Thursday, August 25, 2016

To Increase Your Discipline, Focus on Your Fulfillment

In a post a while back, I wrote about two proven methods for increasing your happiness.  A very important idea from that post is "You're most likely to work on your trading if your trading brings you positive experience."  It's when we feel happy and fulfilled that we're most likely to tap into productive and creative energies.

It is understandable that competitive traders look to their winnings to bring them their positive experience.  This is also where such traders most often lose their positive mindsets.  When inevitable drawdowns in the P/L occur, they create drawdowns in energy and attitude.  That's when traders often look for their happiness in the same place that they lost it.  They hope to regain happiness by regaining profitability.  Such an approach does not gain happiness; it loses control over one's happiness.

That is why one of the most important performance principles is to approach performance in such a way that the process of doing is what brings fulfillment, not just the outcome.  If trading is truly expressing and developing cognitive and personality strengths, it will be *intrinsically* rewarding, not just extrinsically so.  Your great challenge as a trader is to develop a process that is so internally rewarding that it will not break down when external rewards aren't forthcoming.

A skilled, successful trader wrote to me about knowing all the right things to do, but not cultivating the kind of routines that would routinely ground him in those right things.  Traders in such a situation assume that "discipline" is their problem, and they push themselves harder to make themselves do the right things--only to have such a push take them further from the joy in what they do.

If you want to follow a disciplined process, you have to find a way to make the process rewarding and enjoyable.  The best way of doing that is to yoke what we *need* to do with what we're *good* at doing.  We most often lose discipline because we're more concerned about being disciplined than being fulfilled.  The first step to turning that situation around is to stop looking for our happiness in the very place we lost it.

Further Reading:  Two Proven Methods for Building Your Happiness

Wednesday, August 24, 2016

Gaining Perspective on Markets by Shifting Perspective

Almost by definition, if you're pursuing your own, unique path--in life and in markets--you are going to face uncertainty.  If we live life solely by following tradition and consensus, we'll find the security of the known, but will never have the adventure of finding our own path by tackling the unknown.

As the recent post outlined, successful trading is all about standing apart from consensus and finding unique perspectives and edges in financial markets.  But if you pursue uniqueness, you'll pursue uncertainty--and that requires a tolerance of what is uncomfortable and unfamiliar.

Two ways of gaining perspective on markets are microanalysis and macroanalysis.  In microanalysis, we break a market down into smaller pieces and look for clues to future activity based upon the patterning of those pieces.  So, for instance, I might look at the alignment of sector behavior within the SPX to gain clues as to what is strong, what is weak, and what the patterns of strength and weakness might mean for the economy and stocks overall.  A different form of microanalysis would be to break the price action of a stock or index into intraday pieces, as in the case of tracking volume flows or upticks/downticks over short intervals.  Many times, beneath the surface, we can see evidence of accumulation or distribution that gives us a clue as to forward market behavior.

Macroanalysis, on the other hand, places market activity in a broader context and looks for patterns among larger variables.  We could aggregate global economic data, for example, and infer patterns of growing global growth and weakness that could impact the behavior of stocks.  Similarly, we could look across the policies of world central banks and assess whether monetary conditions are skewed toward liquidity or tightness.  In macroanalysis, we might view SPX as a sector itself within the broader universe of global equities.  For example, since 2015, the correlation between daily moves in shares in Europe, the Far East, Australia, and Asia (EFA) has been about +.84 with the daily moves in the U.S. (SPY).  The correlation between daily moves in emerging markets (EEM) and the U.S. (SPY) has been about +.80.  Quite simply, markets are global and what happens in one part of the world is tremendously relevant for other parts.

If you find markets are unclear and/or you find yourself trapped on a consensus path, very often the answer is to take a fresh look through a microscope or a telescope.  Looking beneath the surface of market activity by zooming in on short-term patterns can bring clarity.  Stepping back from day to day activity and focusing on the big picture can also bring fresh understanding.  To gain perspective, we have to shift perspective.  Microanalysis and macroanalysis are two ways of accomplishing that.  It is difficult to stay stuck in a perceptual rut if we have many microscopes and telescopes available to us.

Further Reading:  Market Profile as a Fresh Perspective on Trading

Tuesday, August 23, 2016

Five Distinguishing Characteristics of Winning Traders

At every trading firm where I've worked in recent years, I've observed winning traders and ones that struggle to win.  What makes the difference?  What are stand-out qualities of stand-out traders?  Five characteristics are especially notable:

*  Successful traders trade uniquely - They look at markets differently from consensus.  They process different information and they process the same information differently.  They have found a way of making sense of markets that makes deep sense to them and that grounds their decision making.

*  Successful traders are multidimensional - They have ways of making money in different markets and in different market conditions.  They are flexible; they find ways to win in difficult market conditions.

*  Successful traders work at their trading - They work on themselves and they work at markets.  When markets are closed, they're still engaged in their work.  Their focus is on self-improvement.  They don't just set goals; they live them.

*  Successful traders know when to not trade - They wait for opportunities, they pull back their risk taking when they're not perceiving opportunity.  It's not that successful traders are always successful.  It's that their success springs from knowing how to not lose when they're not seeing the ball well.

*  Successful traders are self-aware - They know their limitations, and they know what they do well.  They are quick to recognize when they're not "in the zone" and they also recognize when they are seeing unusually good opportunities.  They are not afraid to say, "I don't know".

A very significant proportion of successful traders have been mentored by successful traders.  Success breeds success.

A very significant proportion work in teams, relying on others who they can mentor and make successfulSuccess becomes a team sport, with everyone making each other better.

There is nothing static about the successful traders I've known.  They are continually learning and adapting, and they are continually searching for fresh opportunity.  Performance is not simply something they are good at; it's a way of life.

Further Reading:  Two Great Predictors of Trading Success

Monday, August 22, 2016

Why Do We Sabotage Our Trading Talents?

The first post in this series examined how successful performance is a joint function of talent and skill.  The second post focused on how traders can identify their core talents.  This third and final post will address the problems that undermine our trading success and what we can do about them.

The central psychological challenge for trading is that frustration and doubts over losses and missed opportunities can lead to self-doubt, and self-doubt can lead us to tinker with trading to the point of veering from our greatest talents. 

A classic example is the intuitive trader who has a keen sense for pattern recognition.  After a period of frustration and loss, he begins to overthink his entries and exits, losing a feel for markets.  This compounds the losses and turns the normal setback into an outright slump.

Yet another example is the trader whose key strength is risk management and prudence of decision-making.  She decides she should be taking more risk and sizes up positions, creating greater volatility of P/L, and destabilizing her emotionally.

In each of these cases, it looks as though the trader is self-sabotaging.  What is actually occurring is that, under conditions of stress and emotional arousal, the trader has a more difficult time accessing and acting on his or her strengths.

How can we know when we're getting away from doing what we do best?

Two tell-tale signs let us know when we're no longer aligned with our talents:

1)  Trading becomes not fun - When we veer from personality strengths, we no longer experience gratification and fulfillment in our work.  That's when we find ourselves stressed and procrastinating.  Recall the key idea from the previous post:  the exercise of talent brings our well-being.  When trading becomes work and drudgery, we know we need to pull back and get back to what we do best.  

2)  Trading becomes confusing - When we lose touch with our cognitive strengths, we no longer experience a sense of understanding and mastery.  We trade best when markets make sense to us, when the factors we look at align in ways we've experienced before.  When we are confused, it could be the case that markets themselves are confusing:  those factors aren't lining up.  Often, however, our confusion reflects a shift in our processing of information.  We're in the dark because we've gotten away from how we best make sense of things.  That's when we know we need to step back and return to our best modes of information processing.

Viewed in this way, our experience becomes a barometer of whether we're aligned with our talents or not.  The single most important thing we can do when in drawdown is reacquaint ourselves with what we were doing when we consistently made money.  Find when you've been most successful and have traded best and you're most likely to find--and return to--your signature talents.

Further Reading:  The Surprising Reason for Trading Failures

Sunday, August 21, 2016

How to Find Your Trading Talent

The recent post looked at trading success as a function of native talent and acquired experience and skill.  Because the exercise of talent is intrinsically fulfilling, we gravitate to activities that express our talents.  This exercise is what propels us through hours, days, weeks, months, and years of deliberate practice and skill acquisition.  Whenever we see unusual passionate motivation, we are likely to see the consistent expression of talent.  

Consider four dimensions of emotional well-being:

*  Happiness - Finding joy in life's activities
*  Satisfaction - Doing things that are meaningful and gratifying
*  Energy - Doing things that stimulate us mentally, physically, and emotionally
*  Affection - Building fulfilling relationships with others

When our life's activities provide us with these four elements of well-being, we are most likely to be productive and creative.  We're also most likely to be doing what we're good at.  Talent is one of the great sources of emotional well-being.

So if you're a developing trader, how do you know where your talents lie and what you're truly good at?

The simple answer is to examine what makes you happy, what provides you with meaning, what energizes you, and what brings you fulfillment with others.  Your talents are hiding in plain sight, bringing you your most positive life experiences.

Look to your passions and you will find your talents.

When I worked in Chicago, a number of successful daytraders were video game junkies.  They would spend hours in front of screens, trading actively, and then go home and go in front of screens and play actively!  Their talent was for hand-eye coordination and quick decision making, particularly in a competitive context.  Suppose I tried to turn them into long-term investors, researching the fundamental strengths of assets and creating balanced portfolios.  The activity would no longer express their strengths.  They would lose their intrinsic motivation.  They would likely become mediocre performers at best.

Conversely, a talented long/short equity manager I work with is a phenomenal detective, identifying value in places where others fail to look.  His great talents are intellectual curiosity and attention to detail.  If I were to try to turn him into a daytrader, he would find the activity utterly meaningless.  He could never sustain a learning curve.  It's no surprise that, before he started trading, he ran a successful eBay business as a young kid.  He was finding value and buying and selling it before he knew what the stock market was.

So often, talents can be found in the activities we choose to perform when we're not required to engage in activity.  No one has to tell me to rescue cats or write blog posts.  I don't have to get up at 4 AM daily to greet and feed my cats, follow overseas markets, and write my 4500th post to TraderFeed.  As Ed Seykota pointed out, it's not even that I have those talents.  Those talents have me.  

You will find your success, in life and perhaps in trading, by leveraging the talents that have you.  In leveraging our talents, we have the best chance of living a life filled with happiness, satisfaction, energy, and affection.

Further Reading:  Finding Opportunity Amidst Adversity

Saturday, August 20, 2016

Awakening Your Trading Talent

Talent is what we're born with; skill is what we acquire with practice and experience.  Exemplary performance, such as that at the Olympics, lies at the intersection of talent and skill.  Without the hard work of skill development, talent becomes unfulfilled potential.  Many hours of hard work without distinctive talent, on the other hand, can produce competence, but rarely more.

We have one great advantage in our quest for exemplary performance:  talent loves to be exercised.  When something comes naturally to us, when we gravitate toward activities in our free time, when we lose ourselves in the flow of an activity--the odds are good that talent is involved.  Skill building is not always a labor of love; sometimes it is much more labor than love.  When we yoke skill building to talent, we can find the motivation to get through difficult drills and detailed performance reviews.  When skill building is attempted in the absence of talent, it is sheer drudgery, and it is rarely sustained.

Can anyone succeed as a trader?  Of course not.  Not everyone succeeds as an athlete, and not everyone can succeed as an opera singer, surgeon, or graphic artist.  Performance follows from talent and intentional efforts to cultivate talent to its fullest.  Without the right kinds of bodies, we won't be Olympic sprinters, wrestlers, or swimmers.  Without the right kinds of minds, we won't be chess grandmasters.  Raw material matters.  It may not be sufficient for greatness, but it is necessary.

Show me a great trader, and I will show you at least one great talent.  Great traders play to their great talent; they maximize their strengths.  

Show me a great trader, and I will show you a passion for his or her work.  Why?  Because talent loves to be exercised.  A great talent is like a great horse.  You can't keep it in the stall indefinitely.  You have to let it run.  Great talent loves to run and run free.  The result is unusual productivity.  But only if the talent is awakened and refined by skill development.

Trading success comes with greater difficulty in recent years, because the machines have at least two sources of talent:  processing speed and processing breadth.  Machines can "think" faster and can integrate more information than those relying on the unaided mind alone.  What person can trade dozens or hundreds of strategies across multiple time frames and multiple assets to create smooth profit/loss curves?  Little wonder that asset management firms relying on such processing power have amassed hundreds of billions of dollars of assets.  Markets work by the golden rule: those who have the gold, rule.  Market movement is a function of capital flows, and those who have the greatest capital are in a position to most influence those flows.

Great size comes at the expense of great maneuverability.  When you have hundreds of billions of dollars, you cannot easily sell out of your holdings without greatly disrupting markets and getting very poor prices as a result.  Large money managers have to build and trim positions over time, and that building and trimming leaves footprints.  Among the traders who are succeeding in the current environment are those who possess the talents and skills to read those footprints.  Opportunity does exist in the trading world, but it is a different opportunity set from the one I encountered when I first began trading in the late 1970s.

But you cannot exploit those opportunities if you don't understand your strengths, how to exercise them, and how to refine them with skill development.  How can we know what we're truly good at?  That will be the focus of the second post in this series.

Further Reading:  Creativity and Greatness in Trading

Friday, August 19, 2016

Helpful Resources for Developing Traders

While it's true there are no elevators to success, having the right resources and making wise use of them can at least provide an escalator.  Here are some resources that might make your ascent just a bit less steep:

*  Trading methods:  The Become Your Own Trading Coach blog archives the best of past TraderFeed posts. 

*  News and blog feed:  FinViz News updates in real time.  

*  Learning markets:  The SMB training blog covers topics related to how they train new traders.  Check out this one on reading the tape.

*  Keeping on top of finance and more:  No one archives the best of the financial web as well as Abnormal Returns. 

*  Economic review and more:  Always solid insight from A Dash of Insight

*  Social media and networking:  Stock Twits is a great platform for seeing who is out there and who you want to follow.  Check out Steve Burns and See It Market.

Further Reading:  Three Things to Know About Any Market

Thursday, August 18, 2016

Overcoming the Fears that Accompany Our Dreams

Here is a little-appreciated principle:  Accompanying every dream is a fear.  Very often, the greater the dream, the greater the fear.

The fear manifests itself in many ways, not always as outright anxiety.  Sometimes the fear shows up as excuses that keep us from moving forward.  Sometimes the fear takes the form of procrastination; sometimes it shows up as a fatigue and a suppression of our drive.  Yet other times, the fear is a direct fear of failure, hesitancy to take risks on the way to reward.

Why do we fear at the same time we dream?

It's not that we're sabotaging ourselves, though continually giving into fear can end up derailing our quests.  No, the fear shows up whenever there is uncertainty and change--whenever we prod ourselves out of our comfort zones.  Any worthwhile goal entails a shift from the status quo, and those shifts take effort.  They are not comfortable.  Fear is our conserving force, tethering us to what we know and where we're safe.  Fear preserves the status quo.

In many respects, this is adaptive.  If we were wired for easy and continual change, we would find it difficult to navigate life's many routines.  Instead, we're wired for habit patterns, and those make us more efficient.  They allow us to get things done, while saving finite willpower resources for challenging situations.  Once we exit our habit patterns, we extend ourselves and we expend resources.  We introduce uncertainty and the unknown.  And that's when fear kicks in.

So how do we overcome fear and clear the path to our goals?

Here is where the Naomi Principle kicks in:  we can best overcome negative emotional experiences by tapping into stronger, positive ones.  Imagine if we encountered a person whose sole mission in life was to keep us from achieving our dreams and thwarting our fulfillment.  We would actively avoid that person; we would actively confront that person; we would take every action to minimize their impact upon us.  They would become our enemy.  We would find ample motivation to not allow our enemy to win.  In short, our positive desire to fight for ourselves and win our freedom would overcome any fear or uncertainty we might experience.  

When we visualize fear as that person standing in our way--as our enemy--we can summon that will to fight for ourselves.  It's easy to give into procrastination, but if we clearly identify that procrastination is just another face of the enemy--just another form of fear--then we can ask ourselves, "Who do I want to win today:  me or my enemy?"  It's much harder to avoid that workout or prematurely bail out of that trade if we replace flight mode with fight mode.  Anger, channeled as the will to defeat an enemy, is a more powerful--and more positive emotion than fear.  That's what moves athletes and soldiers forward on the field: the desire to not let the opponent get the best of you.  

When our dreams are bigger than our fears, we will fight for those dreams.  No amount of reasoning, journal writing, or analysis ever got someone past a fear.  Only fight beats fright: we achieve our dreams when we truly fight for them.

Further Reading:  What It Means to be Free

Wednesday, August 17, 2016

Four Keys to Emotionally Intelligent Trading

A worthwhile lens for viewing your trading processes is that of emotional intelligence.  The above graphic depicts four aspects of emotional intelligence that are central to trading:

1)  Self-awareness - Are you able to stand apart from yourself and observe your strengths and vulnerabilities in real time?  Emotional self-awareness means that you observe and understand your emotional responses to market situations, and don't automatically get caught up in those.  Self-awareness also means being fully grounded in one's "edges" as traders and not straying from those.

2)  Self-management - Are you able to channel your thoughts, emotional responses, and behaviors in a constructive manner?  Self-managing traders set goals that guide their activity through the day.  They also behave in a rule-governed manner, whether it is with respect to entry/exit execution or risk management.  Self-managing traders are ones who continuously review performance, learn from it, and place the lessons into subsequent practice.

3)  Social awareness - Are you able to read participation in the marketplace?  Can you pick up cues from volume, volatility, the co-movement of instruments and assets, and responses to news items that tell you whether buyers or sellers are dominant.  The socially aware trader is keenly attuned to market flows, digging beneath the surface to figure out who is in the market, what they're doing, and the price levels at which they're acting.

4)  Relationship management - Are you networking with others to make yourself better?  Successful trading is a team sport, even when the trading is solo.  There is simply too much information relevant to markets to process and stay on top of at all times.  Successful traders filter out noise--the conversations, emails, and messages that contain little value--but actively filter in colleagues who have valuable perspectives.  Very often, fresh inputs from those colleagues lead to fresh insights and trade ideas.  Beneath every great individual performance is a well-functioning team, either real or virtual.

How well are you managing yourself and your trading relationships?  How well are you sustaining a high level of awareness of yourself and of market participants?  It's not a far stretch to imagine giving yourself a daily report card simply on these four dimensions to ensure that you're trading in a truly emotionally intelligent fashion.  Very often, failing to monetize smart trading ideas is the result of a lack of emotional smarts.  The good news is that, with practice, we can learn to be emotionally smarter:  better at sustaining awareness and managing our resources.

Further Reading:  Social Intelligence and Trading

Tuesday, August 16, 2016

How to Deal With Losing Money--And Making It

I recently wrote about the greatest weakness displayed by losing traders.  Under conditions of drawdown, the winning trader becomes more grounded in his or her strengths.  The losing trader veers from those strengths.  

To successfully deal with a drawdown, you want to reacquaint yourself with your best trading:  focus on the best trades, double down on your best practices for preparing for the day and keeping yourself in the right mindset.  The great risk of drawdown is that the losses in trading create lost confidence and lead you to abandon what has worked.

Smart traders know that the same process needs to happen after winning periods in markets.  A string of winning days can lead to overconfidence and sloppiness.  It's when you're winning and feeling on top of the world that you once again want to double down on those best practices and best trades.

Losing money is not the only risk.  The greatest psychological risk traders face is losing perspective.  It's when you lose perspective that you want to rediscover the trader that you are.

Further Reading:  Self-Regulation and Trading Performance