Two Paths to Trading Success

 

There are two very distinctive paths to trading success:

The first path is to study market action in great detail and identify patterns associated with large market moves.  When those set up, the successful trader has seen and charted so many of those examples that they can pounce on the opportunity with large size.  Also because the successful trader has observed so many explosive moves, they are sensitive to when the explosion is *not* occurring and can exit with controlled risk.  For this kind of trader, a key psychological strength is patience.  Much of success lies in not trading until the outstanding opportunity comes along.  Another important psychological strength is aggression.  The very successful trader is not just right, but recognizes when they are right and is able to go for it in size.

The second path to great market success is to trade broad rather than big.  This is the path of many successful hedge fund managers.  They search and search and research and research and look for opportunities in different markets, in different parts of the world, and in different time frames.  None of the positions are necessarily very large, but the combination of the positions makes for a sizable portfolio.  Because the opportunities are relatively uncorrelated, the trader can make large amounts of money even when some views don't play out.  The broad trader is placing so many bets with edge that consistent returns follow.

Team structures help the first path to success, as a recent video from SMB Capital indicates.  Having multiple eyes on the short-term price action of many stocks and markets increases the odds of finding the truly special opportunities.

Team structures are essential to the second path to success, because team members with different areas of expertise and experience contribute unique ideas to a broad portfolio.

You can win by trading big.  You can win by trading broad.  It's tough to win trading in isolation.

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How Gratitude Transforms Trading

 

A wealth of research finds that experiences of gratitude--feeling appreciative of what we have--are important to overall emotional and physical well-being.  Of special significance is research that gratitude impacts our brain activity over long time periods, activating the areas responsible for reasoning and problem-solving.  This fits well with research that shows how positive emotional experience helps us see the world more broadly and deeply.  

When we can turn trading mistakes and setbacks into valuable lessons for learning and growth, we can actually feel gratitude toward our challenges.  Once we're focused on our development, everything--our best trading and our worst--becomes fuel for getting better and better.  Amazingly, when we sustain that positive mind frame, we actually see more in markets.  

Negativity blinds us to trading opportunity.

Including gratitude in our daily review process by focusing on experiences that make us better is a great way of sustaining our positive trading psychology.  At moments when I feel frustrated, I look over to our bonded rescue cats, Molly and Ares, see how they have found happiness, and feel grateful for the opportunity to have given them a good life.  Frustrations melt away when we appreciate what we have.  

An optimal trading psychology is one of focus and one of positivity.  Amazingly, when we are highly focused and in a state of emotional and physical well-being, we see markets better and make more clear-headed decisions.  If trading brings us gratitude--even in challenging times--we'll be best prepared to find and exploit opportunity.

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Three Questions to Ask About Your Positive Trading Psychology

 

The book that I'm currently writing, covering the positive psychology of trading, emphasizes that how we approach trading determines how positive our trading experiences become--and that helps determine our trading success.  Too often, people pursue happiness and fulfillment by seeking trading success.  The field of positive psychology suggests the reverse:  if our trading practices and processes draw upon our strengths and what is meaningful to us, we will trade with greater focus and energy, see more in markets, and interact more effectively with peer traders.  

So much of traditional trading psychology is problem-focused, emphasizing what we need to do to avoid reactive, emotional trading; what we need to do to accept risk and handle drawdowns, etc.  The reality is that we will never achieve a peak performance state simply by shoring up weaknesses.  Three questions to ask with respect to our achievement of a positive trading psychology are:

1)  Are my trading processes well-defined, and do they consistently draw upon my personality, social, and information processing strengths?  (Do I truly understand what my strengths are and how my trading methods draw upon those?)

2)  Do I find energy and fulfillment in the processes of trading regardless of near-term P/L?

3)  Do I draw upon the strengths of others and contribute to their strengths so that I am continually learning and improving?

We achieve a peak trading psychology by making our trading an expression of our greatest talents, skills, and ideals. 

Somewhere, hidden in your best trading, is the trader you're meant to be.  

The challenge is to develop a close relationship with your best self.

Further Reading:

Mastering the Positive Psychology of Trading

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Knowing What The F** Is Going On In Markets

 

It's amazing how our trading psychology improves when we take the time to step back, review macro markets, and understand what is going on in the heads of large money managers.

Consider the recent stock market:

*  Growth-related sectors have been particularly weak.  Check out the XLK (technology) and XLY (consumer discretionary) ETFs.

*  Value-related sectors have been relatively strong, especially the ones that benefit from lower interest rates.  Check out the XLRE (real estate); XLU (utilities); and XLP (consumer staples) ETFs.

*  The bond market has been strong, which means interest rates are falling.  Check out the BND (bond) ETF.

*  The US dollar has been weak.  Check out the DXY (dollar index).

*  Commodities have been falling.  Check out the DBC (commodities) ETF and oil prices.

Macro markets do not always trade thematically.  When they do, smart traders pay attention.  You can work on your psychology 24 hours and, if you don't understand market themes, you'll eventually get run over and lose money.

Going forward, a key question to ask is whether the theme of growth slowdown and potential recession is expanding or whether there are signs that the market's "theme-ness" is reversing.  Aligning shorter-term trading with the market's bigger picture helps ensure that you're swimming with the tide, not against it.

Further Reading:

The Importance of Understanding Global Macro Themes

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Exercising Our Character, Improving Ourselves

 

It's been great spending my 70th birthday with wife Margie and daughter Devon, traveling around Colorado.  There's something about natural beauty that inspires mood and mind, turning vacation time into a time of rejuvenation.  With that new energy, I find myself tackling fresh goals and challenges.  One of the most popular TraderFeed blog posts explained the process of FIGS:  Focused, Intensive Goal Setting.  The idea is that we achieve the greatest growth by establishing a limited number of goals and then focusing on working on those on a daily basis, turning them into internalized parts of ourselves.  I've long held that the age at which we become old is the age at which we determine that our best years are behind us.  The key to staying young psychologically is always having a guiding vision that we pursue intensively, challenging and inspiring us.

A particularly powerful vision comes from visualizing the kind of person we would ideally like to be.  What personality strengths would we most like to develop?  We can view our character development much as we view our physical development:  use it or lose it.  We can also set up routines to exercise our character the way we exercise our bodies.  What one personal improvement can you make that will make you a better friend and partner, a better trader, a better human being?  How can you use each day to make that improvement?

The keyword for my character improvement goal is forbearance.  That term can mean a decision to not enforce an obligation, such as the payment of a loan.  It also means patience and an acceptance of the limitations of others.  When we become impatient with others and expect them to meet our needs, we naturally put ourselves first and can create toxic interactions.  The idea of servant leadership is that we best lead by taking care of others, accepting and addressing their needs.  One of the reasons I've enjoyed our adoption of rescue cats is that it pushes us to get outside ourselves and prioritize their development.  In doing so, we create meaningful experiences and interactions.  In building my forbearance, I'm--in a sense--adopting everyone I deal with, committing myself to furthering their lives.

There is wealth in trading, and there is wealth in our personal development.  Indeed, it's not unusual to find that pursuing personal development furthers our trading success.

What are you working on today that will make you a better version of who you already are?  

How will today provide a great exercise routine for the qualities you want to cultivate?

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