The Greatest Challenges of Trading Psychology - I: Trauma

 

There is a common assumption among traders that if they are falling short of their performance expectations, it must be because of their mindset.  If only they can maintain a positive mind frame, the thinking goes, they will be able to succeed.  There is an element of truth of this, and there is an important sense in which it is seriously misguided.

Research suggests that, when we are in our best frames of mind--and especially when we are operating with optimal well-being--we will be more productive and also more creative.  We will engage in our best trading when we are trading consciously, with what I have called a high mental Sharpe ratio.  The right kind of trading interests us, gives us energy, and doesn't deplete us.  The positive mind frame is both a contributor to good trading, and it is also the result of good trading.  Importantly, the proven change methods of psychology can help us find, not only positive emotional experience, but a deep spiritual fulfillment.  That can help make trading personally as well as financially rewarding.  In that sense, trading is not simply about making money.  It is one among many paths toward becoming the greatest person we can be.

It's a logical fallacy, however, to assume that because positive mindset is necessary for optimal trading, then trading success will necessarily follow from improving our mindset.  Negativity can interfere with the performance of an elite athlete, but reaching that elite status requires far more than a positive mind frame.  Mastery is a complex combination of inborn talents, available opportunities, and skills acquired through deliberate practice.  No amount of positivity can substitute for the experience required to gain mastery in any performance domain.  Trading the right way is just as likely to generate positive emotional experience as positivity will help our trading.  

Notice that, in any performance field, the process of gaining mastery is separate from the process of professional performance.  That is, a basketball team will practice offense and defense during the week before playing a weekend game; a singer will practice with a coach before performing in a concert; military troops will practice maneuvers before entering the battlefield.  One of the greatest challenges of trading psychology is that market participants spend relatively little time in pure practice mode and instead hope to gain their experience by putting their capital at risk.  They even justify this by claiming that practice modes cannot duplicate the pressure and stresses of live trading.  Can you imagine battlefield commanders or professional golfers foregoing practice because the stresses are not the same as in actual performance?  It is precisely by cultivating skills through deliberate practice under increasingly realistic conditions that we develop our mastery.

What happens psychologically is that traders who put their capital at risk too quickly encounter losses and P/L volatility that they are not prepared for.  These are experienced as dangers and threats to one's trading successes.  When we take risk too quickly and when we take too much risk in search of high returns on capital, we create emotional upheaval.  This turmoil does not just go away because we tell ourselves to be disciplined and to have a positive mindset.  It is the nature of trauma to stay with us and to be triggered by future experiences similar to those past losses.  I've described this as the dark side of trading:  with unrealistic expectations of profit and premature risk-taking, traders expose themselves to significant emotional turmoil that ultimately unhinges their future performance.

Because market conditions change frequently, even experienced traders need to revisit their learning curves and gain fresh mastery.  If they continue to trade aggressively and with large size based upon past success, they will be vulnerable to significant drawdowns when market themes, trends, and volatility change.  The most successful traders maintain their high mental Sharpe ratios by quickly detecting market changes, avoiding losses, and returning to a mode of observation and practice to gain mastery in the new regime.  If our overriding need is to get bigger and bigger and make more and more money, it's only a matter of time before we traumatize ourselves.  

The best way to learn is to fail fast.  The best way to fail fast is to fail small.

Further Reading:

Trading Addiction and Trading Trauma

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Managing Your Energy for Peak Productivity

Shout out to Terry and WindoTrader for the post on effectively managing your TEAM (Time, Energy, And Money).  The post points to a problem I've noticed in many contexts:  traders who are so busy following and trading markets that they fail to manage the personal resources essential to their longer-term success.

This is particularly problematic in the case of not effectively managing one's energy level.   There are several forms of positive experience that enhance productivity and creativity:  happiness, life satisfaction, energy, and affection.  When we deplete our energy, it is more difficult to sustain the activities that generate the other forms of positivity.  For that reason, a low energy level most often manifests itself in low positive experience, creating a downward spiral--decreasing energy, decreasing positivity--that impacts mood and behavior, and ultimately productivity and sound decision-making.  

How often do traders fail to follow their plans and act on their ideas simply because they are at low levels of willpower due to depleted energy?

Of course we can lose energy due to lack of sleep, overwork, lack of exercise, and poor eating.  A more subtle but significant loss of energy occurs when we fail to tap into our core strengths and values during our daily activities.  Activities that we experience as *meaningful* give us energy; activities that strike us as meaningless sap our strength.  Digging a ditch for no purpose whatsoever would be physically and emotionally draining.  If, however, we knew that digging the ditch in a certain amount of time would lead to a very large payday, we would find the motivation to get the work done on time.

Similarly, when we play to our strengths, we experience activities as affirming.  The exercise of signature skills is intrinsically rewarding:  we find enhancement in doing what we do best.  When we get away from our strengths, effort becomes just that:  labor with little psychological reward.  I will get up at 4 in the morning to analyze a data set that helps me better understand the market; the intellectual curiosity is energizing.  If I had to get up at that time to do household chores, I would find it difficult indeed to stay awake.

An important implication of this perspective is that your energy level in researching and trading markets is a reflection of the degree to which you are meaningfully engaged and challenged.  If you try to process information in a way that is not your strength--forcing yourself to read, for example, when you process material much better by hearing and discussing it--the effort will be taxing rather than energizing.  That, in turn, can lead to those willpower-based lapses in concentration and other seeming problems of "discipline".  The issue is not discipline, per se; it's one of leveraging core skills, interests, and values.

A while ago, I wrote about the core components of a trading process.  At a skill level, a trading process aligns us with best practices:  what we do well in markets.  At a purely psychological level, a trading process aligns us with our strengths and values.  In that respect, process becomes our energy regulator:  it allows us to renew our energy reserves by channeling our efforts toward ends that are meaningful and intrinsically rewarding.  A good process does more than manage energy:  it digs new wells and increases our reserves.

Further Reading:  The Laws of Psychological Energy
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Energy, Well-Being, and Success: Four Steps to Energize Our Trading

An important concept is that our success depends just as much on managing our energy as managing our time and our tasks.  Indeed, if we prioritize our energy levels, we're likely to be happier and more productive: energy is a key link between well-being and productivity.

A while back, I suggested that the greatest performance mistake we can make is to prioritize our work, rather than prioritize the states in which we are most productive.  A great example of that is the person who doesn't feel they have the time to get into shape--and then loses far more time in a state of low energy.

Suppose we wanted to develop a program for boosting and sustaining our physical, emotional, and cognitive energy.  What positive habit patterns would we want to develop?  Here are four possibilities:

1)  Boost energy with exercise - Regular, challenging aerobic and strength training not only makes your body more efficient; it also helps you feel better and is associated with better overall health.

2)  Reduce energy drains with better sleep and nutrition - Both the quantity and quality of sleep profoundly impact mood levels, physical energy, and our ability to concentrate.  Weight gain decreases our energy level; managing our energy through sugar and caffeine puts us in an inefficient spiral of ups and downs.  

3)  Boost energy with positivity - We are most likely to be energized when we are engaged in meaningful personal, social, and work activity:  activities that affirm our deepest values, interests, and talents.  One of the best energy boosters is spend time with people we find inspiring and interesting.

4)  Reduce distractions and improve focus - Too often we waste our precious cognitive resources on processing information that we don't need and won't use.  Prioritizing our activities and using methods such as biofeedback and meditation to train ourselves to enter the zone can greatly improve the efficiency of our work and help us process information more effectively.

For traders, there is a synergistic benefit in developing these into habit patterns.  With more energy, greater positivity, and improved focus, we become better information processors.  We input information more effectively, gain improved access to the information, and combine the information better into new, creative outputs.  Equally important, when we're energized and free of distraction, we improve our implicit learning: our ability to apprehend patterns in noisy market information.  Our gut feel for markets crucially depends upon a clear mind, positive mood, and rested, energized body.

Further Reading:  Maximizing Personal Energy
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When Doing More Means Achieving Less

The research of Ed Diener is spot on:  happiness and fulfillment are not simply states of being, but ongoing life processes.

What I refer to as "personal process" is the life equivalent of a trading process.  A sound trading process consists of activities and procedures that align us with opportunity and optimal performance.  A sound personal process aligns us with our values and strengths, so that we're not only doing things right, but doing the right things.

My template for personal process involves making sure, each day, I am dedicating quality time to:

1)  Engaging in fun activity, and sharing joy and happiness with others;

2)  Engaging in meaningful activity, doing things that have a valuable purpose;

3)  Engaging in stimulating activity, doing things that energize body and mind;

4)  Engaging in connectedness activity, doing things that build significant relationships.

All too often, the reaction to such a template is:  I don't have time for that!  We make busy-ness our business and, day by day, we lose the sense of fun, meaningful purpose, stimulation, and connectedness.  

Many years ago, I was coordinating a student counseling program and had a number of students seeking help.  I did not want students to have to deal with a waiting list, so I moved from 45 minute meeting times to 25 minute sessions.  My counseling office became an assembly line of meetings.  In the 25 minutes, however, we could not go into depth and detail into each student's challenges.  Nor did I have time between meetings to take proper notes and process all that we had discussed.  For the first time that I could recall, I found myself hoping that someone would fail to show for their meeting, just so that I would have time to catch my breath, take my notes, research counseling approaches that could help each student, etc.

In short, the faster pace took away fun, made the work less meaningful, left no time for stimulation, and interfered with the true relationship-building of my work.  In trying to do more, I achieved less. 

Fast forward to today and traders talk with me about their trading.  They raise problems and concerns and usually their answer to the challenges is to do more:  write more in a journal; meet more with other traders; spend more time in preparation; follow more markets and generate more ideas; etc. etc.  They speed up their efforts, they get further from what they love in trading, and eventually the assembly line breaks down.

Imagine decorating your living room.  You acquire attractive furniture and wall hangings and the room looks good.  Then you decide it can look even better and you buy more furniture, display pieces, and pictures for the walls.  At some point, the items clash with one another:  one style of furniture doesn't go with another, one type of decoration does not fit with the style of others.  With each addition to the room, tasteful decoration gives way to chaos and clutter.

So with our trading, so with our lives:  More can bring less.

Sometimes the answer, for traders as for me when I was doing the student counseling, is to do less and focus more on the parts of the work that bring true joy, fulfillment, stimulation, and connectedness.  Those facets of work yield positivity precisely because they draw upon our strengths.  When we focus on what speaks to us, we turn happiness from a transient state into an ongoing process.  That energizes our trading--and our lives.

Further Reading:

  A Powerful Technique For Changing Your Trading Psychology

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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 

What Predicts Success Among Developing Traders?

 

I've spent many years working with developing traders and have learned a good amount about what makes some successful and others not.  Below is a summary of what I've learned:

1)  Motivation and passion for trading and succeeding are not predictive of success - Not all who profess motivation are hard workers and not all hard workers work the right ways.  Starting out with a drive to make money is, if anything, associated with greater odds of failure and emotional upheaval.  There *is* an association between dedicated effort and success (see #2 below), but it's the ability to channel motivation into constructive effort that is key to success.  The louder the trader professes passion and motivation, the more I dig to look for substance.  I generally come away with very little.

2)  The learning that goes on before a trader puts money at risk and the effort that goes into learning when markets are not open are predictive of success - The consistency and intensity of the learning process distinguish those who succeed.  The amount of detail in their journals/reviews and the ways in which the reviews build upon one another over time are big predictors of success.  Unsuccessful traders take away isolated, fragmented bits of learning from each day and week.  Successful traders have a curriculum in mind:  they learn in a cumulative, coordinated fashion.  True deliberate practice is a significant predictor of success.

3)  Innovation is predictive of success - I consistently see successful traders develop multiple ways to profit in markets.  They don't look at the same things as everyone else, and they don't think about markets the same way.  I recently spoke with a trader who utilizes options structures to trade patterns associated with macroeconomic data releases.  Sometimes his trades capture patterns of volatility, sometimes directional patterns, sometimes patterns of relative value.  He is playing on a multidimensional chess board, and that provides him with multiple ways of winning.

As Mike Bellafiore and I emphasized in our recent podcast with Tradeciety, success in markets comes in stages:  first with learning concepts; then by observing patterns in markets; then by practicing trading and developing consistency in performance; then by sizing up risk and cultivating new sources of edge.  A very common source of failure among traders is the temptation to short-circuit this process.  

Now here's a key takeaway:  It's the quality of the learning process that shapes the positivity of a trader's mindset.  A positive psychology does not create success.  A positive psychology is the result of focused learning and the exercise of creative problem solving.  No amount of self-help exercises will substitute for skill development and the capacity to uncover fresh sources of opportunity.  There is a surprising overlap between the qualities of successful traders and the qualities of successful entrepreneurs.  Innovation + focus + detailed effort turns dreams into realities.

The Three Minute Trading Coach Video Series

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How to Get the Most From Your Trading Practice

An excellent post from NewTraderU and written by Colibri Trader explains how 10,000 hours of practice typically goes into the creation of expertise.  As the post makes clear, there is a world of difference between repeated experience and practice.  Practice, in the sense of deliberate practice, means that we actively reflect on our experience, examine where we've fallen short, and then institute efforts at improvement.  The trader who trades for a month and merely jots notes in a journal is repeating one day of trading 22 times over.  The trader who makes daily efforts at improvement, using trading results as feedback to guide future efforts, compounds learning 22 times over.

This is how expertise is created.  We learn with each practice session, feed that information to the next practice session, and continually make incremental improvements.  If we simply target our one biggest mistake each day and figure out why it occurred and how we can prevent the occurrence going forward, we turn trading into a series of performance drills.  Practice can make perfect when we perfect the process of practicing.

One of the reasons the report card has become a major tool in trader development is that it anchors the process of deliberate practice.  When we grade ourselves on aspects of trading that matter, we create a framework for reflecting on performance and systematically pursuing improvement.  When we share the report card within a community of traders, the practice of others provides lessons for us.

In the spirit of my recent New Year's goal of using the blog to highlight the good work being done in the trading community, allow me to add one thought to the post from Steve and Colibri.

The worst, as well as the best, trading is the result of practice.

When we trade poorly and then go over and over and over our mistakes, blame ourselves for them, become frustrated with them, talk incessantly about them, and vent about them in our journals, we are engaging in a kind of reverse deliberate practice.  Just as reviewing our trading constructively can aid our development, reviewing our trading destructively actively builds and reinforces our worst habits.  

This reverse practice effect explains many downward trading spirals.  We ultimately live out the image of ourselves that is reinforced in our thoughts, feelings, and actions.  Everything we do--from how we talk to ourselves to what we read to who we associate with--is a mirror, reflecting an image of ourselves.  Successful people create positive, constructive mirrors and thereby internalize that positivity and constructive attitude.  Unsuccessful people often practice just as hard as the successful ones, but with all the wrong mirrors.  

Take a look at your trading practice.  Reflect on how you end up feeling after a day or week of trading.  You're most likely practicing something.  Are you practicing the right things, and is your practice the kind of practice that will make perfect?

Further Reading:  Fighting for Tomorrow, Living in it Today

TraderFeed Home Page/Trading Psychology Links

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A Good Way to Beat a Bad Attitude

Everyone knows what it's like to be in an attitude funk.  Perhaps it's been a long, slow drawdown; problems in your personal life; an overload of work; a lingering illness; or some combination thereof.  Nothing seems to be going right and nothing is making you particularly happy.  Thoughts and feelings shade to the negative, you're feeling grumpy, and you don't exactly feel like being around other people--especially if they're killing it in markets!

Research tells us that we perform best when we're drawing on strengths and are most vulnerable to burnout when the intensity of our work efforts crowd out the sources of our rejuvenation.  When our willpower is sapped and things aren't going well, it is difficult to access the positivity needed to emerge from an attitude funk.  An absence of positives, not just a surplus of negatives, can weigh on our mood and energy level.

One key to emerging from a bad attitude is making the transition from noun-thinking to verb-thinking.  In the noun-thinking mode, a negative attitude is something we have; we own it.  In verb mode, a negative attitude is something we're doing--we can control it.  More specifically, any attitude reflects our conversations with ourselves:  it is the direct result of our self-talk.  If we tell ourselves we're not doing well and nothing works, we will feel defeated and frustrated.  If we talk to ourselves in ways we'd never want to hear from others, we'll experience attitudes that we'd never want to be around.  

Once we switch lenses to the verb mode, we can see that our attitude is nothing more than the tone of our internal conversation.  Perfectionistic self-talk that emphasizes where we fell short leaves us feeling like we're falling short.  Worry talk about the future leaves us less than energized about pursuing the future.  Our attitude is our relationship to ourselves, made visible.  If we have a caring, supportive relationship to ourselves, we're more likely to face life with gratitude than attitude.

So, in the spirit of verb-thinking, here's a specific activity that can turn negative attitudes around:

Every time you catch yourself criticizing yourself or thinking negatively about your trading performance, write in a thought diary one or two constructive steps that you will take that day and week to make an improvement.  A great way to generate those constructive steps is to reflect on past positive experience and performance and identify what you did well at those times.  Those steps become your near-term goals and your subsequent focus.  It is important that what you write becomes what you do:  goals must turn into action plans. 

In other words, a good thought diary turns negative thinking into constructive thinking:  every self-criticism is answered with a positive change focus.  Negative thinking says, "I'm not doing good enough."  Constructive thinking says, "I'm making myself better."  

That's how we make positive experience a verb rather than a noun:  we can't always defeat a negative attitude with a positive one--sometimes things just aren't positive.  But we can always overcome a focus on what's bad with a focus on what we can improve.  Having a good attitude doesn't hinge on doing well; it is the result of appreciating the ways in which we're getting ever better.

Further Reading:  The Power of Opposites
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How Gratitude Transforms Trading

 

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

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

Negativity blinds us to trading opportunity.

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

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

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Challenging Yourself and Changing Yourself

The recent post described how we can fire on all cylinders in trading--and in our lives.  A savvy trader I spoke with yesterday framed the issue quite well when he pointed out that it was easy to get so caught in the daily minutiae of markets that we never step back and address the big issues of performance and long-term success.

This brings us back to the issue of the dangers of having impotent goals.  A potent goal is a visionary one; it raises us to a new level, challenges us, and excites us.  Visionary goals are inherently idealistic:  not in the sense of pie-in-the-sky, but in the sense of speaking to our ideals.  Impotent goals, on the other hand, are utterly realistic.  They most often are coping goals--goals designed to get us over life's next hurdles.

There is nothing wrong with coping, and I resonate quite well with the bumper sticker that reads, "Forget world peace; visualize using your turn signal."  Dreams don't become realities without a healthy dose of realism and blocking-and-tackling execution.

But what happens when life becomes a daily sequence of blocking and tackling?  The part of us that needs to quarterback our lives needs a vision of the entire playing field.  That's why football quarterbacks drop back before they launch the ball forward.  It's the vision of the open player down field that sets up the big play.

If we don't have goals that challenge us, what will change us?  It's through challenge that we test our limits and exercise our strengths.  If we went to the gym and spent an hour lifting 20 pound weights, we would never build ourselves up.  Yet that is how we spend our time when we're immersed in the minutiae of markets, blocking and tackling, living life with head down.

One of the greatest poisons we can swallow is the wisdom that being idealistic is not realistic.  Those potent goals don't just change us; they energize us.  They are an important source of the well-being referenced in the previous post.  What is the vision for your marriage or your social life?  What is the vision for your physical development?  For the next phase of your trading evolution?  What ideal is so compelling that you won't want to spend more than one minute necessary in bed, because you're so eager to turn those dreams into realities?

In the past, I've shared my definition of old age:  It's that point at which you determine that your best years are behind you.  Nothing keeps us young and alive like the vision of what can be and the sense that we are moving toward that worthy vision.  It starts with how we live today:  we cannot achieve greatness unless we do at least some thing greatly right here in the present.  That's not a bad exercise for building positivity and keeping ourselves young:  each day identify one valuable thing you will perform greatly that day and then set time in your calendar to challenge--and change-- yourself.  

Many individual days lived greatly can add up to a great life.

Further Reading:  Why Living in the Future is the Best Way of Achieving It Now
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Why Teamwork is a Powerful Trading Tool

In a recent post, I suggested that the quality of our downtime can serve as an engine for our work efforts.  The research of Barbara Fredrickson and colleagues suggests that the way this happens is that positive emotions generated from high quality life activity both broaden our potential range of thought and action and build new emotional and behavioral strengths.  One of my favorite studies from this literature created a positive or negative mood in subjects and then showed them quick visual displays of information.  The subjects with the positive mood processed the visual information at the edges of their visual fields significantly better than the subjects with the negative mood.  When in a positive state, we literally broaden our perspectives and take in fresh information.  When we are stressed and distressed, we tend to become tunnel-visioned and miss information that is right in front of us.  How relevant is that to markets?

What I've increasingly seen is traders working in pods or teams, where there are multiple eyes and ears on markets, widening the perceptual field.  An important function of this teamwork is to maintain positivity, even during periods of challenging performance.  Because the right team members challenge one another and bring camaraderie to the workplace, the social aspect of trading can become an important component of trading success.  Show me a high performance team and I'll show you one where belonging to the team adds fun, support, and stimulation to trading.  It's precisely in such an environment that team members are likely to broaden their market views and build fresh ideas and trading approaches.  

Further Reading:  A Quick Evaluation of the Emotional State of Your Trading

Shifting From Negative Emotions to Positive Performance

A portfolio manager I recently met with was stressed out, frazzled from long--and frustrating--hours of following overseas markets.  He wasn't concerned, however.  He simply explained to me that he was going to engage in a vigorous workout in the gym--a rapid sequence of stretching, running, and lifting exercises.  By the time he was finished, he explained, he was so pumped up that the endorphins overcame any sense of stress or distress.

The light bulb went on in my head.  His key to overcoming pressure and fatigue wasn't to chill out.  Instead, he found a way of accessing a positive, pumped-up state that was more powerful than his state of stress.  What enabled him to move from negative emotions to positive performance was emotional transformation:  a gear-shift of experience that overwhelms negativity with positivity.

The problem most of us make is that we address negative states by attempting to reduce our negative thoughts, feelings, and actions.  That keeps us in our same form; it doesn't transform.  When we are sad, trying to reduce our sadness will not bring happiness.  When we are stressed and drained, trying to slow down will not re-energize.  Counting to ten when we're angry can be helpful, but it won't bring gratitude.

The key to self-mastery is to improve access to our most positive emotional states.  What gets a trader out of a frustrated funk after taking losses?  Doubling down on generating the next set of ideas and letting the excitement of discovery wash over the sense of frustration.  Once we learn from negative experience, we want to put that learning into practice--but that requires a shift to a new and constructive mindframe.  As the recent article suggests, we cannot access that mindframe from within our existing form; we need to transform.

Here are five gateways to transformation that I have found useful:

*  Meditation, imagery, using music to achieve a different sense of mind and body;
*  Vigorous physical activity, exercise
*  Social activity, having fun, connecting with others in a meaningful way
*  Generating fresh experiences, going to new places, pursuing new ideas
*  Reaching out to others, engaging in activities that are larger than oneself

The common ingredient is the creation of new experience that accesses new states of mind, body, and emotion.  Turning negative emotion into positive performance means that we become very good at operating the gear-shift of consciousness, where we determine the states we're in and don't simply allow them to determine our course.

Further Reading:  Building Emotional and Physical Health
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Best Practices in Trading: Peak Performance Conditioning

Our next best practice in trading comes from Enis Taner (@EnisTaner) and captures the idea of keeping yourself in peak condition in all areas of life.  Enis explains, "I've found that it is crucial that I am physically, emotionally, mentally, and spiritually healthy if I am to take on the challenges of trading professionally."  Here's how Enis breaks it down:

*  Physical:  30-45 minutes of high intensity exercise, 5-6 times per week.

*  Emotional:  Making it a habit to meet friends and/or family for social gatherings on a regular basis (not less than 3 times per week).  "Good conversation is one of the best methods I've found to reduce mental stress," he observes.

*  Mental:  I try to practice trading techniques on multiple time frames.  Some weeks I will spend my learning time on reading financial statements and conference call transcripts with a focus toward long-term investments.  Other weeks, I will test out correlations of short-term technical indicators.  

*  Spiritual:  I spend five minutes each morning on new things for which to be grateful.  I've also found that helping others, especially young people, with positive thinking and life mentorship overall to be fruitful for my own spiritual well-being.

The key idea here is that it's not enough to reduce stress in order to be a peak performer in markets.  Just as an athlete must be in superb aerobic and strength condition with continuous skill practice and work on mental sharpness, the successful trader draws upon reserves from all areas of life.  It's not difficult to see how Enis' routines could be captured in a checklist, keeping him aligned with personal best practices.  Creating our own peak performance processes ensures that we sustain the energy and positivity to weather the normal ups and downs of trading.

Further Reading:  Success and Making Your Bed
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Positivity and Creating the Right Life Mirrors

In my recent post on quality of life and the pursuit of trading excellence, I suggested that the quality of our downtime--our time away from markets--is a key component of trading performance.  The example I used was creativity:  a process which blends the immersion in analysis with the mind-broadening of synthesis.  It turns out, by the way, that positive emotional experience enhances creativity--and creativity leads to further positive experience.  The quality of our time away from work is an important contributor to the quality of our work.

Responding to that recent post, Bella from SMB posted an important query of traders:  What would you like to spend more time doing?  He offers his own list, including meaningful social experiences, reading stimulating books and articles, and fitness activities.  The common thread is that each of these is an activity that gives energy.  Sometimes that is raw physical energy, as in getting pumped up during a workout.  Other times it is emotional energy, as in connecting with loved ones.  Low quality activities either take energy or fail to renew our vitality.  We may feel like couch potatoes after a hard day at work and plop down in front of the TV, but rarely is that going to tap us into fresh energy stores.

One of my most important blog posts made the point that we are what we eat--and we are always "eating" life experience.  Our daily experiences are what we consume moment to moment.  Sometimes we have a nutritious meal of experience, inspiring us, challenging us, extending what we thought possible.  Other times, our experience is a kind of junk food.  Jotting down your activities each hour of each day and rating them for their quality is a great way to ascertain the value of your time at work and away from work.  The right activities will generate positive experience--indeed, they are positive ways of experiencing yourself differently.  The wrong activities--being with the wrong people, engaging in meaningless routines--are poor fuel for the soul and ultimately fail to catalyze our best life efforts.

A personal tradition is to start each morning with meaningful experiences as a way of setting the tone for the entire day.  Today I woke up around 3:30 AM--not an atypical start.  How did I start the day?  Not with looking at or trading markets, not with checking my mail, not with glancing at overnight news.  Eventually I get to all of those things.  But I started today by saying good morning to my four cats, who wake up with me.  They hang out together in our great room (see above) and each morning I pet them, greet them, feed them, fetch them fresh water, and clean their litter.  It is my way of welcoming the day by making an emotional connection and by tapping into a bit of servant leadership.  It is difficult to feel too important or too full of yourself when you are serving animals and cleaning their litter boxes.  But it's precisely connectedness and leading-by-serving that make me who I am as a psychologist and trading coach.  That gets me up and going early in the morning, fueling the day ahead; not any alarm clock.

Everything in life is a mirror:  a way of experiencing ourselves.  Some experiences reflect the best within us; others fail to connect.  Our work time is a key component of life success.  What fuels work time, however, are the mirroring experiences that remind us of who we are and what we're capable of becoming.

Further Reading:  How to Change Yourself

What We Do Shapes How We Feel

 

The Rabbi makes a profound point:  Our joy supports our thinking.  When we are downhearted, can we really focus on opportunity?  When we are joyful, will we really become wrapped up in short-term P/L and missed trades?  We tend to think that trading well will make us happy.  But what if happiness helps us trade well?

A fascinating study finds that even just simulating the act of smiling leads us to feel happier.  What our muscles do, our minds process.  "When your muscles say you're happy, you're more likely to see the world around you in a positive way," the study author reports.  There are houses of worship where prayer is interwoven with dancing, singing, and clapping of hands.  We see the same thing during weddings.  Could it be that the physical acts of celebration help us internalize a celebratory frame of mind?

We know from psychological research that positive emotional experience helps us process information more broadly and more effectively.  Research also finds that positive experience also helps us be more productive and is associated with enhanced physical health.  What if active expressions of joy, fulfillment, love, and energy actually contribute to our positivity?

This has important implications for trading psychology.  What we express with our bodies may shape the quality of our mindsets and experience.  Think of what you're expressing during your trading, during your meetings with peers, and during your reviews.  Perhaps you're not expressing very much at all in your body language, your tone of voice, etc.  How might such a lack of expression impact your experience?  Perhaps it's not a coincidence that the interns I see learning so well at SMB are so physically expressive in their enthusiasm.

What our bodies do may shape what we experience--and that can either strengthen our common sense or disrupt it.  Cognitive psychology emphasizes that our viewing impacts our doing:  how we process events shapes how we experience and respond to them.  But perhaps it's equally true that our doing shapes our viewing:  what our bodies do shapes our feelings and thoughts.  Could a restricted range of physical activity and expression create limitations in our states of awareness?  

Think about team meetings in most workplaces.  Think about the environment on most trading floors.  Think about how much energy, joy, and satisfaction you give visible expression to during your trading.  Too often, our image of behavior that is "professional" does not permit such expressions.  Could it be, that in our pursuit of the professional, we never find the common sense that is strengthened by joy?

Further Reading:  Radical Renewal

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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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Best Practices in Trading: Self-Control Routines During Trading Hours

During market hours, it can become easy to so focus on trading that we neglect the person who is doing the trading!  Once we lose self-awareness, we can make decisions that we would never make if we were calm and focused.  Self-control is easy when we are not facing stressful situations and dealing with fight-or-flight responses.  During periods of emotional, cognitive, and physiological arousal, however, our state shifts can take us very far from our initial planning.  That is why self-control strategies that can be employed during trading hours are a best practice.

Today's self-control methods are illustrated by reader Gus Joury, a short-term trader of crude oil futures.  Here are some of the daily practices that aid his trading:

"1.  I start my day with 15-20 minutes of meditation/mindfulness.  I practice breathing meditation and or TM to clear my mind and keep me focused and aware of my emotions before I start trading.  During this time, I use the inner balance app with a heart rate variability monitor to measure my performance for that session and I record my score.

2.  I go over my checklist to make sure I had a good night's sleep, protein breakfast, and workout.  I also rate my physical condition, distraction level, and overall emotional and mental state for trading.  

3.  Before I start trading, I look at market conditions and rhythms at different time frames to try to evaluate whether the market is tradable, whether it is trending or choppy, etc.  This helps me decide which tools and setups to use and whether it is worth trading or not.

4.  I start my first trade with small size (1-2 contracts) to test the waters and see if I am in tune with the market and to get a feel for the overall market environment.

5.  Once I start with a winning trade, I start increasing my size in the following trade by adding to the winners.  I like to start small and if the market goes in my direction, I add to my position using buy/sell stops and then scale out at the first target and second target and then trail my last position with one tick below/above the previous bar low/high to maximize my profits in the trade after having pocketed earlier profits.  This strategy makes me less anxious to take profits and helps me hold my position longer with a trailing stop.  It gives me good risk management and allows my winners to be much larger than losers.

6.  During my trade, if I experience any anxiety or discomfort, I take deep breaths in and out in order to maintain my focus and stick to my plan.  

7.  After closing my trade, if I feel any anxiety, regret, or discomfort, I take a breathing session break for 5-15 minutes until I clear my mind and refocus.  I also do some EFT tapping (emotional freedom techniques) with breathing to release negative energy.  I sometimes take a break by walking out of the trading office.

8.  Once I hit my daily stop loss, I stop trading.  I also stop trading if I lose 50-75% of intraday profits." 

Notice how Gus combines methods for physical and emotional control, such as the breathing, with methods of money management.  He attempts to stay in winning trades, exit losing trades with smallest size, and regulate the losses he can incur on any given trading day.  All of these are methods of self-control, and all of them help him stay focused on markets rather than focused on P/L.  

Money management is an essential part of self management in trading.  As I've mentioned in my books, I never want to lose so much money in a day that I cannot have a profitable week; I never want to lose so much in a week that I cannot come back for the month; and I never want a losing month to ensure a losing year.  A major aid to optimism and positivity is ensuring that you always have enough dry powder to mount a comeback after a loss.

Further Reading:  Self Control and Working Memory
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Sustaining the Right Interpersonal Environment

I just drew this chart on the fly.  Imagine we're describing different kinds of people.  The Y-axis captures whether the person predominantly talks about the world around them, ideas, and inspirations vs. talks about themselves.  That Y-axis also captures a positivity dimension:  many people who talk about ideas are supercharged by those ideas.  Many who are self-focused come from a position of need, even/especially when they are in self-promotion mode.

The X-axis captures whether the person mostly wants things from you and is in a taking mode vs. a sharing/giving mode where there is back and forth and true reciprocity.

I've color-coded the quadrants.  I find that the upper right, green quadrant is one that renews my energy.  The lower left takes quite a bit of energy.  A big part of success and happiness is surrounding yourself with the people and things that give you energy and minimizing the things that deplete energy.  This is especially true in one's romantic life.

One reason I like the idea of creating your own trading groups is that you have the opportunity to generate an oxygenated work environment.  It's amazing how much growth and learning can occur when you're around growing, learning people.  It's much easier operating with the right internal, psychological environment if you're in the right interpersonal environment.

Further Reading:  The Essence of Greatness