Overcoming Emotional Trading in Real Time

 

Update:  My medical school colleagues and I wrote a chapter for a standard reference text in psychiatry that just came out.  It covers recent research and practice in short-term approaches to changing our thinking, feeling, and acting.  An important finding is that it takes emotion to change emotion.  We are most likely to internalize changes we make if we truly feel those changes.  One key implication for the topic below:  We can most efficiently and effectively change emotion in real time by evoking the *opposite* emotion, not by trying to make ourselves emotionless.  If we're frustrated and self-critical, instead of trying to empty our minds and meditate, we can evoke memories of trading experiences that left us feeling fulfilled and grateful.  More to come! - Brett  

We read a lot about trading psychology and the need to maintain perspective, trade our plans, control our emotions, accept losses and uncertainty, and manage our risk.  This education is helpful, but it is not training.  Actual training in trading psychology would have to occur in real time, because trading challenges crop up only when we are in certain states of mind and body.  This is why Jeff Holden and I have teamed up for SMB Capital's training program to help traders coach themselves in the heat of battle.  This is going to be a multi-week collaboration, in which we integrate the discussion of markets and trades with hands-on work on our mindsets.

Here is the video from our first class.  

A major idea from the session is that, before we can change our emotional state, we need to be aware of our state.  Jeff presented a "mood meter" that enables us to place labels on what we're experiencing.  As I point out in the video, the very act of identifying what we're feeling enables us to be an observer of our experience--not one who is wrapped up in their experience.  This coming Thursday midday, we'll discuss--in the context of the market trade that morning--what to do once we observe our emotions, so that we can stay constructively engaged in our trading.  I look forward to getting a video for that session as well.

Now here's an important point that we rarely encounter.  It comes from the book I'm currently writing, which integrates positive psychology and trading psychology:

Awareness of our positive emotional states is every bit as important to our trading as awareness of our frustration and negativity.

If we are aware of the emotional signs that accompany our best trades--our feelings of understanding and confidence--that awareness helps us take larger risk when the expected value of our trades is best.  We have positive triggers for our best trading just as we have triggers that set off our worst trading.  Recognizing our positive triggers in real time enables us to make the most of the opportunities that present themselves.  This is why it's important that our "mood meters" capture the best as well as the worst of our trading experience.  

More to come!

Brett  

How To Coach Yourself To Trading Success

 

Update:  During Thursday's session, Jeff reviewed with the group the chart of emotions that described four quadrants at the intersection of two axes:  positive and negative; high and low energy.  We also discussed the very center of the chart as our state of focus.  The idea is that, when we're super focused on markets, we're not immersed in either positive or negative feelings.  At that point, it's not about us.  So the question becomes:  how do we reach and sustain that center point?  The first step is self-awareness:  simply to know what we're experiencing in the present and to be an observer of our emotional state, not immersed in what we're feeling.  An initial exercise in this direction is to write down what we're feeling when we're feeling it.  By observing ourselves, we are exercising (self) focus.  Next week we will build on this-- 

This Thursday, I will join the head of recruiting for SMB Capital, Jeff Holden, for a combined mentoring/coaching class with developing traders.  What will be unique to the session is that I will be presenting and teaching coaching skills to the traders at the same time that Jeff presents and teaches best trading practices for that day's trade.  To the best of my knowledge, this will be the first time that the skills of trading psychology are taught alongside the skills of consistently profitable trading in the context of a live market session.  Once we've held the session for SMB students, I will share the specific methods we talked about in an update to this blog post.  The goal is to go beyond coaching advice and provide specific tools for TraderFeed readers to coach themselves to trading success.  

As Coach K indicates above, the key to elite performance is hungering for excellence, not success.  We can't always win, but we can always learn and learn and practice and practice excellent ways to play the game.  Back in the mid-1970s, I had the honor of being part of the freshman basketball team at Duke.  The coach ended quite a few of the evening practice sessions with an exercise where each player had to hit 10 consecutive free throws before they could go home.  You can imagine, tired and sweaty and needing to get homework done, how the players desperately wanted to get home.  That put real pressure on their free throws.  Over the course of the season, they had practiced doing the right things at the charity stripe so often under duress that they didn't wilt when it came to clutch situations at game time.  They achieved excellence by practicing under the emotional conditions of actual performance.

Now imagine that you couldn't leave your trade station after the market close until you had traded that day's market successfully in replay mode.  Again and again, you'd replay the market and push yourself to stay in the right mindset and take the right actions.  Day after day, those reps would eventually become part of you and you'd internalize sound trading psychology at the same time that you internalized sound trading.  

Stay tuned to this blog post after Thursday morning's session with Jeff.  I'll share the methods I discussed with the developing traders and I'll highlight how you can best rehearse these methods to coach yourself effectively.  This should be fun--

Brett    

Why Can't I Improve My Trading?

 

Think of how many trading courses are out there.  Consider how many trading and trading psychology books have been written.  Trading videos, tweets, interviews, podcasts:  the amount of content related to trading success is phenomenal.  And every week we get more and more and more.  Traders I hear from read books, watch videos, take courses--and they wonder, "Why can't I improve my trading?"

To address this question, I'll offer an analogy:

I could write chapters on how to pack, wear, and deploy a parachute.  I could produce videos on proper parachute maintenance and use.  I could teach a parachute course.  Now suppose you consumed all of the content I created on how to master the parachute and then you jumped out of a helicopter with your parachute.

How would you fare?

Of course, in the military, you learn to properly pack a parachute by packing parachutes and getting first hand instruction and inspection.  You learn to deploy a parachute by being tied to a line from a height and then dropping:  first at relatively low heights, then at higher heights.  You deploy the parachute again and again during real drops that are completely safe before you tackle riskier jumps.

The reason for this is that learning is state-dependent.  We are most likely to recall information and enact skills when we are in the state that we were in during our learning.  If we learn parachuting skills when we are calm and collected in a classroom, we're unlikely to recruit those skills when we're making a leap and the adrenaline is flowing.

Traders typically learn trading techniques and get psychological coaching when they are very far from the heat of battle.  Everything they learn flies out the window when markets are moving and there's real risk and reward every moment.  

We can't learn to drive racecars by watching videos, reading books, or absorbing tweets.

We can't learn combat skills in wartime by staying safe and peaceful in a classroom.  We can't master our upheavals of trading psychology when we're quiet and comfortable outside of market hours.

The best trading education and trading psychology is processed in real-time, in the act of trading.  We learn best by acquiring and practicing skills when we're in the mental, emotional, and physical states of real performance.  Our best teacher is realistic, progressive simulation.

For trading psychology, this is a game-changing insight.  More to come--

Further Reading:

Using Your Body to Program Your Mind

Overcoming the Triggers to Poor Trading

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Should I Join a Prop Trading Firm or Trading Community?

 

In recent weeks, I've had a number of traders reach out to me, asking about joining proprietary (prop) trading firms or joining trading communities.  Here is the essence of my response:

*  There is value in learning trading and developing trading skills and experience when you can learn from the experiences of others.  The best trading firms that I work with operate with team structures where there is a commitment to help each other and learn from each other.  Having trading partners can increase our accountability, and it can provide us with multiple role models.  Simply being online with other traders is not team trading.  Go where traders are committed to one another.

*  The best trading organizations only succeed and make money if their traders succeed and make money.  When I began my work in Chicago, the best prop firms covered basic overhead with desk fees and passed along member firm commission rates to traders.  Those firms shared profits with successful traders.  They did not succeed if traders were not profitable.  They invested in the best trading technology, because that would make the traders--and the firm--successful.     

*  You should be encouraged to make money, not simply to trade.  Other prop firms in Chicago operated as arcades, where traders traded their own capital, kept most of their profits, and paid fees for access to equipment and technology.  Some charged high commissions and made the bulk of their money by getting traders to place lots of trades.  When traders pulled back their risk taking due to uncertainty, this became a problem for management.  The interests of the firm and the traders did not always align.

*  Beware firms selling hope as their main product.  Some prop firms are not really prop firms at all, as they promise access to capital based upon tryouts that traders pay for.  The conditions of the tryouts are quite challenging, and it's not unusual for aspiring traders to engage in multiple tryouts.  Often, the interests of some of these firms are in selling tryouts, not in funding and growing successful traders.  Is there real training, real performance feedback, and real teamwork among participants?  Does the firm's growth depend upon the success of those who pass the tryouts?

*  Seek interactivity.  Online trading communities often offer education and coaching as well as sharing among community members.  This can greatly broaden the learning of developing traders.  The key question in evaluating online trading communities is the degree to which members actually form virtual teams and make teamwork a daily part of their trading processes.  If the communities succeed mostly by selling memberships and services, they cannot foster the mutual learning and development essential to our learning curves.

A quick anecdote:  Tomorrow, I'll be joining Jeff Holden from SMB Capital to help traders make use of a new technology that tracks the expected value of trades in real time.  This can be of tremendous value in sizing positions appropriately and in helping traders grow their risk-taking in responsible ways.  SMB is training the traders to take better risk/reward trades and they are investing in the technology so that the firm will succeed as the traders become more successful. 

Be selective:  The right firms and communities treat you as an investment, not as a trade--

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