How Do You Handle Adversity?

 

It is said that adversity doesn't build character; it reveals it.  When the sh*t hits the fan and everything is going against us, we learn a lot about ourselves.  

When power went down in our region and we were left without telephone, internet, or cable service, I wondered how I would work with traders.  Everyone was working from home, which meant that my only ways of connecting with them had been taken away.  A fleeting thought went through my mind that I could cancel all my meetings.  As soon as the thought entered, I rejected it.  I was not going to give up.  I drove my car to various towns in the area until I found a spot with a solid internet connection.  I kept my phone charged with the car battery and downloaded an app that allowed me to do face-to-face meetings with minimal bandwidth demands.  Instead of working from home, I discovered work-from-car!

Similarly, when everything went down in the recent storm, I received encouragement from Margie and together we figured out how to use a portable generator and connect it to major portions of our house.  I have minimal mechanical skills--I actually tested as learning disabled with respect to performance tasks as a child--but I was not going to be a victim of the storm, and I was not going to let Margie down.  

In both cases, adversity brought out a latent strength, a quality I have, but do not always draw upon:  persistence in the face of challenge.  I refuse to let circumstances control me.  That refusal gives energy and leads to creative solutions I would have not pursued otherwise.

Recently, I've noticed significant differences in how traders handle adversity, whether it's a losing trade, a missed opportunity, a drawdown, etc.  The really good traders refuse to let the setback control them.  They view and re-view their trading and they make sure they drill the learning lessons in their head.  They miss an entry, but they don't give up on the idea.  They don't simply place a revenge trade; they become even more focused as a result of the missed trade--and that allows them to find another way to participate.

That's really it:  adversity can disrupt us, or it can focus us.  It can lead us to withdraw and seek comfort, or it can push us to dig deep and draw upon our latent strengths.  The concept of sisu suggests that each of us possesses a second wind of energy that we can access during periods of challenge.  Might it be the case that the winners in life's race are those with the greatest capacity to draw upon that second wind?  Perhaps by continually placing ourselves in challenging circumstances, we can cultivate the sisu--the access to hidden strengths--needed to perform at our best when we most need to perform.

Further Reading:

The Profound Psychological Benefits of a Purposeful Life

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Trading as Training in Mental Toughness

Every year you start with a zero P/L balance.  At any time, a rogue event could turn your portfolio and your account upside down.  If you don't kill, you don't eat:  you're only as good as your latest performance.  When you're very good, you'll still lose on roughly half of everything you do.  That means you'll have strings of losers and periods of drawdown.  Markets will sometimes change faster than you can adapt.  You'll question whether your edge in the marketplace is gone.  You'll see others whose edges truly have eroded and you'll wonder if you can ever hope to compete with the machines.  

Little wonder that those who do succeed in the money management world display a good amount of mental toughness.  There are tremendous rewards to those who succeed and precious little job security for those who don't.  The entire profession is based upon the ability to act in the face of uncertainty and take meaningful risks.  How many fields--even in sports--require such daily endurance?

An excellent overview article identifies several components to mental toughness:

1)  Hope - A strong degree of self-belief;
2)  Optimism - A general expectation of favorable outcomes;
3)  Perseverance - Consistent pursuit of one's aims in the face of adversity;
4)  Resilience - The ability to adapt to challenging situations

Mental toughness thus requires the grit described by Angela Duckworth--that ability to keep going when the going keeps getting difficult.  Learning to handle smaller pressures and challenges builds the toughness needed to handle the larger ones.  Dealing with day to day, week to week setbacks in trading is training for dealing with the inevitable larger setbacks.  

This can only happen, however, if the elite performer maintains what Emilia Lahti describes as an "action mindset".  The Finnish concept of Sisu describes the ability to tap into hidden wellsprings of resources during times of extreme challenge; Lahti describes it as a kind of second wind, in which environmental demands bring out more than we thought we had.  It is not enough to endure; fueled by Sisu and in an action mindset, we can find and pursue the opportunity in challenges.

I have spoken with many traders who go on winning streaks and then become complacent.  They cut back on their rigorous preparation and take more marginal trades.  It's as if, instead of a second wind, they lose their wind--or at least their willpower.  What if winning is as challenging for the competitor as losing?  What if it's not just adversity that challenges us, but any cognitive/emotional state that greatly differs from our norm?  Ironically, the trader who experiences win after win after win may be as challenged as the one who experiences a series of losses.  

That would explain my observation that the best traders double down on their discipline and planning after they have made money.  In Lahti's terms, they sustain the action mindset.  Their Sisu kicks in, not because they experience extremes of pain, but because they experience extremes of positivity.  It is any shift outside our normal experience that taxes us--even shifts that we desire.  Most traders have a plan for dealing with drawdowns.  How many have a plan for dealing with draw-ups?  

Maybe, just maybe, sustaining performance after consistent winning requires as much mental toughness as sustaining performance after consistent loss.  Perhaps success brings its own adversity.

Further Reading:  Emotional Resilience in Trading
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Handling the Adversities of Trading

How do you handle adversity in trading:  when trades move against you, when drawdowns accumulate?  One of the interesting observations from the Market Wizards interviews was that many of the great traders had undergone periods of great loss prior to their success.  Hardships prepared them for an extraordinary career by teaching them important lessons about risk management, diversification, and sustaining psychological self-control.

How do traders trading today's markets handle adversity?  An excellent set of interviews posted by Richard Chignell on the Embrace the Trend site captures, in the traders' own words, how they deal with the emotions and challenges of trading.  The interviews also illustrate the great diversity of trading styles out there.

Among the gems in the interviews is the running from fire analogy of Charles Kirk from The Kirk Report; the use of visualization exercises from Mike Bellafiore of SMB Capital; the process focus of David Blair from The Crosshairs Trader; and Derek Hernquist discussing the importance of trade blueprints.  An interesting common theme among the traders was the value of physical exercise in managing the pressures of trading.

Where my perspective would differ from that of many of the interviewees is that I would distinguish between negative emotions resulting from particular losing trades and those that are more ongoing, resulting from failure to adapt to changing markets.  When a trader has a demonstrable edge, following plans and sticking to a replicable process will make the most of the positive expected return.  When a trader's edge erodes, those same actions can lock in frustration and negative results.  Sometimes traders experience hardship because they need to change their destinies.

Further Reading:  Adapting to Change
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Four Steps Toward Improving Your Coping as a Trader

I recently offered a self-assessment of coping strategies in trading. This post will conclude the series by outlining four steps traders can take to enhance their coping.

1) Step One: Become A Skilled Self-Observer - Many traders are unable to work on their ability to cope with adversity because they've never stood back and identified what they do to cope with challenges and whether those coping responses are working for them. The self-assessment from the previous post is helpful in breaking coping responses down into eight basic categories. Traders can incorporate these categories into their trading journals and simply observe the steps they have taken each day and week to deal with market challenges. Over time, it will be possible to identify coping patterns that tend to occur during successful trading and those that are associated with unsuccessful trading. The first step toward changing any pattern is becoming aware of that pattern as it is happening. Becoming an observer to your own coping is a first step toward changing the coping.

2) Step Two: Think in Terms of Coping Sequences, Not Individual Behaviors - How we assemble our coping responses into coordinated strategies is more important than the individual coping mechanisms we employ. As a rule, coping strategies that are more complex tend to be more effective than simple strategies that rely upon one or two behaviors. In my work with traders, I will often diagram these sequences as flow charts, showing how coping efforts connect with appraisals, decisions, and emotional consequences. These diagrams help traders become more aware of their own patterned responses to threats. For example, I know that, in my own coping, my first response is usually one of self-control (take deep breaths, tell myself to not overreact), followed by planful problem solving, and positive reappraisal. This coordinated sequence represents how I respond to most challenges, not just ones in the market.

3) Step Three: Become Aware of Deviations From Your Usual Effective Coping - As I stressed in the Psychology of Trading book, alterations in our coping are usually preceded by shifts in our physical, emotional, and cognitive state. These shifts lead us to begin our coping sequences in very different--and usually less effective--ways. For example, when I am coping poorly, I generally follow a sequence of: confrontation/venting, taking responsibility, and avoidance. That is, I will vent my frustrations, blame myself for a bad trade, and then avoid the markets. The change in my coping begins with a shift in my emotional state that leads me to vent rather than engage in self-control. Knowing this shift helps me interrupt the poor coping sequence as soon as I catch myself venting, and I have the opportunity to consciously attempt self-control.

4) Step Four: Mentally Rehearse Effective Coping - Once you're aware of the coping strategies that work for you, you can mentally rehearse (use guided imagery paired with relaxation) challenging market scenarios and walk yourself through the proper sequence of coping behaviors. By vividly imagining how you would like to cope with market adversity, you engage in what psychologist Don Meichenbaum called "stress inoculation": you prepare mind and body for dealing with those challenges in real time. This takes repetition and a willingness to sit with the exercises for more than just a few minutes at a time. The payoff is that, after repeated rehearsal, the good coping sequences become increasingly automatic.

It is not realistic to think that stress can be eliminated from trading. Any field of endeavor that involves decision making under conditions of risk and uncertainty necessarily entails stress. An important key to successful performance is to ensure that the risk and uncertainty never become so overwhelming that they shift you out of the mature coping strategies that you've developed over the years. By becoming aware of what works for you under conditions of threat and systematically rehearsing that, you take an important step toward becoming your own trading coach.

RELEVANT POSTS:

Becoming Your Own Trading Coach

The Most Important Step in Self-Coaching

Letting Profits Run
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Getting Punched in the Mouth as a Trader

A savvy reader recently passed along a quote from Mike Tyson, the boxer:

"Everyone has a plan 'til they get punched in the mouth."

That's one of the central challenges of trading. We set out with plans, then we get punched in the mouth with adverse movement.

Once we're jostled out of our game plan, we lose our edge. We're like the shaken boxer who no longer adheres to a fight plan. Without strategy, we cannot maximize our strengths and compensate for our vulnerabilities.

The flip side of Tyson's observation is that, until you're punched in the mouth, you don't really know if you have a solid plan. Making money is a lot easier when market conditions are favorable. It's when we have to deal with adversity that we discover how resilient we are and how effective our strategies can be.

One way to think of risk management is as a framework that allows you to be aggressive enough to occasionally get hit in the mouth, but not so wild that you'll get knocked out. Learning how to take a punch is key to boxing success, and it's also an important trading skill. That's how you train to dig down deep and find the competitive drive that will move you forward and help you weather adversity.

More:

Keys to Emotional Resilience in Trading

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Winning Through Defeat: The Secret to Resilience

Thanks to a savvy trader for pointing out this Lewis Howes podcast with Eric Greitens on the topic of resiliency and falling in love with pain.  A former Navy SEAL, Greitens learned about resilience first-hand during his training.  In his book, he points out, "If we are trapped in a life where everything is provided for us, our minds fail to grow, our relationships atrophy, and our spirits deteriorate."  We grow through challenges, including those that are hardships.  Greitens points out that we never bounce back from adversity; rather, we find healthy ways to integrate those experiences into our lives.  When we do what we are afraid to do, we don't return to the person we were.  We find ourselves just a bit more fearless.

When Angela Duckworth researched the phenomenon of grit, she found that it wasn't the highly successful children who were most able to sustain effort in the service of long-term goals.  Those who knew little other than success and were frequently praised by parents had very little experience with adversity.  That made it difficult to persevere.  When children experienced setbacks and challenges, they were more likely to develop the internal resources needed to sustain efforts.  Grit is resilience sustained over time.  As Duckworth explains, "grit...entails having and working assiduously toward a single challenging superordinate goal through thick and thin, on a timescale of years or even decades." 

Trading financial markets is unique in that it regularly forces us to experience loss and setback.  The uncertainty built into markets ensures that we will go through drawdowns.  The ever-changing nature of markets ensures that what worked today may not work tomorrow.  There can be no successful trading without resilience, and there can be no successful trading career without grit.

When we approach life as a gymnasium, even the most routine activities can be approached as workouts that challenge and develop us.  Every item in our daily planner--even those connected to recreation--can be pursued in a conscious, effortful way or in a routine manner of going through the motions.  It makes sense for us to undertake routine activities as routines, as this saves energy for more demanding situations.  But if all of life becomes a series of routine activities, we become less capable of responding to demands.  No one builds strength and endurance in life's gym by tackling the equivalent of ten-pound weights.

What's the key to becoming a resilient, gritty person?  I strongly suspect it's the ability to tap into hidden reserves of energy--that mental, emotional, physical, and spiritual second wind--that become available to us under conditions of high challenge.  Emilia Lahti refers to this by the Finnish term sisu:  "the second wind of mental toughness."  The paradox here is that challenges drain us of energy.  Extraordinary challenges--especially those that inspire us--help us tap into new and greater sources of energy.  When we tackle normal efforts, our willpower powers down.  When we reach for greater things, we find our willpower renewed.

In the long run, we don't sustain perspiration without sustaining inspiration.  Goals challenge us, but eventually wear us down unless they uplift us and pull from us the kinds of efforts that yield that second wind of sisu.  If you're cold and exhausted after long days of workouts and little sleep and that's all that's on your mind, you're going to drop on request and ring that bell to get yourself out of the SEAL program and into a hot shower.  The only thing that can move you past that place of pain is a commitment to your team, a commitment to your future, and a commitment to serving a larger cause.

Resilience begins with purpose.  We tackle life as a gym when workouts become the path to a greater future.

Further Reading:  From Setbacks to Success
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The Secret to Overcoming Adversity

 

Margie and I recently toured Eastern Europe and finished the trip with a tour of the concentration camp at Terezin.  During the 3-1/2 years of the camp's existence, thousands of inmates were killed or died of untreated diseases.  What I found most memorable were the displays of artworks created by the inmates during their internment.  Music, painting, drama, sculpture:  all were of vital importance to the inmates.  Despite inhuman conditions of crowding and frequent abuse and torture, prisoners focused on creating works of beauty.  That many of these works are with us today attests to the success of their quest.     

For me, it was a powerful reminder that, no matter how bad our situations become, we always can rise above them through creative expression and achievement.  When we create--a painting, a book, a scientific theory, even a trading system--we rise above what is and realize a vision of what can be.  Indeed, the more we face loss and setback, the more important it becomes to create and immerse ourselves in meaning and beauty.

The secret to overcoming adversity is to transform your life into a work of art:  to become so focused on creating what is beautiful and meaningful that everything else becomes secondary.  Our relationships can become masterpieces; our careers can become paths for pursuing a vision of what is possible.  All of us become artists when we approach life creatively and find the beauty in each facet of life.      

As I was leaving the courtyard of Terezin where prisoners were herded into barracks, I noticed a smooth, round, quartz-like stone on the ground.  I took the stone home with me, and it now sits on my desk where I do my writing.  It's an immediate reminder of the horrors that I saw--and also the soaring human spirit that transcended the evil.  

Every life setback--including setbacks in markets--is an opportunity to rise above loss and create the future.  We tap into our Divinity when we become Creators.

Further Reading:

The Role of Creative Insight in Trading Success

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Blueprint for an Uncompromised Life - Part Three: Resilience

One of the most notable findings in the research on extraordinary creative achievement is that even the greatest performers in their fields produce the same ratio of undistinguished works to notable ones through their careers. Great scientists conduct many unsuccessful experiments; outstanding artists produce many paintings and works of music that never win recognition. Many of the greatest home run hitters have are also leaders in strike outs; the most successful companies, like the best actors and directors, also produce many flops in the marketplace.

What makes the expert performer distinctive, researcher Dean Keith Simonton has found, is that he or she is so productive that it becomes more likely that enough successful experiences will accumulate to leave behind a legacy of achievement. We can think of this in evolutionary terms: the great individual produces many more mutations than the average person. Most of these mutations die off, but those who have produced the most variations will, in the end, have the best chance of being represented among the survivors.

This has huge relevance to trading, as it is not necessarily the case that the most successful traders are the ones with the highest ratio of wins to losses. Very successful traders have typically undergone very significant losses. Because, however, they stay in the game longer--through sufficient capital and superior risk management--they are more likely to eventually enjoy and compound the large winning trades than the average trader.

What this means is that a prerequisite of a high level of success is a high level of resilience with respect to loss and defeat. If the greatest individuals are the ones who are most productive, they will also be the ones with the most failed efforts. Research on psychological resilience suggests that people can survive and even thrive in conditions that others find traumatic. Their coping methods enable them to find meaning and purpose even in the greatest adversity, and they are most likely to maintain social and emotional ties during the hardest times.

In my own studies of traders, I have found a correlation between the success of the trader and the degree to which the trader utilizes problem-focused coping and a coping mechanism called "positive reappraisal". The successful individuals deal with problems as they occur, rather than become wrapped up in blaming of self or others. After they have dealt with the problems, they look back on their experience and try to take away something positive from the experience. For them, adversity becomes a tool of learning--not a defeat.

There are traders who are defeated by losses and there are traders who cope with losses. The highly successful individual, however, is the one who turns losses into gains by generating learning experiences and continuous self-improvement.

Avoiding Burnout: Every Goal Needs A Vision

 

One mistake traders make is reviewing their trading and stating an intention to do things better next time, but then never actually turning that review into specific goals and plans that would guide the improvement process.  This is very common when traders begin keeping a journal.  

A second mistake traders make is setting very specific goals--and often multiple goals--but never connecting those goals to a broader vision that provides energy and inspiration.  Without the vision, work on goals easily becomes drudgery:  an endless task list.  Perhaps that is why I'm hearing from so many burned out traders during this COVID period.  Goals can push and guide our efforts, but it's the pull that comes from vision that truly moves us forward.

In the previous blog post, we looked at handling adversity as a key element in trading success.  It is when we are supremely challenged that we dig deep and access fresh sources of energy.  Many times, this rising to a challenge occurs in a team context, where members of the team draw from each other in a positive role modeling.  When we have an individual or shared vision, we can tap into the meaning and significance of that ideal to forge ahead with our goals even in the face of setback.  

The vision may need to be something larger--more meaningful to you--than P/L alone.  It may be a vision of the kind of person you wish to become; the kind of business you ultimately want to build; the ways in which you want to make use of the returns from your trading.  Perhaps trading is a means to a vision that you pursue in the non-market hours of your life.

In any of these cases, what moves us forward is a purpose that is larger than us.  Yes, it helps to work on our execution, our idea generation, our risk management, etc.  But we will pour ourselves into those efforts if they speak to what is important to us in life.  To use an analogy, no amount of working on problems will restore love and commitment to a troubled relationship.  A fulfilling relationship is so much more than something we work on.  We have a relationship with markets as well.  Working on trading is necessary, but it can't be all that we do.  We also need to nurture the positives to keep the vision alive.

Trading Psychology Resources

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Cross-Talk: Building Confidence as a Trader

John Forman has an excellent post on his site that outlines practical steps for building trading confidence. He clearly links the psychology of trading--the confidence needed to take risk and weather adversity--to the learning process, emphasizing how the emotional appraisal of one's performance is linked to the development of mastery. Too often, confidence is treated as if it is a simple matter of visualizing positive outcomes and sending oneself ego-enhancing messages. When trading is systematically learned, confidence is earned. No psycho-babble can substitute for the lived reality of making mistakes, correcting them, discovering strengths, and building them.

All that having been said, the average developing trader suffers more from an absence of humility than a lack of confidence. Truly confident rock climbers, for example, trust in their skills, but also respect the mountain and the elements, never taking safety for granted. Similarly, a crack fighter pilot needs confidence to take to the skies, but also needs to never underestimate the enemy. Confidence becomes overconfidence when it is not tempered with humility. There is always uncertainty in markets; confidence allows the trader to put on a position in the face of uncertainty, and humility enables the trader to size the position to weather unexpected adverse outcomes.

Beginning traders are taught to establish, for each position, a profit target and a stop loss exit. The profit target is the expression of confidence; it is the anticipated reward for being correct in one's judgment. The stop loss expresses humility; it is the pre-preparation for being wrong. Humility without confidence breeds anxiety: we cut winning trades before they hit targets, exit trades before they hit stops, and undersize trades. Confidence without humility is what the Greeks called hubris: the pride before many a fall. It is expressed in the refusal to anticipate and take losses, as well as the oversizing of positions.

Much of the psychological challenge of trading is finding the proper integration of confidence and humility. When dollar signs dance across the screen and enter your head, it is easy to veer from overconfidence to underconfidence. To anticipate gain with boldness and purpose, but be prepared for loss with prudence and learning: that is a skill as useful in life as in markets.

RELATED POSTS:

Overconfidence and Underconfidence in Trading

The One Question to Ask When You're in a Trading Slump

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The Psychology of Investing: How Investors Differ From Traders

Investment is different from short-term trading, psychologically as well as strategically. The shorter the time frame, the less time traders typically have to plan and research their trades. The intuitive, implicit recognition of patterns is a core skill for the high frequency trader. Many of the traders I have worked with in proprietary firms don't trade with a directional bias. They observe the flow of orders in the depth-of-market (DOM) display, the distribution of large transactions (buying vs. selling), and the waxing and waning of volume to frame trading ideas on the fly. As I've noted before, this rapid pattern recognition requires intensive exposure to multiple market scenarios, so that the high frequency trader literally develops a feel for market action.

The investor, on the other hand, seeks capital appreciation over a lengthy time period. There is plenty of time to research various markets and strategies, and this research is often key to the investor's success. Any investor will only see a limited number of bull and bear markets during their lifetime--not nearly enough to develop that intuitive, implicit grasp of patterns. As a result, the long-term investor must find an edge in his or her ability to identify strategies with an edge and then sustain the patience to stick with those strategies. Where the scalper is relying on implicit feel, the investor must follow conscious reason.

To understand the psychology of investing, it's helpful to look toward other areas of life in which we invest ourselves, such as relationships and careers. Can you imagine what would happen if we were to take a "trading" perspective on relationships or careers? We would set a close "stop loss" and exit the relationship or career whenever that was hit. No doubt, we'd wind up with an impoverished love and work life as a result. To sustain a romantic relationship or a successful career, we have to be able to ride the ups and the downs and remain rooted in our commitment despite difficult times.

This is equally true for the financial investor. Consider the long-term investor in stocks who was frightened out of the market during the scary drop late in February and early in March. Had the investor behaved like a trader, cut losses, and abandoned his or her strategy at that time, a great deal of opportunity would have been lost.

The experience of the Turtles suggests that it is not so easy to follow longer-term market strategies. The Turtles, recall, were given a purely mechanical system to trade, with rules governing when to enter and exit positions, how to size those positions, and how many different positions to take. Even with strategy mapped out for them neatly, the Turtles varied greatly in their returns, as recently noted in Curtis Faith's book. They could not ride out the inevitable drawdowns of the trading method.

To stick with a career, you have to believe in the value of your work; to stay with a marriage, you must remain grounded in the love that brought you to that other person. In no small measure, the successful professional or spouse relies on emotional bonds to ride out short-term adversity. The investor, unlike the trader, must bond with his or her strategies--must really believe in them and their intrinsic value. Look at the trend followers featured on Michael Covel's site: they are passionate about their method. Consider Warren Buffett or Jimmy Rogers: they truly value their (quite different) value approach to investments.

I've often heard advice from short-term traders: "Don't get married to a position." Investors, however, do enter into a kind of marriage: a marriage with their basic approach to markets. Frequency of exposure drives the rapid pattern recognition of the scalper, but it is depth of conviction that enables investors to stay their course. The key, in investing as in marriage and careers, is finding the right partner for that bonding and commitment--not just something you think can work, but something that captures your deepest beliefs; that you're willing to subordinate yourself to.

RELATED POSTS:

Guiding Principles of Trading Psychology

The Objective Basis for Subjective Knowledge

Reflections on Life and Markets

What We Can Learn From An Amazing Cat

Flower (aka Flora) is an amazing cat.  What makes her amazing is that she's not only a survivor, but a cat that has managed to thrive in adversity.  She has never really known a home, as her family kept her outdoors almost all the time.  When the family moved, they just left Flower behind.  She spent 2-1/2 months on the streets until we learned that Animal Control was going to pick her up.  They said they would give her a week to be adopted before they'd have to put her down, since all shelters were filled.  Margie and I drove to southern New Jersey, picked up Flower (called her Flora after the fragrance Flora Danica, because she was so sweet) and brought her home.

Now we're looking for a permanent home for the little girl, as the cat we adopted as an abused and traumatized kitten has literal panic attacks seeing a new cat.  There's a lot we can learn from Flower, and my hope is that her inspiration will inspire a family to take her in.

So how did Flower survive months of abandonment?  The first secret to her success was that she was super outgoing and went to people whenever she had a chance.  No one in the area could adopt her, but they did feed her and make a garage available for shelter.  When someone was walking their dog, Flower would come join them.  When someone left their home to go to work, Flower would trot over to say hi.  She had no reason to trust people, given her abandonment, but she never lost the desire to connect.  

This is an important learning lesson.  So often, we respond to setbacks by setting back.  We retreat and withdraw.  We berate ourselves and lapse into a funk.  Yet it's precisely when we're at lowest ebb that reaching out to others can provide the greatest support and inspiration.  When my trading hit a rocky patch earlier this year, I made a point of initiating conversations with some of the most creative traders I know.  Instead of hiding my "failures", I spoke openly of them and brainstormed ways of addressing them.  One conversation led to a revolutionary insight that reorganized my decision-making process.  Since that time, my hit rate has increased meaningfully and I've recently hit my high water mark for the year.

Instead of hiding her vulnerabilities, Flower put them on display for all to see.  That made her stronger.

Flower's second strength is that she is unusually expressive.  She is so appreciative of any attention that she purrs and purrs and flops over whenever someone pets her.  She loves to have her belly rubbed--almost like a dog in her trusting of others.  Many nights I've stayed in the upstairs bedroom to keep Flower company and she'll curl beside me, purr, knead, and drift off to sleep.  In her expressiveness, she is a walking model of gratitude.

How many of us, if we were abandoned and rejected, would approach the world loudly expressing appreciation and gratitude?  Flower is a happy cat, not because of her situation, but in spite of it.  This past week, when I had a setback in my work, I thought of Flower purring and immediately felt better.  If she can express positivity in her situation, I surely can connect to all that is right in my life.

Reaching out to others in the worst of times.  Digging deep, connecting with all that is right in our world, and expressing gratitude and positive attitude.  Those two strengths are a great formulation for resilience.  When all is going wrong, that's when it's most important to find what's right and use that to build a network.

So now it's the shrink's turn to ask for help.  If you know someone in the northeast U.S. who would love an amazing cat, please drop me a line via Twitter (@steenbab) or email (brett dot steenbarger at gmail dot com).  Flower has all her vet papers, is completely healthy and spayed, and is fully litter trained.  She's three years old and would love a family as amazing as she is.  Thanks--

Brett 

How You Know You're On the Right Track in Your Trading

This is the first picture we have of Naomi, our second youngest rescue cat.  She had been traumatized at an early age and it took a great deal of work to bring her out of her shell.  A future post will tell all about Naomi and what she taught me about bouncing back from adversity.

After I wrote the post on doing well and doing good, I realized that I had come up with a pretty good litmus test for whether performance activities are worthwhile or not.  The worthwhile ones make you better across many areas of life:  they teach you life lessons and give you positive energy.  Raising Naomi gave me sensitivity and patience.  She pushed me to be a better human being, because that was the only way to pull her from hiding.

The wrong performance activities--and especially the right ones pursued the wrong way--consume your energy.  They bury the best within you.  Trading can be an energizing, meaningful performance crucible, but pursued addictively it becomes a destroyer of capital and families. 

When Naomi looks at me now with love in her eyes, I feel a pride in being a part of bringing her out of her trauma.  You want your trading to make you feel the same way:  proud of the person it pushed you to become.

Further Reading:  Turning Frustration Into Pride

The Strengths of the Emotionally Intelligent Trader

A recent review highlighted different models and definitions of emotional intelligence. Among the features associated with emotional intelligence are:

* Ability to accurately read emotion in others and respond in empathic and appropriate ways;

* Ability to effectively assimilate emotion in thought and action for coping and problem solving;

* Ability to regulate emotion, channeling it into motivation, persistence, and effective relationships.

The traits assessed by questionnaires measuring emotional intelligence are wide ranging:

* Adaptability - Flexibility and willingness to adapt to new conditions;
* Emotional Regulation - Ability to control emotions and their expression;
* Low Impulsiveness - Ability to refrain from giving into urges;
* Self Motivation - Tendency to persist in the face of adversity;
* Social Awareness - Ability to effectively network with others;
* Stress Management - Ability to withstand pressure and perform effectively;
* Empathy - Ability to take the perspective of others;
* Optimism - Tendency to look on the bright side of life;
* Happiness - Tendency toward cheerfulness and satisfaction.

These qualities pretty much read as a collection of strengths that are present among most successful traders. To be sure, there are many cognitive strengths that are necessary to trading success, including pattern recognition, memory, and speed of processing. These will not yield consistent profitability, however, if not supplemented with emotional strengths.

In a social interaction, the emotionally intelligent person picks up on subtle cues--tone of voice, body language, changes of topic--to track others and respond effectively. If we think of traders as being in relationships with markets--and if we think of market movements as reflections of buying and selling sentiment--then it's easy to see that the emotionally intelligent trader is one who is highly attuned to the emotional meanings of market communications.

When people become caught up in their own emotions, they become emotionally unintelligent. They respond to others out of their own neediness, anger, or insecurities and fail to track what is really being communicated. Similarly, traders immersed in their own needs for profits or excitement no longer focus on market communications. They make emotionally unintelligent decisions, which are generally unprofitable ones.

The start of emotionally intelligent trading is recognizing that you are in an emotional relationship with markets. If you treat the market as a valued partner, rather than as an adversary to be conquered, you'll be surprised at the subtle communications you'll be able to hear.

RELATED POSTS:

Emotional Intelligence and Trading - Part One (see links within this post also)

Trading With Emotional Intelligence - Part Two

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The Secret to Making Our Own Luck

This is an important post about luck and also an update of Flower's story.  If you recall from the previous post, Flower was a young Maine Coon cat abandoned by her family and living on the streets of a neighborhood for 2-1/2 months.  We went all out to find Flower a home.  I posted to this blog; we put a listing on Craigslist; I networked with friends and colleagues; I asked them to network with their contacts.

Nothing.

No one wanted this amazing cat, the most resilient animal I had ever encountered.  After considerable neglect and never really having a home, she retained a wonderfully trusting, loving personality.  How could no one want her??

With reluctance, Margie and I obtained some gates for doorways and decided to try, somehow, to integrate Flower with our very frightened cat who had freaked out on first seeing Flower.  We figured putting the cats on the opposite side of gates could allow them to see each other and interact with one another safely.

The gates never went up, however.  That day, a call came from a military family that had just been stationed at Fort Dix.  They were *very* excited about the listing for Flower.  They had had a Maine Coon cat for years who had bonded nicely with their youngest son.  The cat died and the boy missed her.  What better Christmas present than a new friend for the family?

The picture above is of Flower in her new home.  She has many people loving her and doting on her.  She has her forever home.  She even has a new name:  Princess Jersey Fluffbottom!

An observer might conclude that Flower is a lucky cat.  What are the odds that she could find a family specifically wanting a long-haired cat who is no longer a kitten?  As the recent article observes, however, luck is no accident.  There are specific things we can do to make ourselves more lucky.  If we place ourselves in front of opportunity in smart ways and do it over and over again, we become more likely to get that phone call and make that one special connection.  

The very important takeaway from the article is that luck occurs when we respond to adversity with creative effort.  That's how we get past drawdowns; that's how we stumble upon market observations that others fail to see; and that's how we find our forever future.  Having been turned down so often, the lucky one is the one who knocks on one more door.

Of course our Fort Dix family is lucky as well.  They had looked for a new cat for a while before finding their perfect match.  Happy endings are possible when we refuse to accept life's inevitable unhappy times.

Further Reading:  Making Our Own Luck
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Valuable Trading Psychology Lessons From My Cats

Well, at present we have four rescue cats and that makes for a full house.  Every morning they wake me up (around 4 AM), and I start every morning by petting them, feeding them, and cleaning up their litter.  I'm a firm believer that we set the tone for our day by what we do at the start of the day.  I don't start by looking at market quotes, news, emails, or chats.  I start by loving and serving those I love.

Actions, repeated, transform us: We become what we do.

Here are three trading lessons I've learned from our cats over the years:

*  We can overcome even the greatest adversity by making use of the strengths we have and finding something in our environment that engages us:  The story of Mali

*  If we want to change a negative pattern in our thinking, feeling, or acting, we need to tap into a motivation greater than the one that underlies our problems:  The story of Naomi

*  We don't create our opportunities.  We put everything of ourselves out there, and opportunity finds us:  The story of Mia

Once we can put our egos aside, we can learn from everything in life--even humble cats.

Brett
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Trading Scared is Trading Scarred

A trader dropped me an email today to explain that he was "trading scared": missing out on opportunities because he was overly risk averse. As luck (or Freudian psychology) would have it, he spelled "scared" as "scarred". That little slip revealed considerable psychological insight.

Most traders who trade scared are also trading scarred. Normal losing trades and periods of drawdown are processed normally, as expectable--if somewhat disappointing--events. When losses are substantial, however, they can be processed as traumatic events. Instead of being processed through normal, explicit, verbal channels, they activate the flight/fight emergency mechanisms of mind and body, leaving their emotional imprint. Later, events similar to the traumatic losses--even normal ones--can trigger the emotional and physical reactions of emergency, including paralyzing anxiety.

Interestingly, our trader had an excellent March after losses in December - February. During those losses, he explains, "I basically got pretty close to running out of money in my bank account." He feels that he should increase his size after the good month, but instead he's trading even more scared than he did before the winning month. As he recognizes, the making of money in March has restimulated his experience of losing money in December through February following a profitable fall season. Because the earlier losses nearly bankrupted him, they weren't experienced as normal losses. They scarred him in a traumatic way, and now he's trading scared.

When traders need profits to make the next paycheck that will put bread on the table, that is too much performance pressure. I've commented in the past that the smartest thing I ever did when learning trading was to begin with a trading stake that I could afford to lose in its entirety without affecting my family's lifestyle. Having the cushion of a second income and/or a secure savings account as backup means that normal slumps don't have to turn into career-threatening events. I've worked with traders who felt that, if they didn't make money in the current month, they would not be able to cover their mortgage payments. Normal losing trades became extreme threats, and the traders traded scared as a result.

It's when the desire to profit becomes an acute need for profits that performance anxiety is likely to overcome efforts at prudent risk-taking. Any business, when it gets off the ground, has to be adequately capitalized, so that it can weather initial adversity. The lack of adequate capitalization leads many traders to take large risks (to make enough money to support themselves), but also to trade with large fear (due to the absence of any cushion in the event of loss). Our trader should not be thinking of ramping up size after only a month in the black. Rather, he should work on achieving consistency with the kind of trading that worked in March.

That will build his cash cushion, his confidence, and ultimately his ability to take risk in a secure manner. The links below outline methods that are quite useful in addressing psych issues related to trauma.

RELEVANT POSTS:

Drama Creates Trauma

Favorite Techniques for Overcoming Performance Anxiety

Expose Yourself

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Trading Notes: Week of September 28th

Friday, October 2nd

*  I'll be presenting at two trading conferences in October; both have unusually strong programs and are worth taking a look at.  

*  The weak payrolls number has led to a premarket selloff after we dipped and bounced back yesterday.  As noted yesterday, all of this is consistent with a market that is in a bottoming process.  My intermediate-term measures are significantly oversold; my models are neutral.  I am watching carefully to see if we can stay above yesterday's lows.  If so, we could see an excellent intermediate-term buying opportunity follow from that.
  

Thursday, October 1st

*  How we develop ourselves through adversity; do losses defeat us, or help us grow?  Very important topic.

*  Yesterday's entry mentioned good odds for a bounce and we sustained early strength into the day session and then overnight.  Two perspectives strike me as important here:  1) During the corrections of 2010 and 2011--ones that were not outright extended bear markets--bottoming took place over multiple months.  Further tests of the downside are not out of the question; 2) The intermediate-term oversold measures referenced yesterday are nowhere near being worked off.  I expect those to be worked off in time and price, with limited upside if we are indeed to see more bottoming and more upside momentum if we've truly completed a test of August lows.


Wednesday, September 30th

*  Overnight action in the stock index futures has given us the bounce referenced in yesterday's post after a day of again testing lows and holding in the 1860 area.  We continue to be short-term oversold and my swing models are moderately bullish.  

*  We continue at oversold levels on an intermediate term basis that have led to positive swing returns, as the chart below indicates.  This measure takes the number of SPX stocks registering fresh 5, 20, and 100-day highs minus lows and calculates a five-day moving average.  (Raw data from Index Indicators).  When this strength measure has been in its bottom quartile (lows outnumbering highs), the next three days in SPX have averaged a gain of +.57% going back to 2010.  All other occasions since 2010 have averaged a loss of -.02%.

Tuesday, September 29th

*  Yesterday's market was a textbook trend day to the downside.  It's very worthwhile studying the characteristics of trend days, so that they can be identified as early in the session as possible.  I find the distribution of NYSE TICK readings to be especially helpful in that regard.  

*  I had mentioned last week that my intermediate-term indicators were relatively overbought.  With yesterday's broad decline, we find ourselves at much more oversold levels, nearing the August lows.  Interestingly, we had 1212 stocks across all exchanges make fresh three-month lows yesterday.  On August 24th, that number was 2906.  Per earlier market notes, I am open to the idea that we are testing those August lows and that we will ultimately succeed in that test. Note, however, than past higher volatility corrections in May, 2010 and August, 2011 took multiple months to find an ultimate bottom.

*  We're seeing elevated index and individual stock put/call ratios, also supporting the idea of a bounce here.  Fewer than 10% of SPX stocks are trading above their three and ten-day moving averages, a level that in the past has tended to yield bounces over a next five-day basis.  My models are moderately bullish over the next three to five day horizon.

*  Thanks to readers for the many positive comments about the recent trading conference and the lessons learned.

Building Our Emotional Fitness

In the most recent Forbes posting, I outline two strategies that traders can employ to be more resilient in the face of market setbacks.

Why is this important?

Positive psychology researcher Martin Seligman describes resilience as a kind of emotional fitness.  Like physical fitness, we can train to be more emotionally fit by learning to respond constructively to adversity.  An important part of that training is the cultivation of optimism: the ability to see setbacks, not as final, but as stepping stones toward success.  We can think of a trading journal as structured training in processing adverse performance outcomes.  The journal can be used either to help us use losses as learning experiences or as personal threats.  As Seligman points out, the alternative to resilience and bouncing back is learned helplessness.  A big part of getting through our learning curves is using failure as a source of empowerment and inspiration, not as a personal defeat.

How do we become physically fit?  By engaging in regular exercise that challenges a variety of functions, from our strength and balance to our aerobic conditioning.  We become more fit by pushing past our boundaries and lifting more weight, running faster and more distance.

Similarly, we become emotionally fit when we challenge our various trading functions, from our ability to stay level headed after periods of winning to our capacity for using losses as sources of learning.  When we bump up our risk-taking as a trader, we give ourselves a workout in emotional fitness, pushing ourselves to tolerate greater profit and loss volatility.  One exercise I've used with the traders at SMB is to compute the average number of trades per day for the past few weeks and then, going forward, only allow themselves to take half that number.  That, too, is a workout in emotional fitness, requiring us to truly hone in on our conviction and focus on the best trading opportunities.

A great way to review your trading journals is to ask, at the end of each entry, how you used that day or week to build your emotional fitness.  What did you do to make yourself a more confident trader, a more resilient trader, a more disciplined trader?  Every day of trading can be a workout; how are you making yourself more fit?

Further Reading:

Trading and the Psychology of Resilience

TraderFeed Home Page and Index

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What Is YOUR Self-Talk?

The latest Forbes article makes the case that self-talk is destiny.  How we process the world--and how we talk to ourselves about ourselves and world--shapes our reality.  That, in turn, defines what we experience as possible and impossible and shapes our actions.  Nowhere is this more true than in trading, where we are constantly dealing with issues of being right and wrong, uncertainty, and making/losing money.

If you click on the above graphic, you'll see a matrix that describes four styles of self-talk.  These styles can be positive or negative in their emotional tone and they can either increase or reduce the energy available to us.  Let's take a look at the four styles and what they might mean for you:

Challenging - This is self-talk that pushes us to do better, do more, and tackle new and larger goals.  

Worrying - This is self-talk that anticipates negative outcomes in the future, triggering fight or flight responses.

Calming - This is self-talk that reassures and puts things into perspective, dampening negative feelings and keeping us focused.

Self-Blaming - This is negative self-talk directed against oneself, dampening initiative and generating depressed feelings.

Clearly, at different times we may engage in different self-talk.  Much of trading psychology talks about dealing with negative emotions (worry, frustration, self-blame) and ways of sticking to trading plans (calming, focusing).  That is an important shift.

The Forbes article adopts a different perspective, however.  Just as we are in danger of living lives that are too sedentary (creating health risks), we can adopt mindsets that are too sedentary.  Many of us can deal with adversity by calming ourselves and avoiding undue worry and self-blame, but not many of us consistently talk to ourselves in challenging and energizing ways.

Take a look at the work of Emilia Lahti and David Goggins cited in the Forbes article.  These are peak performing professionals who have used unusual physical challenges to push their mindsets to redefine what is possible.  A useful exercise is to listen to a David Goggins video clip and think of his talk as your self-talk.  This kind of challenging talk is often found in athletic settings and in the military, but rarely do we see it in office settings--and rarely do I find it on trading floors.

It's great to reassure ourselves, accept losses, and find learning lessons in our setbacks.  That is necessary for a solid trading psychology, but is it sufficient?  If our self-talk is not intensely challenging, how will we intensively tackle new challenges?  A calm mindset is helpful at times, but sedentary calm will never rouse us to do better, do more, and throw ourselves into challenges that expand who we are and what we can do. 

How inspiring and challenging is your self-talk?

Further Reading:

The Psychological Dangers of a Sedentary Life

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