Category Archives: trading psychology
Andrew McCutchen is having a fantastic season for the Pittsburgh Pirates. Projecting his statistics over the course of a 162 game season provide comparable numbers to those posted by Barry Bonds during his NL MVP campaigns in 1990 and 1992.
He, along with a fantastic pitching staff, are the reason Pittsburgh is 11 games over .500 and lead Cincinnati by 1 game in the NL Central through the first half of the season.
McCutchen was a Florida high school star and was chosen 10th overall by Pittsburgh in the 2005 draft. He breezed through rookie and Class A ball with relative ease. He was a natural talent, the kind of player Pirate fans have been eagerly awaiting since 1992.
Suddenly, in 2007, he hit the wall.
Early that year in AA he wasn’t able to connect and he entered what was the first slump of his career, hitting under .200 and struggling mightily at the plate. How could someone with so much natural talent suddenly lose it so quickly?
Fortunately for McCutchen, there was a hitting coach (Gregg Ritchie) in the Pirates system who took notice of flaws in McCutchen’s swing a year and a half prior to when his struggles began. Instead of jumping in and trying to correct his swing, the organization decided to wait. Ritchie prophesied that the flaws in his swing would eventually catch up with him, and that would be the time to present McCutchen with his findings.
Having never experienced any sort of setback with his baseball career, McCutchen was eager to delve into the observations that Ritchie had made. As with anyone who yearns to improve their performance, he listened to Ritchie’s advice and made the recommended adjustments to help modify his swing. The rest, as they say, is history (well, it’s obviously still being written).
As my experience as a trader has grown over the years, I have come to realize that there are significant parallels between athletic performance in sports like golf and baseball with trading. Obviously, there is a significant level of natural talent required to attain levels of success in any of these fields. However, what separates the average from the above average from the great is repeated practice/exposure and mental flexibility/toughness when times are not going well.
When we are nailing trades left and right, superficially, our strategies do not require analysis or tweaking. Shit is good, money is flowing and we have all the answers.
When things go south and our ideas and trades fall apart one after another, how do we confront that harsh reality? Suddenly, we don’t know everything. Our ideas aren’t quite so brilliant anymore.
Do we say “fuck this, I’m just going to keep doing what I’m doing. I was successful in the past and I’ll continue to be successful in the future”?
Or, is a more prudent approach to try and diagnose our flaws and devise a strategy to overcome them through hard work and focus?
I may be relatively young (33), but I have been involved with developing a trading strategy since 1998 (though at the time, I wasn’t remotely conscious that I was in the early stages of this process). I don’t know much, but one thing that I have learned about trading, and can say with absolute certainty, is that the opportunity to be humbled is constantly lurking, waiting to strike.
Every trader (just like every golfer and baseball player) will go through slumps. It’s part of the game and experience.
Success (ESPECIALLY early success) can be poisonous. Once we proclaim to have things “figured out”, that’s when we get slapped upside the head with a steaming pile of humble pie.
We need to constantly evolve to meet the dynamic nature of the markets and, even more importantly, our own psyche.
Ultimately, a critical question that every trader needs to address is: “how will you handle your next slump?”
It’s coming…trust me, it’s coming.
Lastly, if anyone is interested in receiving unfettered and objective analysis with the sole purpose of improving trading performance (pro bono, of course), feel free to email me at: artbuguse at gmail dot com. Coaching and performance psychology is my passion and I would love to share that enthusiasm with the good readers here at iBC.
My best to you all.
Reference for the McCutchen bit was obtained here.
Whilst sitting and waiting (and waiting…) for a connecting flight in hell (aka. Phoenix), I was left with plenty of time to expand upon a few thoughts I have had over the past three days while not actively being involved with the market.
In good markets and bad, we, as traders are always battling to maintain (and improve upon) our level of self-confidence.
In other fields, self-confidence can be developed through a promotion, closing a sale, learning new skills, finding a new job using previous education and experience, etc. One common theme amongst all of these scenarios is a state of control. We are in control how hard we work, or how we interact with colleagues, etc.
Interestingly, psychological research suggests that self-confidence is primarily a byproduct of self-efficacy. Self-efficacy, in layman’s terms, is the feeling that we have control over our actions and the outcomes they produce.
Unfortunately for traders this presents a slew of potential pitfalls, as we have no control whatsoever over whether or not we make money (which, incidentally, is why I believe we all got involved with this business in the first place). Once a trade is on, the only element that we are in control of is how much we are willing to lose on a position.
A common misconception is that self-confidence is reflected in our ability to dominate when times are going well. Quite the contrary is true.
Ironically, self-confidence is forged from the depths of despair. How we handle the toughest of times will go a long way in confirming just how much confidence we have in ourselves and our trading strategy.
This is where self-confidence is developed.
I have been reading a lot on iBC about traders struggling in this current market. A very understandable predicament, one in which I find myself a part of as well. Recently I commented on Rhino’s post and suggested that a potential source of stress was focusing on making money. Of course, this is a universal stress that all legitimate traders must contend with throughout their careers.
A key to building self-confidence is to shift our focus from making money to trading well. The reasoning is simple: we will never be able to control whether or not we make money. By focusing on P/L, we are expending energy on something we have no control over and drifting further from a state of self-efficacy all the while toying with our vacillating self-confidence.
What elements of this profession are we capable of controlling?
We can control how we approach our strategy. We can control how we approach a trade when it hits a stop-loss point. We can control our position sizing. We can control our state of mind when faced with a drawdown or losing streak. These are only a few of the methods we can use to employ a sense of control over our efforts as traders aside from focusing on P/L.
We need to develop the confidence that we are capable of staring down a grave scenario and, no matter what, will follow our strategy and come out in one piece. Even if we continue to put on losing trades, as long as we follow the rules set forth in our strategy, we can feel like we are achieving some sense of control over our actions.
Being able to survive drawdowns within the constraints of our strategy will build self-confidence. We know that losses are part of the game. Even some of our best conceived ideas will not result in winning trades, and that is ok. Those experiences can be some of the most frustrating, but we also have to realize that confidence is built through control over our strategy and recognizing that even great ideas don’t always pan out.
Self-confidence doesn’t spring forth through being right all the time; rather, it comes from surviving the many many many times we will we wrong in our careers.
One final note. I believe that starting a blog and actively sharing your trading ideas is a very important step to build self-confidence. The iBC team has generously given us a fantastic opportunity to share our thoughts with a (relatively) objective and outspoken community of very intelligent people.
When we share our trade ideas we are forced to be accountable for our actions. It’s much easier to ignore a stop-loss and ‘hope’ a trade will come back to us when we are sitting there all alone in front of the screen. In that scenario, where is the accountability?
As I have mentioned many times, we are our own worst enemy. I can tell you from personal experience that I am much more liable to break rules and deviate from goals when I keep myself insulated from the opinions of others.
I make stupid mistakes all the time, but I’m much more likely to irrationally justify those mistakes if I keep them to myself.
Through sharing trades and ideas, there is a much greater sense of accountability to our strategy and ourselves. We all need a plan for losing, if we (directly or indirectly) share our plan, we are much more likely to hold true to that plan and develop a sense of control over our business.
That is the general theme I am trying to nail home here: through control comes self-efficacy, which, in turn, is directly related to our ability to develop self-confidence.
Figure out how you can exert control over your trading and self-confidence will likely follow.
My best to you all.
Expanding upon the theme presented in the latter part of my previous post, I would like to build upon the idea of how continually setting and achieving goals is a catalyst for realized improvement of who we are as traders.
Consciously approaching everyday activities (not just the stock market) with a positive frame of mind is very important in helping us navigate through tougher times. On the other hand, if we allow negativity to overwhelm us, we become bitter, lose focus on the task at hand and deviate from our plan/strategy.
In order to keep our long term goals in focus, we need to actively engage in setting and achieving new short term goals on a regular basis (preferably every day). The focus of these goals is irrelevant as long as the energy is directed toward improving some aspect of trading OTHER THAN making money (because that is ultimately out of our control). If we put in the work toward improving some aspect of our trading, and we do it toward a positive source, we are going to see improvements over time.
The key here is maintaining a positive frame of mind while developing goals. Sure, it seems really simple and mundane; however this shit is not easy…it’s tough enough to sit down and develop new goals on a regular basis , let alone accomplish those goals. Therefore things need to be kept manageable. Goals need to be challenging but they also need to be attainable.
With short term goals, if the bar is set too high, it will be a struggle to regularly achieve these daily goals. This will lead to frustration and, in the majority of cases, failure/relapse. Swing for the fences with long term goals.
If the effort to learn and progress is realized through the accomplishment of short term goals, steady improvement can and will be a realized function of daily interaction with the stock market.
I can’t hammer this point home enough, but residing in a positive frame of mind, not only while trading, but throughout the day is of critical importance here.
I have a personality that tends to gravitate toward the cynical and negativity often seeps into my consciousness. In these periods, I’m usually left frustrated and make little intellectual progress. With frustration comes confusion.
Guess what loves to prey on frustration and confusion?
If you guessed “greed” and/or “apathy”, then you are correct.
There is little doubt that times get tougher when losses start piling up (in the form of monetary loss or W/L record). Even if you stick to your rules, drawdowns are inevitable. Remaining optimistic when things get hairy is a difficult task. Trying to navigate through the shit without taking on too much damage is the goal. It’s probably not the first time, and, if it is, it won’t be the last.
The key is to devise ways to be productive instead of wasting time being pissed off and frustrated. Hell, even if you are pissed off and frustrated, if you expend energy working toward a place of improvement, your work will not be in vain.
As an anecdote, for many years I was a swimmer…I recall many a practice just hating life and wanting to punch someone in the face. Instead (most times) I would take out my frustration on the drill at hand and want to destroy the asshole pushing off in the lane next to me. Sure, I was salty as all hell, but I was directing my energy toward a positive source instead of that guy’s stupid face.
When I hit my stride and am trading well, it feels effortless. The frame of mind that I create when in the midst of those moments plays a significant role in my approach to the market and life in general. I am happy and positive and this is reflected in all aspects of my life. A long term goal of mine is to try and maintain the level of consciousness that I feel when I’m trading well.
When positive energy is expended, in my experience, typically the universe will give back. I’m not talking about monetary gain…even though that is the end-game, it is earned as a result of hard work, dedication and focus. The money is not the product of something superficial like greed.
By keeping losses manageable, consistently pursuing goals, and taking definitive steps toward a state of mastery, each day in the market can be a positive experience…even when your account balance says otherwise. The positive energy is a self-fulfilling prophecy, resulting from hard work and perseverance, which in turn creates more positive energy. It’s a powerful cycle.
My best to you all.
I am of the opinion that once you become versed in the financial markets and find a strategy that works for you, the mental aspect of trading is where the vast majority of the battle lies. How you choose to approach the market is really irrelevant. If you can consistently stick to your plan and control your losses, you are going to be successful. Of course that sounds simple, but there are countless traders that have great plans, great money management skills, and superior focus who end up hindering or ruining themselves with trades gone awry.
How does this happen?
Why is it so easy to relapse into destructive patterns of behavior that we KNOW are wrong, yet we go through with them anyway?
Lastly, how can one enact change to minimize (or, ideally, prevent) this from happening in the future?
The starting process of change is the easiest part. Finding a way to maintain the effort to change is the challenge.
Trading is a unique occupation, there is no paycheck. A trader’s quality of life is determined by his or her success or failure at the end of each trading day. There are a million different ways to try and make money in the market, and all of them are potentially viable.
After reading a ton of literature about traders, the common denominator for success, universally, is a) having a profitable plan that revolves around sound risk management b) sticking to the plan and, most importantly, c) having the mental fortitude to stick to the plan when the more primal urges of avarice inevitably arise.
Rest assured, they (the urges) are always there, and they will always prey on you when you are most vulnerable. Having a rough year? Instead of sticking to the plan and chipping away, you look for the “hanging curve”, put on too large a position based on the unreasonable expectation that you can nail this one and get back into the game. Guess what? Invariably, those are going to be your worst trades. They will lose the most money and be the most difficult to shake.
How do you summon the mental perspective required to change this behavior?
This business is about making money, so greed will always be nagging at you. Just like losing weight, you know what you have to do, but how come it is so hard to press on and break though? In order to enact change, one must take the result of the change and make it part of your being, part of who you are.
For example, if you are struggling to lose weight, and you go to the doctor and come to find out that you have type II diabetes, high cholesterol, high blood pressure, etc. It is not surprising that a brush with mortality can be the kick in the ass one needs to push through the resistance that will inevitably arise once the initial motivation to change passes. Now change is required to continue to live a happy and reasonably healthy life. Change and the consequences/results are no longer an idea or concept, they are real. Years were spent knowing that something needed to be done, ‘wanting’ to change, but never doing anything about it. The prospect of a bleak and unhealthy future is the catalyst needed to fuel the need for change.
What is the catalyst for traders to go from making the same mistakes over and over again, to a place where change can be enacted to avoid those habits in the future?
If one repeatedly makes similar mistakes which result is the realized loss of capital, then losing money is not, alone, a very effective agent of change. This is what makes trading so difficult.
In other fields of competition there is a clearly defined opponent(s) that you compete against and try to defeat. In the markets, for the most part, there are no competitors looking to defeat you. We trade against ourselves. I think that this dynamic makes trading much more difficult than trying to outsmart or outplay someone else. I know all of my tricks…and that evil voice is oooh so sultry, tempting and hard to resist. As long as one is trading, that opponent will always be there, watching, lurking, tempting you, providing you with false confidence in the face of ruin. The ability to change one’s perspective and drown out this voice is imparative to sustained success and is a lifelong pursuit.
The easiest (and most direct) way to overcome and subdue this challenge is to set goals. Start by setting long term goals. Then figure out intermediate term goals that will help you reach your long term goals. Now you can drill down to daily, short term goals that can help you reach your intermediate term goals, which, in turn, can help you reach your long term goals.
Write your goals down and/or use your phone (or something) to record your voice saying them. Read them or listen to them regularly.
This process helps to keep the mind focused on the task at hand. If you concentrate your time on trying to achieve your goals, you are going to spend far less time being unfocused and greedy.
Rest assured, no matter how strong you think you are, no matter how focused you are on your goals, the temptation to relapse will always be lurking around the next corner.
How are you going to carry the momentum of change through these moments? How will your goals be used to combat these moments? Will you focus on building a strength? Controlling or modifying a weakness? Learning from a mistake you made yesterday? Repeating something you did well yesterday?
You have to keep your goals realistic and manageable. Saying that you want to make ass-loads of money is a reasonable long term goal, but is worthless in the short term. You need to figure out what you are going to do on a daily basis to guide yourself on the path to being wealthy. This is the foundation of a manageable and sustainable approach to long-term success.
I think the power of visualization is vastly underused in trading. Have you ever watched a bobsled driver prior to their run? They visualize navigating the course flawlessly many times. Entering a relaxed state of mind and visualizing using your strategy productively can be very effective. This practice helps to block out the noise and focus on the task at hand; mainly: how are you going to accomplish the goal you set for yourself today?
In order to have staying power, your goals need to be based an emotional force, not a desire. If you set goals based on a desire, once that desire is fulfilled, you will lose focus and your momentum will weaken and even fall apart completely. What happens next? You find yourself caught in the loop of questionable focus and bad habits. At that point relapse is all but inevitable. You need to feel your goals deep within your being, as if anything short of accomplishment can be considered failure of you, as a person, not just as a trader.
Yes, that is harsh, but as I have mentioned, the enemy within is always there lurking…waiting for a slip up.
My best to you all.