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