The majority of psychological problems in trading occur "in the heat of battle", when we become so caught up in market action and our concerns about P/L that we become reactive rather than proactive. At those moments, we become immersed in our thoughts and feelings and lose the broader awareness of what is going on and what we are meant to do in such situations. That is why we can look back on our actions at a later occasion and wonder how we could have been so foolish. Once we enter that "fight or flight" mode of stress, we activate parts of the brain that are geared for action, not reflection.
Self-awareness is the capacity to think about our thinking and reflect on our actions before we react to situations. The self-aware trader stands back from his or her reactions, notices his or her thoughts and feelings, observes the tendency to act upon these, and then steps back to decide the best course of action.
Notice that self-awareness does not mean being totally free of emotion and impulse. Self-awareness means that we become observers to those so that they do not dominate and dictate our next actions.
For example, I can see the market drop on increased volume and notice that I'm frustrated that I'm not participating in the move. I begin to think, "What if this is the start of a bear move?" and then I experience a fear of missing something even larger. As the weakness continues, I quickly hit the bid and sell the lows, only to see the selling dry up, value buyers come in, shorts cover, and price zoom higher.
The self-aware trader learns to pull back from decision-making during times of "fight or flight". Often that can mean a temporary pull back from the screens and a self-reminder that this is not a good time to act impulsively. Here are some specific techniques I've found to be helpful in these situations:
* Slowing Down - This is where meditation practice can be tremendously helpful. By breathing slowly and deeply for a sustained period while keeping your focus on one thing, you can learn to quickly re-enter the zone. It is difficult to be emotionally worked up when you're cognitively focused and physically relaxed. The more you practice meditation and relaxation skills, the quicker you can access the calm, focused state during the heat of the moment. Daily practice is essential for internalizing these skills. The Headspace app is a popular tool for building meditation skill and self-awareness.
* Coaching Self-Talk - Because I've worked with so many traders, it's easy for me to step back and ask myself what I would tell another trader in the same situation. For example, I'll remind myself that there is a significant probability of a bounce following the market decline based upon my previous studies. Instead of becoming fearful of missing further downside, I begin a slow, careful hunt for signs of bottoming and opportunity to benefit from trapped bears. Combining the slowing down with coaching self-talk can be very helpful in avoiding problems but also using situations to find opportunities. A good example of this is taking a loss in a good trade idea and using the information to find an opportunity in the opposite direction.
* Journaling - Writing naturally slows us down. When we write out what is happening in the situation (or talk it out in an audio journal), we become able to hear ourselves think and plan. We also gain the ability to read what we've written or listen to what we've said. This gives us a greater level of perspective by bringing a measure of objectivity to our processing. Even a brief journaling can help us remember best practices in situations. I find it helpful to remind myself that I'm in no mindset to trade and that the best thing I can do is use the occasion to refocus and find new opportunity. That turns the journaling into a positive, putting us on the front foot.
* Mental Rehearsal - It is helpful to have a basic self-awareness routine that you establish as a process. You can then, as part of your preparation for the day, use imagery to conjure up situations in which you lose self-awareness and then visualize yourself going through your basic routine. So, for example, you can visualize yourself becoming frustrated and then visualize yourself talking in a self-coaching way while pulling back and slowing your breathing. The idea is to turn your self-awareness process into a habit pattern that eventually will kick in on its own.
There is no loss of discipline without a prior loss of self-awareness. If you can sustain an awareness of what you're doing and why you're doing it, it becomes difficult to fall into reactive modes. That is what helps us stay cool in the heat of battle, whether in athletics, military combat, or trading.
An important theme of my recent Forbes article is that what we do in life becomes internalized. Our actions shape our identities. Can we live undisciplined lives and become disciplined traders? Can we look at the same information as everyone else and generate unique ideas and returns? Can we remain self-focused and self-absorbed and sustain close relationships with others? What we do becomes who we are.
Nowhere is this more true than in our personal and professional relationships. Who we spend time with is also internalized and becomes part of who we are. I spend time every day taking care of my cats and providing them with a loving home. That experiences exercises important capacities for empathy and caring, both of which are important in my personal relationships and in my professional work.
This is why our romantic choices are so important. Our partners are part of our daily experience and become important parts of us. In a very real sense, everyone finds their soulmate--sometimes for better, sometimes for worse. An important way that we experience ourselves is through our relationships. What is mirrored to you in your friendships, your family relationships, your relationship with your spouse/significant other? Your partner in life becomes your soul.
How are relationships a "trading psychology technique"?? It's easy to lose sight of the fact that every trader experiences a relationship with the markets he or she trades. For some, it is an adversarial relationship; for some, a challenging and difficult relationship; for others, it is a threatening relationship; for still others it is a stimulating and rewarding relationship. Can we have static relationships in our personal lives and expect to dynamically keep up with changing markets? Can we have conflicted relationships and frustrating relationships and hope to stay cool and calm in our relationships with markets?
We are always practicing our trading, even when markets are closed and we're away from screens. Who we are and what we do during non-trading hours shapes our trading experience. The quality of our personal relationships (including our relationship with ourselves) shapes our relationships with markets. We only focus on markets as well as we focus on others; we only follow market communications as well as we listen to others; we only understand markets as well as we understand the people in our lives.
A great way to work on our trading is to work on ourselves outside of trading.
Benzinga, in partnership with Traders4ACause, is holding a trading summit in New York on June 20th. I'll be there and will be presenting from 12:10 - 12:40 PM. Here is a tentative agenda for the conference. If you use the Promo Code DRBRETTVIP when you register, the ticket price will be half off. A portion of conference proceeds will go to charitable causes.
In my presentation, I will be addressing the topic of finding quant edges in the market by understanding the psychology of other market participants. This enables you to see which way traders and institutional participants are leaning and then use that information to your advantage in a rigorously backtested way. Some of what I present will share edges that I have found in the market; some will draw upon the excellent work of Rob Hanna from Quantifiable Edges.
The topic of trading psychology usually addresses our emotions and thought patterns and how those impact our trading decisions. That can be helpful, but it is also possible to take the topic to the next level and identify the edges in markets that come from understanding the psychology of those active in the marketplace. As Rob's work makes clear, such edges *do* exist. It's only a question of whether we trade with awareness of them or in ignorance of them.
Thanks for your interest; I hope to see you in the Big Apple!
I have consistently found, personally as well as in my work with others, that how we live our mornings sets the tone for the entire day. I've equally observed that how we start our mornings sets the tone for the entire morning. In life, as on the racetrack, getting off to a good start does not guarantee a win, but getting off to a bad start puts the winning odds against you.
Here's a general rule for successful morning routines: whatever you are trying to develop in your life overall, make sure it's an active part of your morning. Whatever goals you have--personally and in your trading: make those integral parts of your morning routine. You want the morning to provide an emotionally impactful set of experiences that enables you to sustain the sense of moving forward.
Unfortunately, that's not what many of us do.
Too often, we roll out of bed, shake off the cobwebs, grab some food and coffee, and start our day, whether it's with a commute to work or time in front of screens. In such a situation, we've gained nothing from our mornings, but we *have* internalized the habit of living life on auto-pilot. If we live life in routine ways, can we really expect to excel? If we start our mornings without direction and purpose, can we truly live the rest of our days productively and meaningfully?
Whatever functions you want to develop in your life, exercise them in the morning. That internalizes the sense of living life intentionally, meaningfully, with purpose.
My mornings typically begin early (between 4 and 5 AM EST), as I follow markets and communicate with traders overseas and prepare either for a day of work at a trading firm or a day of trading and writing. Here are the usual elements of my morning routine:
1) Prayer - In my tradition, there is a wake up prayer that begins Modeh Ani (I give thanks). The idea is to begin the day on a note of gratitude and spiritual connection. What I *don't* want to do is begin my day cluttering my head with ego concerns: things to do, worries about markets, etc.
2) Cats - If I don't get up early on my own, our four rescue cats pretty well ensure that I'm up to take care of them. All our cats were either neglected, abandoned, abused, sickly, or some combination of those. We have socialized them and they have become quite loving, toward us and toward each other. Each morning I greet them, pet them, change their water, give them food, and clean out their litter. I take care of them before I tackle any of my personal priorities. In acting on our values, we cement those as active parts of ourselves.
3) Quick Market Update and Look at Emails - The evening before, I've updated my market research and formulated tentative ideas and plans for the trading day. I quickly review market activity during the overnight hours (in Asia and Europe) and, if necessary, do a quick update of my ideas and plans. I scan emails to see if there is anything pressing and respond as needed. This is also when I set goals for the day and enter them into my daily calendar. The calendar ensures that I attend to the things most important, whether it is book writing, attending a class, or getting work done at home. I often do this update while listening to inspiring music; this is the music I'm listening to at the moment.
4) Exercise - This includes time in a massage chair, stretching, weight lifting, and jogging on a treadmill. The idea is to first warm up and then push my limits, both with strength and aerobic conditioning. I keep track of my reps at each station in the indoor gym and my treadmill measures my distance run, pace, heartrate, degree of incline, etc. I also wear a Fitbit that records my exercise minutes as well as the quality of my sleep, my heartrate, etc. This helps me be accountable for getting in shape. I want to begin the day pushing myself, breaking a sweat. We don't grow unless we push our limits, and we don't push our limits if we stay in our comfort zones and never break a sweat.
5) Morning Prayer, Meditation, and Reading - Once I've worked out the body, it's time to engage mind and spirit. It is during this time that I want to be connected to the meaning and significance of what life is all about. In a very important sense, the prayer and study are to the mind and spirit what the exercise is to the body: a way of building our capacities. In the case of prayer and reading, I'm building the capacity for quiet focus and inspiration. During this time, I engage in meditation exercises for the same purpose. The goal is to be energy-filled from the exercise, but also centered and focused in tackling the rest of the day.
6) Family Time - A longstanding tradition is that I make coffee and bring a small breakfast in bed for Margie. That is a nice time to connect and start our day. Usually one or two of the cats will be clamoring for attention at this time, so we spend a little petting and purring time together.
7) Following Markets - Here is where I will dig in, update my research, and revise my ideas for the day's trading. If I've been successful with the prior elements of the morning, I'm usually pretty good at staying open minded for the start of trading, framing my ideas as "if-then" scenarios that tell me what I'll do under various market conditions. That scenario planning will also incorporate goals that I've formulated from the trading journal the evening before.
8) Reassessing - Although most of my trades are intraday, I don't want to trade reactively, jumping from one trade to another. I reassess my plans and scenarios based upon the outcomes of the initial trades I placed. This enables me to adapt to market conditions (if they are slower or busier than usual; if there has been a breakout or important news), but it also tells me if I need to re-evaluate my views or perhaps double down on them. Very often, the first trade is smaller, as a kind of feeler in the market, leading me to reassess and place more significant trades based on that learning. I always want the current trade to benefit from the trades placed most recently.
How you construct your morning routines will of course differ from what I do. The important thing is to be the person in the morning that you want to be during your trading--and during the rest of the day. Notice how much of my morning routine has little to do directly with trading, but everything to do with being in the right state of mind, body, and spirit for good trading. We want to live our mornings with purpose and meaning, and that helps us carry significance to the rest of our day and from day to day. Inspiration doesn't just come to us. We create it and recreate it until it becomes a regular and energizing part of what we do and who we are.
In the first post in this series, we took a look at the do's and don'ts of creating an effective trading journal. The second post examined the importance of testing our trading ideas and truly understanding our edge in markets. When you are on a productive learning curve and when you trade with an edge you understand, you are able to trade with energy and enthusiasm. Yes, it's important to manage our risk and it's important to manage positions. In our personal lives, it's important to manage our time and manage our homes and our savings. Few of these things, however, provide us with energy and inspiration. It's surprising how few people have reliable processes for managing and growing their energy.
Why is this important?
Energy is one of four key components of positive emotional experience. The other three are happiness (doing what we enjoy); fulfillment (doing what we find meaningful); and relationships (doing things that bond us to those we care about). It is difficult to imagine experiencing well-being without a good measure of energy and enthusiasm. Indeed, research suggests that we are most likely to succeed at work and experience good health if we enjoy a high degree of well-being.
Energy comes from multiple sources: intellectual stimulation; physical exercise; optimism and inspiration; novel experience; and more. In a very important sense, energy comes from those other dimensions of joy, fulfillment, and connectedness. When we are energized, we are most alert, most mentally switched-on, and most able to process information broadly, quickly, and deeply. It is very difficult to be at our cognitive peak if we are run-down, bored, or otherwise in low energy states.
And yet that is often what I observe: Traders become so concerned about not losing money, about poor performance, and about trading mistakes that their self-talk becomes profoundly de-energizing. Think about it: how often does your trading journal inspire and energize you? How often is your self-talk during trading breaks optimistic and enthusiastic? How often are you trading in states of high mental energy (concentration, focus) and high physical energy (aerobic fitness)? Many times we have processes that guide us in risk management and trade entries/exits, but not in processes that keep us in the right state for peak performance.
A process that manages and maximizes our energy would include at least five components:
* Ways of taking breaks from trading that keep us alert and renewed; * Ways of preparing for trading that keep us positively and constructively focused; * Ways of interacting with other traders that keep us informed and inspired; * Ways of using our time outside trading to do things that excite and interest us; * Ways of using our time outside trading to stay physically fit and energized.
How many of these five cylinders are you firing on from day-to-day, week-to-week?
If re-reading your trading journals and re-viewing your trading day doesn't energize you, you know you're operating outside your peak performance zone.
In the first post in this series, we took a look at the do's and don'ts of keeping a trading journal. This post tackles a very different skill essential to trading success: testing your trading ideas.
You might be asking WTF?!. How is testing trading ideas a trading psychology technique?
The sad truth is that a substantial portion of trading (and trading psychology) problems stems from trading sheer randomness. Traders convince themselves they see a pattern in price action, earnings, macroeconomic data releases, indicators, etc. and they act upon that pattern without testing its validity in any fashion whatsoever.
I recently met with a trader who was frustrated over losing money. The trader described a trade where one price bar made a lower high and lower low than the bar previous on increased volume. He inferred that a decline was underway, waited for an uptick to enter, and then stopped out when his entry bar took out the highs of the previous two bars. He complimented himself on his risk management (i.e., honoring his stop out level), but said he was frustrated because his "setup" didn't work. He concluded that he needed to be more "patient" with his entry and wait for weakness within the current bar before entering his position.
My approach to helping the trader was a bit unorthodox. I downloaded data for his symbol and created a database in Excel. I coded with 1's versus 0's all instances in which the current bar made a lower high and lower low than the bar previous on increased volume. I then assessed the forward returns (over the next 1-10 bars) for the "setup" group versus all other occasions.
There was no difference whatsoever.
The pattern being traded was not predictive.
So here we have a situation where the trader is diligently working on his trading psychology (keeping a journal, observing his losing trades, making plans for improvement), but his psychology is not the primary problem. His frustration and discouragement stem from the fact that the ideas he is trading lack a foundation in objective reality. Imagine if a person played roulette at a casino and placed bets on numbers corresponding to the birth dates of family members. That person then becomes frustrated and stressed because his system is not working!
(To take the analogy further, imagine a "gambling coach" who emphasizes to the roulette player that he needs to maintain a calm focus and stick with his system in a disciplined manner.)
How many traders trade sheer randomness, only to have mentors and coaches insist that there is an "edge" and that the key to success is faithfully following the system?
That is not just bad trading. It is a clear waste of time, energy, and resources. When someone trades randomness and can't obtain results, they *should* get upset! What is delusional is continually getting one's hopes and confidence up and "working on trading" by tweaking utter randomness.
There is, however, a more subtle problem associated with the lack of testing for ideas. The great majority of traders aren't really crazy, though I may occasionally question their sanity. They realize that their ideas are untested, and they can't truly explain *why* the patterns they trade should produce an objective edge in the marketplace. As a result, they never develop confidence in what they do, even when the ideas are seemingly working out. It is the cognitive grasp of why trading signals are valid that leads to the development of true conviction.
There are two ways of testing trading ideas: 1) backtesting over multiple independent data samples (to make sure any single backtest isn't spurious) and 2) establishing an objective track record in simulated and real-time trading that demonstrates, over multiple time periods and market conditions, results significantly better than random. Ideally, the first way of establishing the value of an edge leads to the second, so that backtests are validated in real time.
The bottom line is trading ideas that you've worked with and tested provides an unparalleled--and reality-based--foundation for your trading psychology. Testing also tells you what doesn't work--and that can lead to a deeper understanding of hidden edges. Sadly, there are many traders who insist that they will succeed in their trading through sheer passion and willpower, when in fact they display all the signs of a trading addiction. You would never purchase a car without giving it a test drive; your trading deserves nothing less. It is not enough to rely on the promises and claims of peddlers offering the next best trading scheme. Test before you invest your precious time and money.
As mentioned in the previous post and the recent Forbes article, I will be posting a series dealing with research-backed methods for improving both our psychology and our trading performance. I am doing this because so much of the writing I see in the area of trading psychology is long on what to do and short on how to do it. This series will focus on the how-to's, to help traders better coach themselves.
The focus of this post is on the proper construction and use of trading journals. Several evidence-based approaches to psychological change make substantial use of journaling, including cognitive therapy. Like many cognitive-behavioral methods, journaling can improve our self-awareness, making us more mindful both of what we are doing well and what needs improvement.
Traders often keep journals, but in ways that are not especially helpful. A few common journaling mistakes are:
1) Inconsistency - Journal entries are sometimes detailed, sometimes sketchy. They are sometimes more frequent, sometimes less frequent. The trader lacks a consistent journaling process. The frequency of the journal is often out of line with the frequency of trading. If traders are making multiple decisions per week, for example, it makes sense to keep a weekly journal. If the trader is making multiple decisions daily, a daily journal will be useful.
2) Isolation of Entries - A trader writes a journal entry one day, then the next day, then the next. Very often, the entries do not reference one another: they are written in isolation. As a result, the trader gets little cumulative benefit from the journal process. It is very common that traders never look over journal entries from a week or a month ago, and thus don't fully learn from experience.
3) Focus on Reporting - The trader's journal entries report what happened during the day--sometimes in detail--but spend relatively little time analyzing why these things happened and what they can learn from them. The journal ends up being more descriptive than prescriptive. The journal as a reporting tool is not necessarily a performance-building tool.
4) Focus on Venting - The trader's journal expresses frustrations and focuses on things that went wrong, mistakes made, etc. There is little time spent on what the trader did well, and there is little constructive writing about how the trader could correct the mistakes. A useful journal is a constructive journal; it isn't mired in negativity.
5) Narrowness of Focus - The journal focuses mainly in one or two areas, not with trading overall. For example, the journal may focus on psychology and not actual trading decisions. The journal might focus on entries and exits, but not position and risk management. It is uncanny that the areas left out of journals are often those most important to work on!
So, what are some best practices regarding the keeping of journals?
1) Frequency - Note that, in cognitive therapy, people keep journals daily and make multiple entries per day. They write in the journal as soon after significant events occur. That allows them to observe what happened, how they processed the event, how that processing impacted them emotionally, and how they might process the occurrence differently and more constructively. By journaling often, the person becomes very aware of their thinking and grows in the ability to address problem patterns before they occur. The frequent journaling becomes a tool for building positive habit patterns.
2) Backward and Forward Looking - The ideal journal entry notes something distinctive that was done right or something distinctive that needs improvement. In both cases, the focus in on clearly identifying what was done right or wrong and why it was desirable or undesirable. Then the journal entry looks forward to identify a concrete goal based on the observation and a specific plan for implementing that plan going forward. For example, the journal entry might identify a way of scaling into a position that was very effective in several trades. This becomes a concrete goal to implement going forward, perhaps with a position management checklist to be used in coming trading sessions.
3) Reviewing as Well as Viewing - If the journal entry sets a goal and a plan for reaching that goal, the next entry should spend some time reviewing how well the goal was reached. If the goal wasn't fully met, modifications in plans can be made going forward. If the goal was reached, there might be some reflection on how to make the improved practice part of an ongoing process. If a goal is worth setting, it's worth implementing and reviewing!
4) Keeping it Doable - Focused goal-setting and review is more effective than scattershot approaches to change. You might want to work on one main goal per week or month, depending upon the frequency of your trading. You don't want journaling to become unduly burdensome, and you don't want to be setting different goals every day, never truly building changes into robust habit patterns.
I like keeping journals in apps that allow you to share the entries with teammates and colleagues and that allow you to tag entries and sort through them during your reviews. As I mentioned in a previous post, an app like Evernote allows your journal to become truly multimedia and interactive. Pulling up all your entries on a given topic, such as risk management, is a great way to track your progress and learning. At SMB, for example, trading journals structured as daily report cards are routinely shared with mentors to facilitate feedback and learning.
The bottom line is that the focus should be on journaling as an ongoing learning and performance-enhancement process. Keeping a journal has minimal value unless it is part of a cumulative process of assessment and deliberate practice.
Many traders focus on their results--their P/L--and never make the process changes that could lead to sustained results. A great deal of writings in the area of trading psychology emphasize the changes that traders should make--not actual techniques traders could employ to make those changes. When I wrote The Daily Trading Coach, the idea was to create a "cookbook" that would help traders coach themselves, using established, proven techniques from applied psychology.
It's time, however, to update those "how-to's". In the most recent Forbes article, I explain how evidence-based approaches to short-term therapy can be adapted to help us achieve peak performance in our trading--and in our personal lives. This is a major development in psychology. Until recently, change techniques have been used to help troubled people reduce their problems. They have equal value, however, in achieving positives as "therapies for the mentally well."
In future posts and presentations to trading groups, I will be elaborating the how-to's of trading psychology, drawing upon techniques proven in their effectiveness based upon outcome research. (This book, which I wrote/edited with two colleagues at the medical school where I teach, reviews the research going into each of the methods.) Three of the specific approaches are covered in the Forbes article and will be a starting point for future posts: behavioral techniques; cognitive exercises; and solution-focused methods. As always, thanks for your interest and support!
The SMB Blog recently posted its 10 top trading tweets of the week. There are excellent insights here, including reflections on "What I Wish I Knew Before I Started Trading". One of the tweets pointed to the importance of feeling pain when we're trading poorly.
This past week, I've been teaching psychology and psychiatry trainees in techniques for helping people make changes. A major theme I've touched upon is that, in our normal, routine states of mind, we tend to think routine things and engage in routine actions. If we're looking to make changes, we need to get out of our habitual consciousness and access new ways of experiencing ourselves. Interestingly, joy and pain are both helpful in that regard.
When we feel joy and gratitude, we focus on what we've done well; when we feel pain, we focus on how we've fallen short of our ideals. Both states of mind cement our perceptions and help them stand out from routine. We change via powerful emotional experiences, not simply by writing things in journal and talking them aloud.
Many of our most powerful learning experiences occur in the context of meaningful relationships. The experiences we provide our children as parents; that are part of our romantic relationships; and that occur in counseling and therapy are processed deeply because of their emotional power. Because they are also part of ongoing relationships, we achieve the repetition that helps us internalize those new experiences of ourselves. Many of our most powerful changes occur within the context of (new) social roles.
What is your relationship with markets? How do you experience yourself in your trading? What emotional experiences are you internalizing over time during your trading? There is a role for joy in trading and a role for pain. Both help us learn from our experience and, together, they help keep us confident and humble.
In coaching, counseling, and therapy, people typically try to change the "texts" of their lives: their thought patterns, habit patterns, etc. But what if our greatest changes come from shifting, not texts, but contexts?
Suppose a movie is going to be made of your life. Is it a film you would go out of your way to watch?
The sad truth is that most of us are living good lives, but not adventuresome ones; not ones that we would be proud to have made as books or movies.
The article poses a unique perspective: perhaps we are operating at states of energy and in environments that fail to bring out our greatest strengths. If you're trading and living with less than movie-worthy adventure, perhaps this is not because you lack discipline or proper self-talk.
Perhaps, like Aries, you need a change of context.