A Trader Journal

I read an interesting article in Scientific American magazine. Imagine, for example, that you are in a library and you are lost. Are you in the Science Fiction or the Fantasy section?

One approach is you can go around until you find a helpful sign. Let's say you took faster approach and simply looked at the books on the shelf next to you. You see:

Losses are always painful, but the emotional repercussions are often more difficult to redress than the financial consequences. By focusing all & attention on an errant trade, we quite possibly overlook other emerging opportunities.

I believe we are more alike than different. When confronted with unexpected adversity, we likely to be gripped by a mix of emotions: panic, hopelessness, or a dogged determination to get even. The consequences of each of these reactions are discussed below.

Every trader runs into this question at some point. So which is better? No stops does NOT mean no risk management. Thought will clarify as some times I jump to conclusions from headlines.

Wide Stops:
Does this sound familiar - "I've had on too many times the market pull back on my stops only to find that it went on to do what I thought it would. Nothing more frustrating on being stopped out again and watching trade move on to my target but without me. I do admit the financial risk is higher with wider stops. But expecting the market to move fast every time in my desired direction with out much breathing room is a lot to ask"

I think understanding why we do things that are not in our best interest and then intiating a change is more effective than trying to change by will power alone. Following are some reasons that cause us to outguess our system -

Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make it feel like the outcome was in doubt. The momentary suspense adds the thrill factor necessary to keep our lives from getting too boring. However, when it comes right down to it, no one trades to lose or puts on a trade believing it is going to be a loser, and all systems will definitely have some percentage of losing trades. So it's difficult not to be tempted into trying to guess which ones are going to be the losers and not participate.

Another reason - We often form expectations about the future with information that method don't take into consideration. Consequently this sets up a conflict betwen what our intellect says should be happening and the prediction of human behavior offered by our well tested method.

Another reason - If we risk our money on a gambling event that we know has a random outcome, then there's no rational way we could have predicted what actually happened. Therefore, we don't have to take responsibility for the outcome if it isn't positive. Whereas, with trading, we believe future is not random i.e., price movement, opportunity and outcomes are created by traders acting on beliefs and expectations of the future. So we form a concept of future and how that will affect the markets. This adds an element of responsibility, desire to over analyze and outguess our method.

My experience is trying to out-guess a well tested method is often an exercise in frustration. Sometimes the signals we get from a trading method will have us trading in ways that are contrary to our reasoning and turn out to be right. Other times, you will agree with the method and it will be wrong.

In short, trading methods are not designed to be out-guessed i.e., they aren't designed to give us isolated signals of an opportunity to be taken when it seems right. Their job is to define and categorize past relationships in collective human behavior and give us a statistically probably outcome of the future. (Credits: Source - Mark Douglas material).

Hope you enjoyed this post. Feel free to share and leave a comment.

This post probably will be skipped by most in search of something more intellectually stimulating on understanding market behavior/our own minds. On other hand, a big part of trading involves developing new habits that enable us act in our own best interest.

So how do we develop a new habit? Following is a simple and powerful methodology for new habit development that I came across:

1. First, make a decision clearly that you are going to begin acting in a specific way and spell it out clearly.
2. Second, till it becomes a habit (like first 3 weeks) don't make excuses or rationalizations. Don’t let yourself off the hook. 
3. Third, visualize yourself performing/acting this behavior. The more often you imagine yourself as if you already had the new habit, the more rapidly this new habit will be accepted by your subconscious mind and become automatic.
4. Fourth, create an affirmation that you repeat over and over to yourself. This repetition dramatically increases the speed at which you develop the new habit.
5. Fifth, resolve to persist in the new behavior until it is so automatic and easy that you actually feel uncomfortable when you do not do what you have decided to do.
6. Sixth, give yourself a reward of some kind for practicing in the new behavior. Each time you reward yourself, you reaffirm and reinforce the behavior. 

Understanding above is not hard. The difficult part is doing it. One reason I am writing this post is to reinforce this methodology to myself. Hope you enjoyed this post. Feel free to share and leave a comment.

Every day, we make decisions that have good or bad consequences for our future selves. Can I skip gym just this one time? Can I take this trade just one time against my rules? Can I eat this creamy pastry just this one time? The list goes on.

The following Ted talk video (15 minutes) from Daniel Goldstein talks about tools that help us imagine ourselves over time, so that we make smart choices for our future self.

This is a simple story of a stone cutter. It is also an empowering story that I think many traders can feel and see themselves in.

How does a stone cutter break open a giant boulder? He starts out with a big hammer and whacks the boulder as hard as he can. The first time he hits it, there is not a scratch, not a chip - nothing. He pulls back the hammer and hits it again and again - 100, 200, 300 times without even a scratch.

After all this effort, the boulder may not show even the slightest crack, but he keeps on hitting it. People sometimes pass by and laugh at him for persisting when obviously his actions are having no effect. But a stone cutter is very intelligent. He knows that just because you don't see immediate results from your current actions, it doesn't mean you are not making progress. He keeps hitting at different points in the stone, over and over again, at at some point - may be on the 500th or 700th hit, may be on the 1004th hit - the stone doesn't just chip, but literally splits in half.

When traders lose money, they often attribute the problem to a lapse in discipline. Then often the next step is negative self-talk, self-criticism followed by resolutions to stop this with will power and self-control.

I think not all discipline problems are necessarily due to psychology. Many times the loss of discipline can be due to other problems in trading. I think having an understanding of what caused (trigger) the lapse in our discipline coupled with self-control is more effective than trying to resolve by just will power alone.

Following are the top 10 reasons:

1. Environmental distractions and boredom cause a lack of focus;
2. Fatigue and mental overload create a loss of concentration;
3. Overconfidence following a string of successes;
4. Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;
5. Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested;
6. Personality traits that lead to impulsiveness and low frustration tolerance in stressful situations;
7. Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);
8. Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;
9. Not having a clearly defined trading plan/strategy in the first place;
10. Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.

Credits: The source for the post is from this article by Dr Brett Steenbarger.

It is not the trading that's hard, it is the discipline!

If you think about it, in trading we have disappointments everywhere. Disappointment for missing a great trade, for taking profits too soon,  for tightening stop too fast,  for slip of patience at critical time, performance not living up to expectations….the list goes on.

I wonder how many traders pay attention to this aspect and think about how well they manage disappointments?

IMO recognizing that disappointments in trading is a rule (not an exception) and being prepared for it will give a good edge in markets. At the very least the trader will spend a bit less time in negative emotional loop, more productive in making progress, better health, longer life  and find the journey a bit more better.

I could not find any articles on this topic directly related to trading. Following is a good general article for ideas on how to manage disappointments. Feel free to share any techniques you found useful in your experience.


Link: managing disappointments

The size of your success is measured by the strength of your desire; the size of your dream; and how you handle disappointment along the way … Unknown

• The way firefighters evaluated their options and their sequence in those situations sounds close to the way scalpers/short term traders approach. This seems different from usual tendency of people to maximize outcome by considering all choices. May be this is one reason people with heavier intellectual orientation find scalping difficult.
• Another takeaway I felt closer to trading is the subtle learning happens via repeated exposure by deliberate practice and how it helps in decision making during high pressure situations.

The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honors the servant and has forgotten the gift – Albert Einstein