The more we focus on our bad habits, the more we reinforce their dominance in our minds. The person who tries diet after diet after diet to lose weight doesn't gain weight because of a lack of focus on weight loss. The trader who overtrades is the person who talks most about discipline. But focusing on a negative can never reinforce the appropriate positives. This is an important principle. We never actually replace bad habits and behavior patterns. We find something more valuable and special than the undesired habits and patterns and fill ourselves with love for that. The alcoholic doesn't simply kick drinking. He finds support and a higher power in AA and ends up loving that more than his drinking. In my recent Forbes article, I emphasize how our daily activities build or tear down our character traits. When we love something more than a negative habit pattern, we so feed the love that we starve the negatives we want to change. The trader who gives within a team and receives the giving of teammates is so invested in the team's success that individual poor trading patterns fall by the wayside. I have gone to trading conferences and discussion groups that encourage sharing of ideas. Invariably, the attendees are reluctant to share. They simply want to take learning from others. Ironically, in seeking help, the reinforce the very ego-involvement that underlies their trading problems. They are so consumed with the identities of troubled traders that they cannot see themselves as having value to share with others. One reason AA is successful is that it provides troubled people with the direct experience of being of value to others. Loving helping others reinforces their best qualities. Feed your strengths and you'll starve your weaknesses. Pursue what you love and you'll naturally overcome what you hate.
In my recent podcast for CMC Markets (see Episode 7, and check out other interviews with Linda Raschke, Jack Schwager, and more), I describe a technique that I use when a trader falls into overconfidence after a winning streak. We use guided imagery to visualize a scenario in which the most recent period was a losing one. Would the trader still put on the trades being contemplated? If so, would the sizing be the same? A simple exercise such as this is a way of instilling a degree of self-awareness for the trader who may fall victim to recency bias. We tend to overemphasize recent experience, extrapolating it into the future. This can make us underconfident after losses and overconfident after wins. When our performance reverts to its mean, we are undersized when we're due to make money and oversized when we're due for a P/L pullback. Reactive variability in our trade sizing and overall risk taking is a major cause of lagging performance. Self-awareness means that we step outside ourselves and think about our thinking and observe our feeling states. When we coach ourselves, we are by definition in a state of mindfulness, as we stand above our behavior patterns and exercise a higher degree of choice and self-control. This is one of the great advantages of trading journals. When we write about our performance, we can stand apart from performance and take a coaching perspective. This is a very important performance principle: When we work on self-awareness outside of our trading, we build the mindfulness skills that eventually kick in during our trading. Coaching ourselves before and after market hours eventually leads to ways of thinking and behaving that creep into our real time trading. One of the key indicators of trading success among developing traders, I've found, is the ability to recognize trading mistakes and turn them around during the course of a trading day. It is very difficult to fall into a trading slump if you're aware of problems and actively coaching yourself about those in real time. So how can we move from being reactive to being proactive? How can we reduce mindless trading and trade in more self-aware ways? Here is a routine I've found to be particularly helpful: Divide your trading day into three segments: premarket/pretrading; middle of day; and end of day. During each of these segments, you are going to engage in a routine that involves self-awareness. Before the trading day starts, you are actively reviewing your previous day and your plans to continue doing what you did well that day and correct mistakes you made. You are reviewing market activity and generating a number of what-if scenarios that tell you what you want to do under a variety of possible conditions. Midday you are taking a trading break and refreshing your focus/concentration. You're also stepping back from following price action and updating your scenarios to identify potential opportunity in the afternoon. Midday is also a great time to once again review performance, learning from what you did right and wrong in the morning. It is during this midday break that you can interrupt any negative patterns that may have entered into your trading, so that you can perform better in the afternoon. At the end of the day, you actively review the day's performance and set specific goals and plans for the next day. Those will become part of tomorrow morning's review. In this end of day review, you'll assess whether you focused on the right areas of opportunity, whether you trading that opportunity well, and whether you did a good job of identifying new opportunities. It is this end of day review that allows you to learn from experience, reducing the odds that today's mistakes will bleed into tomorrow. Notice how this truly is a self-coaching process. Just like a basketball or football coach will work with a team before a big game (preparation), during the big game (halftime and time outs), and after the big game (review and practice), you are working with yourself before, during, and after performance. This builds your self-coaching skills; it turns mindfulness into a daily activity--which means it eventually becomes a positive habit pattern. This could be the greatest report card you could ever give yourself: Does your daily process systematically make you better? If you repeat today again and again, will you build skills and develop positive habit patterns, or will you languish in mediocrity and inconsistency? Does your daily routine make you more self-aware and self-determining, or does it leave you vulnerable to cognitive biases and emotional impulses?
When I surveyed the trading success I had observed over the course of years of coaching as part of writing Trading Psychology 2.0, one conclusion jumped out at me: Traders with distinctively good returns display distinctive strengths. Their success is the result of leveraging unusually strong personal and cognitive competencies. This is true of the intuitive pattern recognizer; the analytical quant; and the big picture portfolio manager. They draw upon the best of who they are. Traditional trading psychology focuses on reducing our vulnerabilities and eliminating our weaknesses. That is all well and good and can be helpful. But no amount of trimming problems will create unique success. If a couple reduces their arguing, that's great. It will not result in a distinctively happy, passionate relationship among soul mates. Tuning your car when it's misfiring is great. It will not produce a race car. Learning from mistakes and moving from being a developing trader to being a competent one is a necessary phase of the growth process for traders. Moving from competency to elite performance, however, is a very different process. When we draw upon our strengths, performance become intrinsically fulfilling. We draw energy when we exercise our competencies, and that energizes our efforts and propels us through our learning curves. Show me someone who is not passionately learning, and I'll show you someone whose development is not aligned with their strengths. This is the problem with many romantic relationships. If each person does not bring out the best in the other--and if the couple fails to play to their collective strengths--then the relationship is not renewing and, at best, becomes stale. You know when your development is on the right course, because performance *gives* you energy; it does not drain you. If you feel chronically drained doing what you're doing, you are not on the path of peak performance and personal fulfillment. Sometimes trading itself is not our proper path. I have written of how I left psychology for a time to trade full time. I learned a good deal, made some money--and was thoroughly unhappy. I missed working with people. I missed being a part of their development. What gives me energy is not participating in the next breakout, trend, or reversal; it's participating in the next breakout in a person's life. Our best future is aligned with our greatest strengths. We can become so focused on the dream of trading that we ignore the reality of who we truly are. Too often, developing traders focus on their mistakes and weaknesses and never truly discover their strengths. Day after day they write in their journals about all the things they did wrong and the long-term result is that they internalize the identities of troubled, losing traders. This is why I have emphasized using journaling to learn from our best trades as well--as a method for reverse-engineering our successes. What we do best in trading--and in life overall--illuminates the path of our greatest fulfillment. If there is a formula for success, it might be this: Be ever more consistent in being who you are when you are at your best.
The Market Wizards books were enormously influential in helping us think about trading success. There are many great lessons offered by the Wizards and their paths to success. The relatively unwritten story is how few of the Wizards have sustained a high level of success. In recent years, we have seen many formerly successful money managers and funds achieve returns well below their benchmarks. A surprising number have gone out of business altogether, unable to justify the fees they charge. Interestingly, the majority of funds that have achieved superior returns in recent years have utilized quantitative methodologies. An important reason for this is that successful quantitative funds employ large numbers of researchers and can deploy large numbers of strategies across multiple markets and time frames. That is well beyond the bandwidth of individual traders. To be sure, I continue to see--and work with--successful traders. A majority of those depart from traditional Market Wizard advice in one important respect: they don't trade a "style" that "fits their personality". In fact, I've found that having a fixed "style" has been an excellent predictor of trader failure. The trader with a static methodology is ill-prepared to win when markets change in their volatility, trending, correlations with other markets, and relationships to economic variables. A great deal of recent underperformance has occurred in recent years as the result of the failure of directional traders, dependent on momentum and/or trend, to adapt to low volatility markets that exhibit significant mean reversion on short time frames. Unable to adapt their strategies and/or time frames, they become dinosaurs. More successful traders have shown an ability to do what the quants have done--and often have integrated quantitative modeling into their discretionary trading. They develop multiple strategies for trading, increasing the diversification of their returns and raising the odds that some strategies will pay off while others lag. In my own trading, I break down the most recent market regime into a trend component and one or more cyclical components. Depending on the presence of a trend and the frequency and amplitude of the dominant cycles, I could end up looking like a short-term directional trader, a longer-term trend trader, or a mean-reversion trader. Alternatively, many day traders that I work with screen for stocks exhibiting the qualities that fit their trading styles, trading different names on different days. Either way, the key is adaptability. By viewing markets creatively, traders can develop new and multiple edges and sustain their success. This has been such an important dynamic in recent success that I made adaptability and creativity two major emphases in the Trading Psychology 2.0 text. Many, many seeming psychological problems in trading are the result of the frustration that occurs when we trade in ways that simply do not fit the markets we're trading. Once we begin to research and innovate, the sense of adventure, opportunity, and optimism returns. Change is never easy. It requires the willingness--and especially the humility--to return to the learning curve and start over as a student. But that also is part of the fun and challenge of markets: we're always given the opportunity to learn and develop. A great first step in this process is networking with other traders and seeing what they are doing that is working. Another great step is reviewing your own trades to see what has separated the winners from the losers. Activate your curiosity and you'll begin a creative challenge that can thoroughly remake your trading. Market Wizardry is something that always has to be built anew. No edge lasts forever, because no market stays the same forever.
Interesting research suggests that people are less able to think in creative ways when they are in negative mood states. People are also less productive when they are down in the dumps. When we become negative in the face of disappointing returns, we can unwittingly create a downward spiral, where we limit our insight and productivity just when we need them most. Cognitive psychologists emphasize that it is our way of thinking about events, and not only events themselves, that shape our emotional responses. (See Chapter 6 of The Daily Trading Coach for a number of cognitive techniques used to reshape our emotional responses.) When we find ourselves mired in pessimism, very often it is because we are telling ourselves that we cannot win, that we are sabotaging our own success, etc. Such self-talk is not constructive; by it's nature, it can't lead us to a solution. As the Ward quote suggests, the answer to our challenges is not to complain or to passively hope that things will blow over. Our job is to adjust our sails when conditions change. When we trade poorly, perhaps we have shifted in our ways of trading, becoming overconfident or fearful. Alternatively, perhaps we're trading in our usual ways, but markets themselves have shifted. As we've seen in the last couple of years, approaches to trading that have worked in the past (short term momentum/breakout trading, for example) can dramatically fail when the environment changes radically. Either way, when winds blow against us, we need to either adjust ourselves or adjust our trading--and sometimes both. A helpful step in breaking negativity and pessimism is to think of your self-talk as self-coaching. We are always talking to ourselves about performance, opportunity, mistakes, and risks. If we view that self-talk as self-coaching, we can ask the questions, "How well am I coaching myself? Would I coach someone else in this way? Would I want an actual trading coach talking to me the way I'm speaking to myself? Is this coaching really going to move me forward?" The essence of cognitive work is thinking about our thinking. When we focus on learning and improvement, we move ourselves forward--in trading and in our psychology.
That's it: New traders turn into professional traders when the Fear of Tilting Out (FOTO) exceeds the Fear of Missing Out (FOMO). If you lose a trade opportunity, others will come along. If you lose your mind, it doesn't matter how many trade opportunities set up. When you have the right FOTO, you replace the need to get into the market with the need to get inside your head. That reinforces self-awareness and self-control. I'm seeing traders make great progress by coaching themselves in real time, so that losing trades don't have to become losing days; losing days don't have to become losing weeks and months. A great deal of profitability comes from what you do during the day when you're *not* trading. Preparation and research; learning from recent trades; reviewing goals; focusing attention. One trader journaled me after losing money in the morning and bouncing back nicely in the afternoon. His midday break turned around his trading. We can call that a FOTO finish.
Unless you as a trader operate with a consistently high hit rate on your trades--far and away the exception in directional trading--then you're likely to experience sequences of winning and losing periods simply as a chance occurrence. The noisiness of markets, which means the presence of flows from different participants at different times, ensures that good ideas will sometimes not work. A major problem for developing traders is that they fail to distinguish between periods of losing money and periods of trading poorly. This leads them to continually change their trading and risk taking, eroding their probabilistic edges. There is a flip side to this problem, however, and that is allowing strings of winning trades to skew forward risk taking. Falling prey to the "hot hand" fallacy after a winning period, traders falsely assume that they now have a much larger edge and expand their risk taking. They size positions unusually large and/or take many more positions. As a result, when the inevitable losing trades occur, these wipe out large amounts of the prior gains. It is not unusual to see traders oscillate between sloppy and complacent trading after winning periods and overcautious and risk averse trading after losses. This means that they are most likely to lose when they take more risk and most likely to follow rules and trade carefully when they take less risk. This recency bias ensures a downward skew to P/L over time. Complacency after winning periods can show up in other ways as well. Traders can become less focused in their research and preparation following profitable runs. They can also let positions stay on their books without careful periodic review, allowing those "stale" positions to surprise them by reversing on unexpected news or flows. The key to avoiding overconfidence bias is to actively view winning periods as risks to future trading. This is counterintuitive, as human nature is to feel good about succeeding. If, however, you are actively reminding yourself that wins can lull you into carelessness, then you have an effective prod to double down on the essential elements of trading process. An exercise I've found helpful in this regard is to visualize that the recent gains have instead been recent losses. How would you be preparing for the day in that event? Would the trades you're contemplating when you've made money also be ones that you would take if you had experienced losses? A common mistake at trading firms is to allocate capital/buying power to traders after winning periods and reduce capital/risk after losses, when such stretches of losses and wins are entirely expectable given the trader's historical Sharpe ratio. It is not at all unusual to see a trader wipe out prior gains by meaningfully bumping up risk taking after a profitable period. Ultimately, traders become vulnerable when their feelings about themselves and their work are tied to short-term returns. As I noted in the 2.0 book, one of the greatest strategies for avoiding recency bias is to have sources of happiness, fulfillment, and energy outside of markets and thereby ensure that trading fits into your life and not the reverse. We become vulnerable when our recent returns dictate our current moods.
Mike Bellafiore recently mentioned that quite a few of the traders on the SMB floor that floor have been experiencing their best ever returns. That creates a wonderful database for studying the ingredients of trading success. The first contributor to success is simply the market environment. It is not a coincidence that November was a stellar month for the active day traders. Many smaller cap stocks in the blockchain/crypto space have made huge moves intraday and over the course of a week. It is very difficult for directional traders to achieve stellar returns in low volatility environments, something we're noticing among hedge fund returns lately. What enables the active traders to achieve solid returns is their ability to direct their trading to what is "in play" at the time, thereby finding spheres of opportunity when VIX is still modest. The principle here is that what you trade is as important as how you trade. You can be the greatest gold miner in the world but go broke if you're digging in the wrong places. On a parenthetical note, I might mention that the above principle is as important for longer time frame participants, not just the active day traders. The directional macro investor typically benefits, not simply from volatility, but from trend. If you look at the returns of hedge fund traders this past year, you'll find that the ones doing well have tended to be those who have been long stocks (or a combination of long stocks and long bonds in the risk parity trade); short volatility (which has trended lower most the year); and/or trading "mean reversion"/relative value strategies (in which stretched relative relationships tend to retrace in lower volatility environments). Like any entrepreneur, the successful trader has to operate in a market that provides distinctive opportunity. The second contributor to success for the traders who have had career best months and years has been the presence of an overarching visionary goal. Several explicitly stated to me early in the year that they wanted to be million dollar earners this year. It was a regular part of their thinking, and it framed how they thought about their performance. The presence of a vision kept them energized and provided the motivational thrust for working on their trading. Holding the vision kept them excited and energized through the year. In many cases, that excitement and energy carried over to members of their team, fueling their performance. The third success element for these traders was having small goals to accompany their large visionary goal. The small goals were the things they needed to work on day to day and week to week to keep getting better. Without the large, visionary goal, the smaller, process goals would have been mere drudgery. But without those short-term process goals, the big vision would never have come to fruition. As Bella explains in his post, it was the accumulation of trading improvements during the year that set the trader up for exploiting the trading environment. When you have an inspiring vision and a robust process for working toward that vision each day, you set yourself up for success when opportunity arises. How are you preparing for success in 2018?
Sound trading lies at the intersection of rigorous thought and decisive action. Without rigorous thought, we trade randomness and fall prey to impulse. Without decisive action, we betray our best ideas. Overtrading occurs when we take risk without a clear edge in our trade. On the surface, this seems like madness. Why would a rational human being risk their hard-earned capital on an idea without merit? The answer is that even rational human beings can fall short of consistent rationality. Under conditions of fear, greed, frustration, and overconfidence, we can act mindlessly--in ways we would never contemplate if we were in our normal, grounded state. Peak performance requires full focus. Any distraction impairs efforts that require concentration and pattern recognition. Watch weightlifters before they snatch their weights; golfers before their putts; kickers before their field goal attempts; basketball players before taking a free throw: all will compose themselves, get themselves in the right state of mind, and then perform. Great performers summon focus at will. They have stronger focus muscles, and they have superior control over those focus muscles. Suppose a surgeon finds himself distracted immediately prior to a surgery. Would he or she blindly go forward and make an incision? Of course not. The surgeon would first find their focus, make sure the team has made the necessary preparations, carefully review the surgical plan, and only then move forward. Above all else, do no harm is the commitment of every physician. Life is precious. Every trade is an incision in your net worth. The capital you're trading is precious. When we find ourselves distracted or emotionally aroused during the trading day, we need to do what the surgeon, weightlifter, or golfer would do: slow ourselves down and engage in a routine that reinstates focus. Slowed and deepened breathing, accompanied by a review and/or visualization of what we want to be doing, can be very helpful in grounding ourselves. I'm a big fan of keeping two lists at one's side during trading. One is a to-do list that captures everything you look at and everything you do when you're trading at your best. The other is a to-don't list, which captures all the wrong things you engage in when you trade poorly. With those lists in front of you, it's easy to conduct a focused review before placing the trade to ensure that you're aligned with your best practices and not repeating your worst ones. In recent posts, I've addressed steps we can take when our trading is impacted by performance pressures; anger or frustration; and negative, perfectionistic thinking. All of these can lead us to act on impulse and overtrade. I'm currently working with several traders who are having unusually successful years. They have demonstrated an improved ability to catch themselves in the wrong states during the trading day and refocus their efforts. Improved self-awareness has enabled them to work on their mindstates in real time. Equally important, however, is to avoid overtrading that results from boredom. Many times traders find themselves staring at screens even during times when they know they shouldn't be trading. Sure enough, they notice something that looks meaningful and act upon it, without clearly thinking through a bigger picture and plan. In such situations, it is not enough to simply count upon "discipline" to avoid the overtrading. What is needed are positive, alternate activities that will move your trading forward, even when you're not trading. Those alternate activities could include rejuvenating oneself through exercise, social interaction, or meditation. They also could include getting away from the desk to work on research and generating the next set of ideas. Many traders I work with identify--in advance and in their calendars--the hours in which they want to be trading and hours in which they want to be doing other things. There is no time for boredom--every hour is moving you forward in some fashion. The cure for overtrading is self-mastery. When your head is in the game, you work on the game. When your head is elsewhere, you work on your head. Approaching trading the way surgeons approach their craft is a great way to avoid doing harm
In this post, I would like to introduce the concept of co-trading. Co-trading is the collaboration of independent, curated traders within a coworking environment. Let's unpack what that means: First off, co-trading features true collaboration. That means the sharing of ideas and resources, as well as coordinated work on personal and professional development. Within a co-trading environment, collaboration can include mentoring, coaching, research, brainstorming, performance review--all of the functions that traditionally occur within a large trading firm, such as a hedge fund. The members of co-trading teams, however, are independent traders. They affiliate based upon shared values, interests, and experience. Unlike a hedge fund, co-traders trade their own capital, retain their earnings, and bear the brunt of their losses. What is shared is intellectual capital and the benefits of operating within a community. This works best when the co-working community is curated: carefully selected to ensure that the commitments and benefits are mutual. All of this occurs within a coworking environment. Coworking is well known among professionals involved in startups. Sharing a work environment with others who are passionately committed to what they do creates and sustains a high level of energy. Networking among talented professionals generates learning and growth. Surveys find that people thrive in coworking settings: they are more engaged in what they do and happier in their workplaces. For a single membership fee, coworkers enjoy everything from comfortable lounge, cafe, and meeting space to shared technology and the flexibility to work individually or within teams. To be sure, co-trading has occurred in other settings. Traders have affiliated in online chat rooms and groups for years. So-called arcades have been trading firms that offer workspace and technology to traders who rent desk space. Co-trading is different in that traders are physically located in their work areas with other traders, but also potentially connected via videoconferencing with other co-trading pods at other locations. The co-trader has the opportunity to trade at multiple affiliated locations, while traveling across the country, for example. Perhaps most important of all, however, is that co-traders operate within larger shared office spaces with professionals from other fields. Across the aisle could be professionals starting up businesses and developing apps, as well as people engaged in fields as diverse as journalism and business consulting. In a recent trip to a coworking space in New York, I met with an insightful professional mountain climber who conducts personal development hikes for his clients. I would never encounter such a person in my normal daily, office-based routine. These are people who can expand each others' horizons. If I belong to the coworking space in Connecticut, I can choose to work in the affiliated New York or Chicago office. I can connect with my team with high speed videoconferencing, and I can participate in a new team. The coworking space is available 24/7, which means that I always have a home away from home, free of the distractions of home. In my co-trading site, I can attend online education events with members of my team and collaborate on implementing what we've learned. That turns trader education into true continuing education for professionals. Of course, co-trading won't be for everyone. Beginners in financial markets will benefit from joining firms that offer high quality training. Experienced traders who rely on proprietary technology, teamwork, and capital will want to retain the benefits unique to a proprietary trading firm or hedge fund. Co-trading will most benefit experienced traders looking to maximize their independence, while simultaneously maximizing their access to other experienced peers. This coming week, I will be exploring coworking spaces for traders. My sense is that this could be a dynamic way of blending the benefits of teamwork with the advantages of independence.
Traditional trading psychology has tended to focus on the emotional side of human nature as a source of performance success: both controlling emotions and maintaining discipline and using our feelings as intuitive sources of information. Both are essential; indeed, it is only by becoming observers to our emotions that we can learn from them. Still, the research I've undertaken to identify the characteristics of successful traders has consistently shown that cognitive traits, and not just emotional ones, are essential to superior performance. This is why, for example, I have emphasized the structure of the learning process as a source of mastery in the Enhancing Trader Performance book and why I devoted a large section of the Trading Psychology 2.0 book to the development of creativity and the cultivation of our cognitive strengths. Show me a successful trader, and I'll show you someone who displays unusual talents in processing information. The most basic of these cognitive strengths is focus. Indeed, the ability to sustain focused attention is seen (albeit in different ways) among both successful daytraders and successful investors. In the daytrader, we see the ability to sustain intense concentration on a number of variables simultaneously. It is this parallel processing skill that enables the daytrader to act quickly on shifts in buying and selling flows. Conversely, the skilled investor maintains a depth of concentration over time that allows for a deeper understanding of fundamentals and the supply/demand changes that result from monetary and geopolitical sources. The challenge faced by these market participants is distraction. Distraction interferes with focus and thus reduces the quality of our information processing. Distractions can be emotional in nature, but can result from environmental sources as well. Indeed, I've consistently found that both home environments and trading floor environments are poorly suited for the optimization of focus. This is why many of the successful traders I've known have made it a practice to get away from their screens for periods of time during the day to both renew their concentration and to increase their focus on the bigger picture of what they are doing. All of this is important because the quality of our focus mediates the quality of our access to intuition and prior learning. When we have superior focus, we literally have greater access to a larger library of information. In a highly distracted state, we lose any edge we might otherwise possess, because we simply cannot access the sources of that edge. Indeed, it is only through focused immersion in information that we, over time, develop a keen capacity for intuitive pattern recognition. Without that immersion, we never truly internalize our learning. This is why so many successful traders value sleep and physical exercise as part of their daily routines. They realize that fatigue and burnout increase our susceptibility to distraction: to optimize our focus, we have to keep ourselves in an energized and rested state, renewing our willpower. So what can we do to build our focus and reduce distraction? Several steps stand out in my experience: 1) Optimizing our physical environment - Surrounding ourselves with the people who contribute to our decision-making and tuning out others. Creating a trading station that is comfortable and well laid out, with the right lighting, temperature, and sound level. 2) Optimizing our cognitive environment - Making sure we have ready access to the information essential to our decision making, but not more than that. Laying out screens for ready comprehension and action and avoiding a cluttering of our information environment. Controlling when and how we access chat, email, and phone calls to minimize external noise. 3) Optimizing our capacity for focus - I've written extensively on the topic of biofeedback as a tool for improving focus. Indeed, biofeedback is a major treatment modality for children who suffer from attention deficits. In biofeedback, we learn to sustain frontal brain activation over time, literally training ourselves to build our attention muscles. This helps us filter out distractions and maintain focus for longer period of time. 4) Optimizing our personal lives - In addition to maintaining a high quality of sleep and exercise, many people find that how they eat and take in caffeine and sugar impacts their level of focus. Quite a few traders I've known have made use of coaching, not to work on their trading per se, but to sort out challenges in their personal lives (relationship issues, family matters, financial challenges) that can be distracting to their trading. It is generally a mistake to try to put such issues out of your mind. Finding time and a proper forum for addressing the issues directly helps prevent them from intruding on trading time. As the quote at the head of the post suggests, it is very difficult to achieve great things if we're distracting by little things. Building our focus from day to day is helpful in sustaining a greater life focus, where we're not only doing things right, but doing the right things.
Real time stress is one of the most common psychological challenges faced by competitors in performance activities. Even very experienced golfers have been known to get the "yips". Most public speakers have had the experience of going blank during a major talk. The student who has studied all night for the exam can "freeze" during the test and forget what he or she has learned. Traders who have laid out promising plans for trades can find themselves exiting on a small move against them or--worse still--struggling to "pull the trigger" to enter the trade. What causes this stress--or performance anxiety--and what can we do about it? First, note that not all stress is a bad thing. As I pointed out in a recent post, anxious feelings can point the way toward our growth. In such cases, tackling the nervousness that occurs when we push our boundaries is very constructive. The last thing we want to do is try to bury the feelings that point the way toward our growth! Conversely, not all anxiety is performance anxiety. Some people experience anxiety across a range of life situations, not just during periods of performance demands. Broader anxiety problems, such as generalized anxiety disorder, panic disorder, and various phobias, require professional assistance, usually with behavioral methods and medication assistance. True performance anxiety is specific to performance situations. It occurs when we become so worried or concerned about the outcomes of our performance that our nervousness interferes with the performance itself. Fear of loss is the most common reasons traders experience performance anxiety. Instead of accepting loss as a natural part of playing a probabilistic game, such traders view loss as a threat. This is important to understand. It's not simply losing money that creates anxiety, but the interpretation of loss itself. When we view losses as threatening, we naturally respond with the fight or flight stress response--and this colors our subsequent decision making. Very often, we choose flight over fight and fail to enter good positions or bail out of existing positions at poor levels. Sometimes this performance anxiety is the result of having taken large--too large--losses in previous trading. The emotional upset associated with those outsized losses return when positions move against us, so that even normal noise is experienced as threatening. In a previous post, I noted that drama in P/L can create trauma in our emotional responses. Sound risk management is essential so that we ensure that losses cannot become truly catastrophic to our accounts--and to our psyches. A rule that I have long advocated for active traders is to make sure you do not lose so much in a trade that you cannot finish the day in the green. Similarly, you don't want to lose so much in a week or month that you cannot finish the month or year positively. This is helpful psychologically, as no losses become undue threats to our success. Should you find yourself overreacting to past losses, it is very helpful to return to modest risk taking, regain consistency in trading, and gradually rebuild size as the sense of security and confidence return. This is how people recover from all traumas: repeated experiences of mastery and safety eventually reduce the sense of threat. The behavioral techniques described in The Daily Trading Coach are particularly effective in dealing with performance-related stress. Visualizing hitting one's stop and taking planned losses while mentally rehearsing constructive self-talk and keeping yourself calm and focused with deep, slow breathing is a way of reprogramming catastrophic self-talk and the upsetting impacts of past losses. If those visualizations are performed repeatedly before trading hours, they create what psychologist Donald Meichenbaum referred to as "stress inoculation". We expose ourselves to manageable threats and this exposure provides us with a sense of mastery and perspective that helps us deal with drawdowns in real time. I have worked with many successful traders. The great majority lose money on a substantial number of their trades. Where they succeed is that they keep the size of the losers small and profit more meaningfully on the winning trades. If we cut our winning trades short because of performance anxiety, we create a situation where it would take an unrealistically high hit rate on our trades to ensure profitability. Ironically, it's when we can accept and even embrace losses--ensuring that we learn from losers and thus take away something of value from our setbacks--that we can make the most of our trading strengths.
Two factors stand out among the successful traders I've been working with: 1) They collaborate: They find like-minded colleagues and reach out to discuss ideas, research, and performance. That collaboration allows for a richer processing of information, as traders not only see something on a screen, but actively work with that information. Many traders fall short of their potential because they aren't processing information in the ways best for them. Active processing is great, but many traders excel at interactive processing. 2) They find multiple ways to make money: They aren't limited to one strategy or pattern to trade. That allows them to succeed when markets become slower or when trends are not dominant. Many times, the discovery of new ways to succeed comes from the collaboration mentioned above. Seeing how other traders are succeeding sparks ideas for a trader. Imagine how successful you could be if you cultivated a fresh source of edge each year. Over time, you would have quite a portfolio of methods for succeeding, and you could reap the benefits of diversification: always having some methods working while others are not. A great way to not succeed is to be isolated and locked into a single style of trading. To go far in trading, as the proverb above suggests, it helps to go together. So what makes collaboration successful? What do you look for in a trading colleague? This recent Forbes article highlights the research pertinent to teamwork and the factors that will help you effectively collaborate with others:
Of all the psychology problems I observe among highly competitive traders, frustration is the most common. Indeed, as I recently noted in a presentation to fund managers, frustration is a great example of the principle that strengths, taken to an extreme, can become vulnerabilities. When we are achievement oriented and demanding of ourselves, having something get in our way breeds a natural frustration. That frustration, in turn, triggers a fight/flight state and suddenly we are no longer nicely grounded in our brain's prefrontal cortex. Instead, we activate motor areas to cope with the situation and act in ways that we would never entertain if we were calm and focused at the start of the trading day. As the above quote suggests, frustration comes from expectation. When we have a goal and the achievement of that goal becomes blocked, we are wired to take action to remove that block. That can be helpful if, say, our path out the driveway is blocked by high, wind-blown snow. The frustration of the situation can energize us to take out the shovel and remove the block. But what if we cannot take remedial action? If a car suddenly pulls in front of us without signaling and nearly causes an accident, there is no ready, constructive action we can take. So we blow off steam and curse, hit our horn, etc. Suppose, however, that we are in a *rush* to get to our destination. We need to be on time, and the car suddenly pulls in front of us and causes us to get stuck at a red light. That's when frustration is likely to be channeled as anger. The inconvenience is now processed as a threat and our fight/flight mechanism goes into overdrive. It's not just having a blocked goal that creates frustration; it's the *need* to reach that goal that sets us up for a performance-destroying response. Should we react to the traffic situation by running the red light or suddenly switching lanes ourselves, we could create a real accident. Those are actions we would never take under normal driving conditions. As I point out in The Psychology of Trading, many times frustration and anger are responses to current situations that bring up the feelings from prior challenges and conflicts. In such cases, our frustration seems out of proportion to the immediate situation. That is because we are responding to past situations, not just the (similar) current one. For example, if we experienced considerable difficulty learning in school, perhaps because of a learning disability, normal setbacks in trading can feel like past failures, eliciting self-criticism, negativity, and frustration. In such cases, our frustration problems will not be limited to trading contexts. When the past intrudes into the present, that typically affects a broad swath of life domains, including relationships and work. If those patterns are interfering with many life areas, it can be very helpful to seek professional help. When frustration is more situational and shows up dominantly in the trading context, the techniques described in The Daily Trading Coach, such as building positive associations and exposure methods, can be quite helpful. (Another way to access resources relevant to frustration is to Google "Traderfeed frustration" and you'll see quite a few posts pertinent to the topic). One particularly powerful approach is directly addressing the perceived *need* that fuels the shift from frustration to anger. It is natural--and not necessarily problematic--to be frustrated when we don't reach a desired end. When we tell ourselves that we *must* achieve that goal *now*, we set ourselves up for overreaction. In such cases, training ourselves to embrace losses and learn from them is very helpful to our trading psychology. Quite a few times, I have entered a good trade with a positive expected return and it hasn't worked out. When that has occurred, I will say to myself, "That should have worked!" That leads me to entertain the hypothesis that the market cannot sustain the expected direction and may indeed trade the other way. That can be very useful when a breakout trade suddenly stalls and returns to a prior trading range. Embracing the loss and now looking for a possible retracement of that range, given that others are similarly trapped, can turn the losing trade into a tuition for an even more profitable winning trade. Other times, we may extract useful information about our trading mistakes from losing trades. Perhaps our entry execution was sloppy, triggering us to work on firmer rules for entries. That channels the frustration constructively, away from anger. Many traders I work with become very alert to the cues of mind and body to recognize frustration as it's brewing. They are able to recognize that as an emotional pattern that has cost them money in the past, and that triggers them to step back from screens and regain emotional equilibrium. We are best able to change an emotionally driven pattern if we're aware of that pattern. Mindfulness is a great antidote to reactive trading in the heat of battle.
Most traders have dealt with runs of winning and losing trades. We can expect those to occur simply as a function of chance. A greater problem occurs when we have runs of sound and unsound trading processes. In other words, we become inconsistent in our preparation for trading; inconsistent in our research; inconsistent in our sizing and risk management; etc. This inconsistency threatens any possible edge that we can have in markets. One of the reasons I encourage traders to keep regular report cards to grade their performance is so that they can catch inconsistency as early as possible, before it can sabotage their trading and their mindset. A trader I recently met with scored himself unusually low on his ability to anticipate risk. He simply failed to engage in scenario planning should his position fall out of bed on adverse news. Because he had been trading well, he became comfortable and complacent. We used that lapse to help him make the scenario planning part of his daily checklist. The goal was to review the "what if" contingencies--and mentally/emotionally prepare for them--*before* putting the trade on. So what causes us to become inconsistent? There are three important possibilities: 1) The market has changed. Our trading can become inconsistent when markets themselves exit one regime and enter another. As trends change, correlations among markets change, and volatility changes, what had been working may no longer bear fruit. If you find that your trading processes have remained relatively constant but your results are noticeably worse, you want to take a deeper look into what you're trading and whether it has become a different market. If so, you want to make sense of that new regime and develop fresh trading ideas based on new understandings. Be especially attentive to alterations you have made in your trading processes in reaction to changed markets. One trader I recently spoke with found himself trading more frequently as markets became less volatile, in essence pressuring himself to make money by taking more trades since each trade was yielding less. That overtrading led to poor results. 2) Our state has changed. In the example from the second paragraph above, the trader became overconfident and overeager after a period of winning. In other situations, we lose consistency when we become frustrated or fearful. The state change into fight or flight mode causes us to act in a reactive, unplanned fashion. At such times, we place trades as much to manage our states as to optimize our profitability. If we find that critical portions of our planning have been overlooked in the heat of battle, then our goal is to work on staying calm, focused, and mindful in real time. In my Trading Psychology 2.0 book I discuss self-hypnosis as a way of replacing negative states with positive ones. The Daily Trading Coach covers a number of methods for state-shifting, including the use of trance and behavioral exposure techniques. When we can recognize problem states in real time, we can then use meditation and guided imagery methods to switch into a calm, focused mode before the agitated state can hijack our trading. 3) We have become fatigued. Fatigue is a special kind of state change, as it relates to energy level more than emotionality. Very often traders spend long hours in front of screens and overtax their willpower. This is a short-term equivalent of the burnout described in the recent post. In that situation, we need to renew ourselves, typically by getting away from screens and entering a different mode and state that is stimulating and renewing. Taking an exercise break midday, getting off the desk and talking with colleagues--these are ways of shifting gears that can be renewing. Getting the right amount and quality of sleep at night is also an important consideration, as the lack of restorative sleep can lead to diminished concentration and susceptibility to inconsistent trading. The positive impact of healthy eating, healthy exercise, healthy sleep patterns cannot be when it comes to optimizing one's energy level. Building positive, stimulating activities into non-trading time can also be highly renewing. In short, there is no single answer for inconsistent trading, as there are many potential causes. As a rule, if your process is inconsistent, then state changes could well be the trigger and culprit. If your processes have remained rigorous but results have gone downhill, it could be a sign of changing market regimes--important information in itself. Inconsistency in trading generally means that you have fruitful work to do, either on yourself or on markets.
Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), Trading Psychology 2.0 (Wiley, 2015), The Art and Science of Brief Psychotherapies (APPI, 2018) and Radical Renewal (2019) with an interest in using historical patterns in markets to find a trading edge. Currently writing a book on performance psychology and spirituality. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014.
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