If there is one common element I've observed among very successful traders it's that they have superior personal networks. They cultivate sources of information; they take on role models; they hang out with people they admire. In all, they spend time with people who make them better.
This can become our online strategy as well. We can become caught up in noise and bickering online--or we can surround ourselves with inspiration and information.
But how do we know where the great sources of online information can be found?
One simple but effective strategy is to find the people who post ideas online and do so with a passion. They post regularly, and they post over periods of years. They do so because the ideas speak to them. Their passion has become a purpose--and very often it anchors their profession.
Once you find a few such sites, you can then see who those people link to and whose work *they* admire. The odds are good that purposeful, passionate people hang out with--and link to--others of their kind. Before you know it, you can develop a network simply by following the links of those who post with purpose.
What an amazing resource hidden amidst the noise.
Here is my recent article, highlighting four of my favorite purposeful online participants. Follow their links and you'll learn a great deal.
And if you have your own favorite online participants, feel free to with their links and I can add those links to future posts. It's a great way to build each other's networks and support people doing great work.
Imagine living your life jumping from one activity to another based upon what looked good at the time. There would be no constraints; you could pursue anything at any time.
At first blush that might seem like heaven, until you realize that, cumulatively, you would accomplish nothing. You might have fun, but would your life be meaningful? After a while, all the activities begin to feel the same. Life wouldn't feel complete without some sense of purpose. In pursuing what is meaningful, we postpone things that might be fun at the moment. We invest ourselves in some greater set of goals.
A full life is one in which we derive both happiness and fulfillment. We do some things for here and now fun and some longer-term things to achieve meaningful goals. We know we have hit a sweet spot in life when we find enjoyable ways of pursuing our life purposes.
That means, in life, we are both shorter-term traders and longer-term investors. Activities we get into and out of day by day are trades. Goals that we seek over time are our investments. The sum is our life portfolio, and we hope that all its components produce unique, positive returns. When we find happiness in our fulfilling activities, the result is an unusually high level of well-being.
So it is with our financial lives. There is trading for immediate gains, and there is investing for longer-term returns. One pursues short-term opportunities; the other seeks longer-term growth. Increasingly, I see a sweet spot of performance among those who find trades that align with a longer-term view. When a portion of a portfolio can earn investment returns over time and another portion can benefit from the price path over this period, the total, risk-adjusted return can be handsome. For that to happen, the shorter-term trading must be aligned with the bigger picture view.
In life and in trading, there is much to be said for diversification across time frames--and the alignment of shorter and longer term pursuits.
I recently enjoyed the commentary on the week ahead from A Dash of Insight. I won't steal Jeff's punch lines, but suffice it to say that he summarizes a wealth of economic data with conclusions that I just don't hear from the majority of traders. The big picture he perceives in multiple data sets and multiple analysts has meaningful conclusions for those trying to trade stocks, stock sectors, and the overall market.
See also the recent perspectives from The Fat Pitch site, which looks at one data source after another to get a sense for the probabilities of impending recession. There are important big picture market implications from this information that can inform trading *and* investment.
As a back of envelope calculation, I looked at the percentage returns from SPY each day since 2016, broken down by overnight change (yesterday's close to today's open) and day change (today's open to today's close). The returns over the two time segments were pretty equivalent. In other words, roughly half of all the recent bull market has not been available to the pure day trader.
A psychologist learns to listen to people. Sometimes what they say is straightforward. Other times, a person will jump from topic to topic in seemingly unrelated ways. The psychologist knows that, at those times, what doesn't make seeming logical sense makes a psycho-logical sense. Maybe the person first talks about an overbearing boss at work, then talks about not feeling well, then talks about a friend who has been distant lately. Underlying all of these is a feeling state, a sense of discouragement and frustration. It's that state that is the theme, not the particulars. One has to see beyond the concrete details to appreciate the underlying theme.
Sometimes markets trade in uniform, coherent ways that we call trends. Other times, markets move up and down in seemingly random ways. We call those markets choppy and see them as difficult or even impossible to trade. But what if markets, like people, make their own sense during the times when they seemingly flit from up to down and back again?
The "choppy", range-bound market may be one that is trading with a dominant cycle. It may be trading non-directionally, but continuing relative strength versus overseas shares. It may be in a range itself, hiding relative movements of individual market sectors. Perhaps growth stocks are strong and value shares are weak. Natural resource stocks are strong, rate-sensitive issues are weak. Large caps are weak, small caps are strong. Very often, beneath the "choppy" chart are real themes that can be traded.
But we have to listen and look beneath the surface. Like the psychologist, we have to be sensitive to themes behind what seemingly doesn't make sense.
Many, many times we develop a narrative--a view--and then become frustrated when the markets don't follow our story. Can you imagine a psychologist operating that way?
If we can take our egos out of the picture--our desires to make the big market calls--we can open ourselves to what markets are really doing and trade accordingly. It all begins with a simple question, "What is the theme here?"
* Predicting - Being able to anticipate future events;
* Understanding - Being able to explain events.
We can predict without understanding. We know to anticipate changes in weather without being able to explain the chain of events by which these occur.
We can understand without being able to make specific predictions. We might understand reasons for a market's behavior without being able to predict when and how the market will move.
This is a bit of a simplification, but a good deal of what we call technical analysis seeks prediction. A good amount of fundamental analysis seeks understanding.
The vulnerability of much technical analysis is that it finds patterns that appear to be correlated with price changes, but cannot explain the nature of that relationship. As the video explains, if we look at enough patterns, we can find something that appears to be predictive. Indeed, with a large enough search space (thanks to powerful computing), we can find things that work in sample and out of sample that still are random!
The principle that makes sense here is that we don't *truly* have an edge unless we can clearly explain why this edge is present. Prediction without understanding is a frail basis for risking our hard-earned money.
If we can explain the basis for a predictive relationship, we possess true understanding. Real conviction and confidence in trading comes from understanding the basis for what you're doing.
A person with a purpose in life has a "why"--a considered set of reasons for doing what they're doing. That person is most likely to travel in a coherent direction. Without a "why", we wander through life. That's the difference between having a year of experience versus one day of experience repeated 365 times.
So, too, with trading.
Trading psychology is much easier when we have a genuine "why" underlying our actions. Too many people are pursuing trading because they can't figure out another way to work independently and make enough money to support themselves. This is understandable, but invariably ends badly. People setting themselves up as gurus are all too willing to exploit the desire to make a living from trading. A great question to ask about any idea advanced by a guru is, "Why?" If you--and they--can't truly explain why an idea works, how do you know you actually have an edge and not just another pattern fit to market data?
I recently received an email from someone interested in trading for a living. The person knew little about markets other than reading a few books and following some traders online. He only had a small amount of money to open an account, but indicated a passionate desire to turn this into a living.
Consider these results from Gallup organization polls:
* Polling finds that in the UK, 14% of people indicate that they strongly agree with the statement that they have enough growth opportunities in their work. That number is 21% in France; 19% in Spain; 33% in Germany.
* Another poll finds that GDP has been rising in India, but only 3% of the population describe themselves as "thriving".
* Surveys consistently find that 30-35% of American workers feel "engaged" in their work.
Most people don't have the capital, connections, or experience to start their own businesses. They look at the jobs out there and talk with people working and don't exactly feel inspired by what they see and hear.
Perhaps, just perhaps, people seek trading--against all odds, against all common sense--because the pursuit of a remotely possible winning life feels preferable to assured misery. It's the same reason refugees defy all odds on the high seas in hopes of a better home, a better life. What many aspiring traders need is not false hopes, but genuine, viable alternatives to the traditional "opportunities" out there.
Shoutout to vlogger Meir Kay, who produced an outstanding video that captures the relationship between anger and empathy.
There's an important psychological lesson here.
Frustration is a form of anger. It occurs when we have a goal and something prevents us from reaching that goal. We develop an idea, place a trade based on that idea, and then a burst of volume comes into the market and moves our position against us. Our hopes for profit are dashed with the reality of a loss.
We can voice frustration at the market or at the traders who are "obviously manipulating" the market. We can become frustrated with ourselves and beat ourselves up over how stupid we were to place the trade. Regardless of the object of our frustration, once we become angry, we enter fight/flight mode and stop processing the world objectively.
The good trader will catch themselves at that moment and take a step back, slow down, calm themselves, and return to their trading.
The great trader, however, will do something quite different.
Remember that markets are always speaking to us. They tell us where participants are finding value, where participation is waxing and waning, and when participation is dominated by buyers or sellers. The great trader is like a great listener in a conversation. That requires empathy: the ability to not just see, but feel what other market participants are doing.
Suppose you bring up a topic in a conversation with someone you care about and they quickly change the subject and start talking about something else. You can become frustrated, filled with a sense of injustice over being "cut off", or you can step back and say to yourself, "That's interesting...my friend doesn't normally change topics like that. This must be very important." That empathy makes you a better listener. Going with the conversational flow will bring you closer to your friend.
If you have formulated a great idea for a trade and the market changes the topic on you, perhaps there is an important message there. Doubling down on your listening skills and drawing upon your empathy opens the possibility of profiting from this new information. It's yet another way that developing ourselves as traders is not so different from developing ourselves as human beings. When we replace anger with empathy, frustration with listening, we make new connections and profit from those--in markets and in life.
In pursuing your life goals, imagine that you are the leader of your own team. In other words, consider that what you achieve in life will be a function of teamwork, not just your individual talent and effort.
That perspective raises interesting questions. Who is currently on your team? How well are you working with them to achieve your goals and theirs? What is missing from your team? How would you add to your team to enrich everyone?
My latest article introduces the notion of life as a team sport and identifies three specific factors that make teams work. This is true for sports teams and teams in workplaces. It also applies, however, to our personal lives and, yes, our efforts as traders. Who is on a team, what they bring to each other, and how they interact with one another very much determines the odds of success.
I've thought long and hard about the very successful traders I've known. To a person, they go out of their way to maintain contact with insightful and talented market participants--and very often they build formal teams to assist with the tasks of generating ideas, managing positions and risk, and staying on top of developments that impact markets. Whether through informal networks or formal teams, successful traders get that way by expanding their bandwidth. To paraphrase the Michael Jordan quote above, talent wins trades, but teamwork and intelligence make for winning trading careers.
As the previously mentioned article emphasizes, there is much, much more to effective teamwork than simply touching base with people who you think can help you. I would go so far to say that people often fail at their work for the same reasons they often fail at their marriages: they select the wrong teammates; they don't fully embrace the give and take of being part of a team; and they don't sustain a vision of how everyone can make each other better.
Your life is an enterprise, and you are its leader. The lives of those who matter to you also represent enterprises and you are part of their teams. You're not just an individual; you're also part of an interconnected network. When you improve the network, everyone improves.
Trading is based upon the notion of recurring patterns in markets. These could be patterns of price behavior, patterns of response to world or economic events, or patterns that occur in the relationships among markets. A common trading pitfall is perceiving patterns where none truly exist. We can become anchored to recent occurrences and assume that these will recur. We can overemphasize dramatic market occasions, such as large drops in prices, and look for similar "setups" going forward. If we look at enough patterns, something by chance will appear to be significant. Not all "overfitting" is performed by quants.
Just as there can be patterns--and false patterns--in markets, these can also exist in our trading. One daytrader I worked with had flat results over several months. When we dissected the P/L, it turned out that certain hours of the trading day (early morning) were consistently profitable. Other hours were losers. The patterns being traded, which involved momentum, were more likely to occur during periods of higher liquidity.
I also met with a portfolio manager who was having trouble making money. When we examined his returns, it turned out that newly initiated positions were getting stopped out for losses unusually often. This was because, in a lower volatility market, he was waiting for strength before going long and waiting for weakness before selling. He kept stops tight and thus was whipsawed when the short-term price movement failed to extend.
There is tremendous benefit in dissecting your returns as a trader. Yes, we can overinterpret and perceive patterns that do not exist. Many times, however, there are rational explanations for why the returns are patterned. Perhaps we're trading differently after having made versus lost money. Perhaps we're trading differently as a function of market conditions. Perhaps we're trading differently as a function of how we have prepared for the day or week.
I find it again and again: Successful traders spend significant time not trading, studying their markets, and studying their performance. Successful sports teams review game films to prepare for the next contest. What is your review process, and how rigorous is it?
Here's an important principle: Your attention operates like a magnifying glass. We program ourselves with our attention. What we focus upon, grows within us.
This is why our self-talk is so important. If we focus upon our shortcomings and berate ourselves for our mistakes, that is what we internalize. We recognize this with parenting. We realize that if we were to focus on every flaw in a child, we would damage their self-esteem. As I mentioned in a post a while back, we are what we eat--and we're always eating life experience. Our experiences are what we internalize. Ultimately they define who were are.
In trading, if we focus on rules and best practices, we make those our own. As young children, we had to be taught rules of proper behavior, such as thanking people who do good things for us. Now, as adults, we don't need to consult the rule or motivate ourselves to follow it. We naturally feel gratitude for good deeds and offer thanks. The trader who makes rules about risk management or about what constitutes opportunity consistently focuses on those rules and eventually they become internalized principles. They are no longer simply things to do; they are part of us.
Here's a great experiment: Quickly, write down the principles that guide your trading. Only give yourself a couple of minutes for the exercise.
If you can't enunciate your principles quickly, they are not an automatic part of you. It's when principles are front and center that they form the backbone of trading process. That can only happen when we focus on principles and keep them conscious.
What a great practice for developing traders: Writing principles on a card and consulting them before trading for preparation, during trading for execution, and after trading for review. After a month of such repetition, we become more consistent because we become more principled.
A while ago, I wrote in an article that, "Perhaps the greatest mistake in managing our lives is to treat energy and willpower as finite resources." It is partly for that reason that a major theme in the book I'm currently writing is renewal. All of us lived new and fresh lives as children growing up. The challenge of adulthood is to re-new and rediscover that early sense of adventure and excitement.
One of life's great paradoxes is that we need routine to efficiently navigate through life--think how exhausted we would be if we had to approach each task as if it were our first time--but it is precisely that immersion in routine that makes life feel, well, routine. Renewal requires new-ness, the exiting of routine to partake in what we find enjoyable, meaningful, and energy-giving.
In the new book I describe a "principle of alternation" that helps us recharge: By arranging daily activities so that we draw upon different strengths, we rest one set of functions while exercising others. For example, I might alternate trading time with time spent helping people as a psychologist and then turn to immersing myself in family activity and finish the day reading a new book and listening to favorite music. The energy from each of these activities stimulates the next ones. We become like batteries continually connected to a power source: we don't run down.
That is an important part of living a truly diversified life. When we alternate activities that draw upon the best of us, energy and willpower are no longer finite resources. We spend much of our days facing the sunshine. That not only brightens our perspective, but lights our path.