading.  Creativity and learning are my two greatest strengths, and I lose motivation when I'm not discovering and doing new things.  The common wisdom of trading psychologists is to turn everything you do into reliable, repeatable processes.  That is precisely what bores me.  If trading begins to feel like an assembly line, I start to feel trapped in a rote, routine job.  To keep trading fresh and exciting, I need to do the same thing that I do in my marriage and in my personal life:  find new challenges and new opportunities and always, always devote some portion of my time to innovation.  

I recently wrote on the topic of finding different sources of trading edge.  I also wrote on the topic of developing resilience as a trader.  The two topics are intimately connected--for me, and for many people I work with.  What keeps us going during the inevitable drawdowns is that we're continually learning, continually discovering, continually moving forward.  Doing new things keeps us psychologically fresh.

Earlier today, I began analyzing a new dataset.  I looked at market breadth broken down sector by sector.  Interestingly, over the last few years, when breadth strength in the consumer staples (XLP) sector has greatly exceeded breadth strength among the consumer discretionary stocks (XLY), the next 10 to 20-day returns in the overall market (SPY) have been significantly above average.  This finding has set off a flurry of queries into various sector rotations and how those might act as meaningful measures of market sentiment.  New data, new patterns, new trading opportunities, new motivation and drive, new games to play and win.

We master the positive psychology of trading by drawing consistently upon our own positives and expanding those.  I believe this is the single greatest frontier in the field of trading psychology.  More to come!

Further Reading:

Should High Achieving Traders Seek a Balanced Life?

Therapies for the Mentally Well:  Proven Techniques for Building Your Positive Psychology

Radical Renewal:  Tools for Leading a Meaningful Life