I am very excited to be able to offer the fourteenth in my series of posts asking Pro Traders about their psychological processes. Delving a little into how it feels to them when trading. The good and the bad. How this has changed over time and what preparation they do mentally for performing as a trader.
One of the key features for me was that I wanted traders with experience who have been through the mill over the years and of course those who were kind enough to broach this subject publicly. This I hope gives developing traders more to learn from.
I’m very fortunate to have a great line up and this week is:
Trader: Jon Boorman
1) How long have you been trading?
I’ve held a variety of roles within the financial industry since 1987. I started with Schroders in London just a few weeks before my 18th birthday. My first real break came a few years later when I went from being a fund manager’s assistant and moved up into the trading room. They were a fantastic group of people and I learnt so much. Even before I joined Schroders I had an avid interest in markets and used to place trades with a broker in between lectures at college.
2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?
I’m a technical trader, specifically a trend-follower. It’s taken me many years to get here, to understand what works best for me, and develop trading systems and methods that suit my personality and trading style. I think that’s key. I trade global index, currency and commodity futures with systematic trend following, and US stocks with what I call a ‘rules-based discretionary’ style.
3) How do you feel when a trade goes against you?
I don’t like it, but I accept it readily. As a trend-follower you typically have more losing trades than winning ones, but as long as you are disciplined in executing the time honoured strategy of cutting losers and running winners, your average win will outweigh your average loss and make you profitable overall. So I now look at losing trades as being part of a winning system.
4) How do you feel when a trade goes for you?
It feels good as it means I don’t have to do anything, and for some people that’s the hard bit. The sitting, waiting, letting those winners run can be difficult if you expose yourself to the noise of news and commentary bombarding you with reasons to do something.
5) How have these feelings changed over your trading career? (Can you recall how you originally used to feel and elaborate on how this has changed over time?)
Great question. The actual feeling of not liking it when I lose and enjoying winning hasn’t changed, but the way I process and act upon those feelings has markedly. From years of being a buy-side head of desk, a sales trader to institutions, and a prop trader at an investment bank, I picked up unhealthy habits of telling people what they want to hear, and most fatally developed a need to be right, which was only further fostered by that environment. Now, as a trend follower, knowing that I will have a low strike rate has all but removed that ‘need to be right,’ I don’t live from one trade to the next, each one is a tiny part of an overall process. I accept that there will be more losers than winners, and I can never know what each trade brings, so after a while you learn to treat them all the same with little emotion. Your only job then is to manage risk to ensure those losses remain small enough for the big winners to outweigh them monetarily.
6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?
Having young children is certainly a great leveler, it helps cement what’s really important, and any time spent with them is a welcome departure from markets. I try to relax as much as possible to clear the mind, and I think diet and physical exercise are important too. I’ll happily row for an hour, or play tennis, anything that gets the blood pumping and your energy levels higher can only be a good thing. Beyond that I currently sing in a classic-rock covers band which is a lot of fun for me, and a good outlet for the ego!
7) Have you always done this?
In some form or another yes, but I think I probably thought about it less previously. Now it’s something I feel like I have to plan or remember to do, whereas before it was something that happened on the fly. Having a family is the big game-changer there in terms of the time and commitment it demands.
8) If not, how have you learnt to deal with the feelings that come up when trading?
The difference now is I know what feelings to expect, I know why I feel that way, and I know how to deal with it, which stems from becoming more self-aware over the years.
9) Can you describe a time in your trading life which really rammed home the point that so much of trading comes down to psychological factors?
I had always believed that psychological factors play a large part, and have seen people talk about what percentage of trading is psychological. I’ve got to the point now where I think it’s 100% psychological. Every single facet of trading, whether it’s developing systems, stock picking, entries, exits, position sizing, even selecting an algorithm and pushing that button, all starts with human involvement and the biases and emotions we have that shape our beliefs. What really drove that point home for me was a lot of the self-work I did after moving to the US in 2005 when I read some of Van Tharp’s work and attended one of his courses.
10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?
It all begins with you. Know yourself first, and then you can recognize your emotions when they reveal themselves in your trading. It’s like the quote from The Money Game “If you don’t know who you are, the stockmarket is an expensive place to find out.” I can now watch a situation develop in the market and recognize what the old me would have done. It doesn’t mean I don’t still feel those emotions, but I now understand the reasons behind them, what motivates me, the biases I have, and how to deal with that. If you can combine self-awareness with a systematic approach to trading you will significantly improve your chances of success.
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I’d like to thank Jon Boorman for sharing about the way he tackles the market from an emotional / mental side of things and for his willingness to allow me to post this as a free resource in the hope that traders who have been in the market for less time or are thinking of entering can perhaps pick up some A-HA’s.
If you are interested in finding more out about Jon Boorman you can find him:
On twitter: @JBoorman
At his blog: www.jonboorman.com
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Previously in the series:
Charles Kirk - read it…..here
Matt Davio - read it…..here
David Blair - read it….here
Mike Bellafiore - read it….here
Mark Holstead - read it ….here
Brian Shannon - read it…. here
Mike Dever - read it…. here
Anthony Crudele - read it… here
Derek Hernquist - read it … here
Ivan Hoff - read it… here
Brian Lund - read it… here
Greg Harmon - read it… here
Michael Bigger - read it… here
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
A very long time ago the Buddha said that the presence of change is the only constant.
A little more recently but still a century ago Charles H. Dow (1900) said “The one fact pertaining to all conditions is that they will change.”
As many of you have picked up on, I study Chinese martial arts which provides a fantastic balance to the rigors of trading. You can read around the blog a little to find out more or stay tuned as I will surely be writing more on it.
One of the most important Chinese philosophical texts is the I Ching (pronounced Yee Ching). This books title is normally translated into English as The Book of Change.
(Image thanks)
So here we have the the Buddha, the Godfather of technical analysis Charles Dow and one of the most important Chinese philosophical texts all focusing on change.
Yet I notice as I read and speak with traders how few have really started to embrace the need to become comfortable with change. Too many want predictive capabilities, cast iron reliable approaches, fool proof guarantees to wild profitability and wealth in the markets.
The reality is that this is going against a basic reality that everything changes. When you interface with the market you have to start to become very comfortable with change and the varied gyrations.
Want to be successful then copy the Pro’s and do this:
That is why you read so many of the Pro’s focus on the importance of having a process rather than their actual entry parameters (read the Pro’s Process interviews). The best know that anything can happen as you interact with the ever changing market. That their individual psychology or perception changes regularly even throughout the day no matter what they do. As a result having a consistent process as to how to interact with the change that is the markets. Doing this allows you a fighters chance of being successful.
When you combine it with this….. you increase your chances significantly
You will also see how the Pro’s all have a statistically significant approach to trading that along with their process they work hard to execute consistently. Good traders know that everything changes and there are no guarantees when they put on a trade that it will work out. They also know however that it is one of many over their week, month, year and career. Each trade taken on its own is statistically insignificant. (If it isn’t you are on a very slippery slope and you should really do some re-evaluation of your trading approach. No one trade should have the possibility of taking you out of the business).
By thinking in terms of probabilities each individual trade takes on less emotional significance if things change up in your face as you enter, as a result of thinking in terms or probabilities / statistics, you can take it with more aplomb rather than letting it smack at your ego.
Change is the one constant present in all your market interactions. Embracing this fact and focusing on both your process and having a probabilistic edge are two of the most important things you can do as a trader.
Thinking you know what is going to happen is just wishful thinking and goes against what the Buddha referred to as the only constant - change.
(Image thanks)
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Thanks to all the kind people who wrote to me asking when I would be writing again. I really appreciate your nice words. After a break to focus on other projects I am back.
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
Trading is all about making good decisions in an uncertain environment. There was an excellent post (last year!) at Farnham Street called What Happens When Decisions Go Wrong? It is so good that I include an excerpt below and urge you to consider this in the light of your trading. Particularly the Process - Outcome Matrix.
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Good decisions don’t always have a good outcome, just as bad decisions don’t always have bad outcomes. For example, if you are sitting at a blackjack table and happen receive an 18 on the first two cards, should you hit when the dealer asks as a courtesy? Let’s suppose you take that hit and the next card is a 3. You made a horrible decision but you lucked out. Worse, you might never know that you made a poor decision.
In Winning Decisions: Getting It Right the First Time, Russo and Schoemaker explain this concept with the following matrix:
In talking about this matrix, Paul DeDodesta, the Harvard stats wiz featured in Moneyball,writes:
We all want to be in the upper left box – deserved success resulting from a good process. … The box in the upper right, however, is the tough reality we all face in industries that are dominated by uncertainty. A good process can lead to a bad outcome in the real world. In fact, it happens all the time.
… As tough as a good process/bad outcome combination is, nothing compares to the bottom left: bad process/good outcome. This is the wolf in sheep’s clothing that allows for one-time success but almost always cripples any chance of sustained success.
This is where it gets interesting. If you can’t recognize when you’ve had ‘dumb luck,’ you’ll never be in a position to correct the way you’re making decisions. Eventually your luck runs out.
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I encourage you to read the post in its entirety: What Happens When Decisions Go Wrong? and to think carefully about whether you have done everything to ensure that your trading means your outcomes fall within the ‘deserved success’ or ‘bad break’ categories. After all if you are trading a positive expectation approach you can be a very good trader without a particularly great looking win / loss ratio.
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
Everyone likes certainty. You do. I do. It’d be so nice to know for sure that XYZ stock was going to go up and to what number it would reach.
Imagine how much nicer your life would be if you were completely sure that Coffee was going to rise and to exactly what number before it turned.
I imagine all the anxiety would leave. The butterflies in your stomach would be a thing of the past. You’d load up big, wouldn’t you, to maximize your profit out of this event.
The problem is this is a fairy tale!
I’m constantly amazed by peoples need to predict and to search for financial heroes that correctly predict the future.
After all, do you not laugh at the fortune teller in the local mall?
If you answered no to this I would strongly suggest reconsidering trading or investing as a career choice.
Let me make something absolutely clear. Nobody knows what the market is going to do.
The best they can do is make an informed guess.
It doesn’t matter if they way you inform yourself is through analyzing charts, statistics or the fundamentals…. It is all at the end of the day a bet.
I wrote a post called More of my man Lao Tzu this time with Peter Brandt
Where I covered how some keyboard warriors with no skin in the game or what Peter calls ‘soprano choir boys’ always have a pop at him for regarding his comments about charts.
You see what they do is read the analysis and then when it turns out not to be exactly as Peter said, take great pleasure in pointing out how wrong he is.
Peter responded with two great quotes that any of you stuck in the dream world of thinking you or anyone else can predict the market really need to take heed of:
“I do not want you to miss the next point: Charts do not provide a prediction, they provide a possibility! Sorry, but that is the function of a chart.”
and
“Please connect with what I am saying here - using imagination to think about the possibility of a chart is NOT the same thing as making a prediction or forecast. Charts are NOT predictive.”
I’ll leave it to you to see what Lao Tzu said about this.
Now it should come as no surprise that I like Nassim Taleb and value his writing. He may be a cantankerous old sod but he is sharp and full of good wisdom. Not only are his previous books ‘The Black Swan’ and ‘Fooled by Randomness’ must reads but he has banged out another one ‘Antifragile: Things That Gain from Disorder’. Even the title is worth considering and thinking about if you are a trader or investor. We certainly are involved in a market that is not exactly ordered.
I wrote in 1 Illuminati Secret as To Why Twitter / StockTwits Banter Reduces Isolation and Helps Trading how I love his use of ‘Hammurabi’s Code’ and link to an article for those who don’t want to get his book that I think is particularly helpful to traders.
So I shared this with Peter and I encourage you to watch the below presentation by Nassim. The whole thing is good but at 06:20 I couldn’t help but think that there was a clear parallel between Nassim’s thinking and Peter’s.
Here is the link to the short video that I suggest you watch: Nassim Taleb talking about Antifragility at the RSA
Peter responded to my tweet:
There you have it for the hard of hearing:
PREDICTIONS ARE IMPOSSIBLE - TRADERS ONLY DEAL WITH PROBABILITIES
and as Nassim say’s:
Economists have been giving us bullshit models for a long time. Why? Because they are never harmed. Predictors are never harmed by their mistakes.
If you are still engaged in the need to find predictors or to predict yourself you really should consider these two men and their clear statements.
2 key points:
1) You can’t do it! Being obsessed with prediction is a fools game.
2) It only matters if you have skin in the game. What you think is irrelevant to making money. There is the possibility that you will make money and turn out to be right. If you’re not. So what? Keep your bet size small and you can have another go and still make a lot of money.
Prediction is about the ego. Making money is about trading possibilities and managing risk.
If you like the Lao Tzu thing I also wrote for you: 1 Major Lesson Lao Tzu Taught Famous Investor Jim Rogers That Helped Him Make Millions and 5 Ways You Can Too
Got something useful to say? I love that. Please go for it in the comments below.
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
As traders we can often be very alpha. Very competitive. Very driven.
This quote may help you a little:
“Be patient with yourself. Self-growth is tender; it’s holy ground. There’s no greater investment.” –Stephen Covey
Carry on taking the necessary steps in your process to succeed but take a few deep breaths and allow yourself some time. Be tender with yourself and let the momentum of small changes build.
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
I am very excited to be able to offer the thirteenth in my series of posts asking Pro Traders about their psychological processes. Delving a little into how it feels to them when trading. The good and the bad. How this has changed over time and what preparation they do mentally for performing as a trader.
One of the key features for me was that I wanted traders with experience who have been through the mill over the years and of course those who were kind enough to broach this subject publicly. This I hope gives developing traders more to learn from.
I’m very fortunate to have a great line up and this week is:
Trader: Michael Bigger
How long have you been trading?
I started on Wall St in 1992. I was trading the equity derivatives book for Citibank Canada. I stayed in Canada for 2 years and then I moved to New York. Before that I was trading my own account for another 5 to 6 years.
That’s 20-25 plus years’ experience. What style of trading or investing would you say you practice?
Everything.
I notice on your website that you are not just a trader but you’re also active in investing as well.
We trade, we invest, etc….. trading is about making money and opportunities are fleeting and they present themselves in different shapes and at different times. We do not have blinders on that say, oh you know, that we have to just trade value or something like that. We don’t look at the world in that fashion. Our model is that, and maybe we draw it from physics, that we are basically trading potential energy. That is basically what Buffet does. Buffet calculates the value of a company, comes up with an intrinsic value, and, if it’s below and if he likes the model of the company and stuff like that he goes ahead and buys it. So basically what he does is that he exploits a level of energy between its intrinsic value and the stock price. We do that in terms of value, in terms of statistical arbitrage, etc. We are always thinking about exploiting pockets of valuation. If we buy something, if it’s statistical, what else can we sell against it. If we buy a stock, what’s its intrinsic value, can we hedge it with the S&P. We try to rotate our inventory and do things of that nature.
Are you also market agnostic? Do you trade futures and stocks or are you stock market focused?
Yeah, I used to run big equity books so we basically do everything, but, we don’t touch commodities that much except for trading them with ETF’s.
So getting into the reality of when you are actually trading; how do you feel when a trade goes against you?
That’s a very good question. You know it doesn’t affect me like it would affect a lot of other traders. I’m not right or wrong because in the next 5 minutes something goes against me. We try to get ourselves in situations where if it goes against us we still feel good about the situation.
To give you an example: let’s say we have a stop, we would never have a stop that is so close to where the market is so that we would get pushed out of the situation. Usually we are in a situation where we are very confident of our facts and we let our positions run and it’s fine. We run big portfolios, they’re diversified so we’re not neurotic about a position in particular. We bought a lot American Apparel which is in a distressed situation, it went to 1.70 came back down to 90 cents, This reversal doesn’t affect me one bit. The thesis is still intact. If you are driven by the stock price you are going to go crazy.
Does this alter at all when you have your trading or your investing mindset in place? Obviously one has a longer term time frame and different parameters that you are thinking about. Does that effect your emotional feelings?
Aren’t they the same? We are looking at potential energy in situations. Whether it be a short term position or a long term position we don’t look at the world that way. We look at the world in terms of potential energy and where can we extract the energy out of the system. We don’t categorize in terms of ‘are we doing value investing here or there’, in a sense a little bit, but overall that is not what we are trying to do.
I think that makes a lot of sense.
We have backgrounds in physics. We have mathematicians working with us and PHD’s and so we look at the world from a physics kind of standpoint and where the energy is in the system and how we can exploit it. And you know what, I don’t care what category other people put on how things are trading, they can have their own stuff, we look at the world our own way and we’re very happy with that. It’s a little bit peculiar but that’s just the way we look at the world. So if we are valuing situations, we get those values, we look at the facts and act accordingly. And if we have to get out of a position because we are wrong we just do it but it’s never so related because the price went down or it goes up or goes against us or stuff like that.
I think that offers a very interesting perspective – especially the physics and the energy direction side of things. There is the flip side to the question about how you feel when trades or investments goes for you? Because obviously emotions are at play to some degree. How does that differ?
We try not to get influenced by it but you know mentally you are always influenced a little bit by your position especially when you have a big position on. If it goes in our favor you know we can be, maybe, a little overconfident but we know we have to manage that.
I’ll give you an example, when we traded CROC’s we bought the stock at about 90 cents it went up to 32 and then we sold a little bit, but it was just a tiny bit on the way up, and then it came down to 12 dollars. We have a very long term thesis on that company so we wish we would have sold more but we’re happy with the thesis and so it all really depends on your time horizon, it depends what you own and sometimes you wish you had sold more but that is easy to say when the stock price is down.
I could have done the same thing with Amazon when it went from 100 bucks to 34 bucks in 2008. We had that big gap down but man you look at the stock price now. On American Apparel we have a huge position in that name and we think the company is going to earn its stock price in basically 5-7 years from now so that puts the stock to 10-15 dollars if it doesn’t go bankrupt and bankruptcy is a potential. We have our own odds on that. Does it matter if the stock goes to zero? It doesn’t. I mean we are going to lose money but in terms of how you look at it right now and the probabilities and stuff like that you know what your bet is and zero is part of the scenario.
So Michael your very scientific based approach and viewpoint means that you never let your emotions override a thesis that you have?
Oh….. I don’t know. We’re very emotional. I’m a very emotional guy but I know what I’m dealing with. Like in the case of American Apparel the reality is that it could go to zero and it has potential of 10 to 15 dollars so we know that probability, so of course I am going to be emotional if we lose all that money and it goes to zero, of course, but that doesn’t change the nature of the bet that we made. I guess we are a slave to that bet unless the facts change for some crazy reason, which can happen too, and then we would unwind. But we’re emotional.
Michael I notice reading your bio you come from a very scientific background and obviously you have been speaking about science and physics with regards to your company’s way of trading but have your feelings changed over the course of your trading career or have you always had this sort of background where the emotions aren’t going to effect your models?
Well I think one of the best lessons I have learned was when I was in New York trading the single stock derivatives book, it was never my calling to say ‘oh Microsoft comes out today they want to sell say a million put on the stock and hey Michael do you want to buy them or……’ you have no choice. You have a market to make, you have a market for size to make, and, then you make your market. If you get hit because the companies sell puts now you own like a few million puts on Microsoft, I’m just giving you an example, or Dell or whatever the companies were in those days, so you have a huge position. So you have this huge position and most of the time you don’t like what you have because it’s big and it’s very hard to get out of it. So you get very very good when you have a big position like that, you get very very good at working your butt off and going to the market and trying to find other things you can sell against it or buy… you know what you need to do to reduce the overall exposure. So when you run big books like that you get very very good at dealing with having a position and then starting to work your way out of it or reducing the risk and things of that nature and that’s basically how we approach our trading. We have a lot of positions and we are trying to move value from one to the other. So for us it’s more about that process, exploiting value and sometimes not having the stuff you want to have but working very hard to exploit that potential of energy. It is very hard to explain in words but if you get dropped a massive position and you have to deal with it, I tell you, you learn very quickly. And you know the charts don’t matter and sometimes the volatility doesn’t matter if you have a huge position what matters is how the heck can I trade out of this, how can I find other opportunities to trade against it, if you buy something that is quite cheap or fair value what can you sell… this is a very different discussion to what many talk about like the chart looks good aghhh come on guys.
With a lot of that stuff, particularly having very large positions, obviously your internal system or your emotional system gets bombarded by it. Do you have any practices that you do away from the office or the trading screen to help handle things mentally or emotionally?
Well I play hockey and I do a lot of kite boarding.
Michael do you find that actually gives you a balance to your market operation? A mental or emotional balance?
Yeah, kind of. Well hockey is more like hustling. You have to hustle when you play hockey so it’s a little bit like trading as you have to make things happen, you have to produce. So that doesn’t get me too much away from the trading mental framework. The kite boarding is definitely more meditative: more of a meditation or relaxation as it is just such a totally different atmosphere.
Have you always had some sort of approach to balance yourself personally away from the markets? What about when you were back on Wall St?
Yes and no. I guess not really. You know we’re thriving in that commotion of trading the market and just going around and finding opportunities. So that is almost like a mediation too although it doesn’t sound like it. If you like it so much, and are passionate about what you do, for me it is like playing a hockey game you know?
Do you feel you are naturally attuned to the market game and the involvement in it? Is it something that just came naturally to you?
Absolutely. Another way to explain it is that when I came to Wall St, when they moved me from Montreal to New York, I asked the big big boss of the trading floor “What the heck, why did you guys hire me? There are so many people in the US etc?”. I mean there were pretty big books back then and 500 traders on the floor and I was just always puzzled why I was given that book in New York. Junaid Rubani told me how to play the game: “Look you’re a street fighter. You know we go into a fight and you go in there and you make things happen. You hustle, you make plays happen. That’s what it is.” You see it’s never the same and there are different fights that you have to fight. You have to create things. You have to make things happen on your own without resources. It’s like entrepreneurs… that’s trading. I think what he said captures the essence of trading, which is a little confusing for me as people approach trading saying it’s stop losses, and, set-ups and all that stuff. For me it’s not all that stuff. It’s more like, you know, walking down the street and getting attacked and you have to defend yourself. It’s a totally different thing. The last two weeks with the fiscal cliff made it a totally different ball game. You have to readjust how you see the market and do it very quickly.
I find it very interesting with your comments about a street fight and having to defend yourself as well as the context of the recent fiscal cliff. Do you find trading is more about having a good defense rather than an offense?
I think it is having a killer offense when people are panicking. That’s where the street fighting comes from. During the fiscal cliff episode when people start shaking you have to go into the market and if they need liquidity you have to provide it. That’s basically how I trade. What the charts look like and all that stuff is irrelevant. The money you take is the money you get from other peoples mistakes in one way or another; because they are mis-pricing securities. So when you sense that the market is nervous and is mis-pricing you have to go in there. You can’t wait for the sun to show up because it doesn’t work that way. You have to go in there and provide liquidity and extract money out of the system. That’s how we look at things.
This is brilliant stuff Michael. I am conscious though not to take too much of your time so let’s wrap up with: If you could give one piece of advice, with all of your years in the game street fighting in the markets, to aspiring traders about emotionally handling the market what would it be?
I think, maybe it’s going to surprise you, but I think if you can have a little bit of the emotion that the market has and be able to step out of it and look at yourself and how your emotional in that situation, it gives you a good read for how the market participants are acting. So it’s almost like you need to be emotional to get the vibe of the market and how fearful people are and then you are in a much better situation to exploit that. It’s almost like getting the good read on the emotional state of the market and then overriding your own emotion to take the proper position which is never easy. I have quite a bit of experience in the market and even during that fiscal cliff period when I had to buy futures and then it goes down against you, you get emotional and others are emotional but no one wants to get in there, just a few people want to go in there and buy the market. So it is a case of how do you go in there and override that emotion. It’s important to have that emotion because it gives you a good read on the market but you need to be able to override it and then just go and be confident in yourself. For me that’s how I approach it. I think this notion that you have to be a rational agent is rubbish.
The idea that you are some kind of Doctor Spock or Data from Star Trek with no emotions and very passive?
Yeah it doesn’t work that way! It’s impossible. I mean we’re people on that mission so we shouldn’t be too emotional.
So despite the fact that you’re a scientist and most of those that work for you are scientists you can’t take out the human emotion side of the market?
No you can’t take out the human factor. We have a little model that is called the ‘Levy flight’, you can search it on my blog as we wrote about it, it’s basically a mathematical model that represents how animals go and search for food and their random process that they use to gather food depending on the conditions of the environment. The model accounts for that and when we think about this we think about the news and journalists and the media. The media and those people are always looking for food as they have businesses to feed so they create a lot of anxiety etc and the Levy Flight is just a great model to use to visualize how things evolve in the media. Then you can look at that and then you can spot when the media moves, when the media goes totally all in, like with the Fiscal Cliff. That’s when you want to look to get involved as that’s when there are tremendous opportunities. You see that is one way we use science to understand emotion. We are all animals with that kind of instinct but we just try to use mathematics to model some of those things.
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I’d like to thank Michael Bigger for sharing about the way he tackles the market from an emotional / mental side of things and for his willingness to allow me to post this as a free resource in the hope that traders who have been in the market for less time or are thinking of entering can perhaps pick up some A-HA’s.
If you are interested in finding more out about Michael Bigger you can find him:
On twitter: @biggercapital
At his blog: http://biggercapital.squarespace.com/
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Previously in the series:
Charles Kirk - read it…..here
Matt Davio - read it…..here
David Blair - read it….here
Mike Bellafiore - read it….here
Mark Holstead - read it ….here
Brian Shannon - read it…. here
Mike Dever - read it…. here
Anthony Crudele - read it… here
Derek Hernquist - read it … here
Ivan Hoff - read it… here
Brian Lund - read it… here
Greg Harmon - read it… here
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
Twitter and StockTwits can be a good tool for traders.
I think they can be dangerous as well if you are inclined to lean too heavily on others rather than doing your own work. There are so many people ‘in’ this business with big mouths and fast fingers, with no skin in the game - you want to watch out for and avoid these like the bubonic plague.
Heed this advice or else:
Image thanks Wikipedia article on bubonic plague.
If you would like to read about why having skin in the game is important and have not heard of ‘Hammurabi’s Code’, I love this Nassim Taleb article from the Observer an overview: Nassim Taleb: my rules for life.
I use and enjoy Twitter / StockTwits for information and exposure to interesting people I wouldn’t normally cross in daily life. I’d say that now it’s all basically upstairs trading rather than in the pits, one of the best uses of these services, is for banter and preventing isolation.
Trading can be a very isolating business to be involved in. I have several stories of successful traders who are depressed because no-one around them (family, friends, etc) understands them and they trade on their own all the time with just their screens for company. While there are probably bigger issues at foot here and other approaches to dealing with them; building a community with Twitter / StockTwits is a good one to look into (with the caveat in the second paragraph applying).
One of the twitter guys I wouldn’t normally bump into is @soolebop. Not only does he have one of the most original and interesting of bio’s of trader websites / blogs I have visited but he banged out the following tweets which were class:
I told him what I was going to do:
He said:
And you know what…… it’s this nice post that’s the result.
Re-read the above and unless you are a major Dan Brown fan replace Illuminati with the core subject of this blog -» TRADERS.
Following @soolebop’s sage advice as to what makes a good Illuminati member is pretty damn good advice for traders. I write on here about the importance of mindfulness and being aware of your emotions. One thing is for sure, for almost all circumstances you want to be making rational and calculated trading decisions.
There are occasionally times when you internal voice will scream out and following it may be the right thing to do but…… I think you will normally find that these really are few and far between.
This is a game better tackled in the realms of probabilistic thinking rather than gut hunches.
For now listen to the Illuminati advice and use your nut.
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You know you want to comment :-). Go for it below:
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
Let me cut straight to the point.
Are you fit? Are you healthy? Do you take care of yourself?
This is a personal question for you to answer. Don’t shirk it; really answer it.
I admire people who are fit, healthy and take care of themselves. It shows me that they care about themselves, are responsible towards their family and their community.
It shows above all self-discipline.
Self-discipline has a massive carry over to being a successful trader or investor. I’d go as far to suggest that it really is key to being a success in just about everything.
If you are willing to do things that keep you healthy - then it translates to your willingness to be self-disciplined in your business life (trading is a business).
James Altucher has a well regarded post called How to be THE LUCKIEST GUY ON THE PLANET in 4 Easy Steps. I think it is excellent. In short he recommends having a daily practice that includes looking after the physical, emotional, mental and spiritual dimensions of your life.
In it there is a key paragraph for me:
“The “idea muscle” atrophies within days if you don’t use it. Just like walking. If you don’t use your legs for a week, they atrophy. You need to exercise the idea muscle. It takes about 3-6 months to build up once it atrophies. Trust me on this.”
Now James is a very creative guy and has a lot of people from the creative realm that read him. I am not saying working on your creativity is not beneficial; it is. However for the purposes of this post and this blog what I’m interested in is self-discipline.
Now I am going to go out on a limb here. If you are overweight, unhealthy, not regularly exercising, not adhering to a diet plan, etc you are lacking in self-discipline and whether you realize it or not - it is affecting your trading performance.
Take James’s quote and tweak it for our purposes a little and it reads as below:
“The “self-discipline muscle” atrophies within days if you don’t use it. Just like walking. If you don’t use your legs for a week, they atrophy. You need to exercise the self-discipline muscle.”
Just so that this is not lost on you let me be clear….. like a muscle that develops from regular contraction and extension due to the increased blood flow and recruitment of muscle fibers so does your self-discipline.
Every day that you practice something, exercise it, you build it. If you are lacking in self-discipline the first thing you need to do is realize that you are and accept it. Then take the key step of doing something about it.
Pick one thing and commit to doing it every day. Not for x number of days or weeks (like it takes 30 days to form a habit or quitting sugar for a month etc) but forever.
That’s why a lot of times we fail because we give ourselves a get out of jail card. You know the old: if I eat chicken salad for 2 weeks and lose weight then at the end of it I’ll go back to what I was doing. You’ll feel happy because you only have a limited period of pain to endure and then are free. Being free feels good. As a result you lose weight and are happy with yourself. BUT you then go out and reward yourself - normally with food and drink. A few months pass and you are exactly where you were when you started.
Stop this crap! If you accept that you want to be healthy and fit - pick something that matters, that’s good for the long haul, the real long haul and settle yourself. Prepare yourself. Tomorrow morning wake up and start the first day of building the self discipline muscle.
Since this is a major commitment you might slip up. You know what? Since it’s a major commitment, the benefit you derive from it, hasn’t suddenly changed because you slipped up. It still makes sense. So you know what you do? You just seize the opportunity to start exercising the self-discipline muscle again.
The more you do this the more amazing things will happen. The more people will say wow you just always look so good or run so fast or move so well.
What you will know deep down is that it all came about because you built from nowhere, one little day at a time, until you have such a refined self-discipline muscle that it spills out into everything you commit to doing.
I guarantee that even starting being disciplined with your health & fitness, a seemingly unrelated thing to trading or business, that you will see your professional performance improve by an order of magnitude.
I’ll finish with a bit of a challenging comment:
Do you really think that you can with a straight face say that you are disciplined in your trading if in many other areas of your life you are the opposite and that it’s not all interrelated?
There may be guys out there who have killer discipline at their desk and are the total opposite in other areas of their lives. What I’ll stand by is that they are by far and away the exception rather than the rule. You know what…everyone want’s to think they are the exception but in reality, buttercup, you are just like the rest of us.
Do you want cheese with that whine?
Get on with building your self-discipline muscle in any area you can and become a better man / woman.
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You know you want to comment :-). Go for it below:
I’d particularly love to hear accounts of how you changed your fitness and health habits and saw a carryover to your trading or business performance.
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
Are you smart? I hope so.
There is clearly a certain minimum requirement to be successful in the trading or investing business. Without the basic foundations you aren’t ever going to manage to get your trading house built.
It stands to reason that the smarter you are the better. After all to really win big and be a trading legend you have to be some super brain, some Gary Kasparov on steroids.
I’m going to let you into a little secret:
The first part is true. You do need some basic intelligence to trade well.
The second part is a sensible assumption but false and in many ways badly wrong. Not only is being super intelligent not necessarily going to make you better at managing risk but it likely means you will have to overcome a lot more to be better than your less intelligent competitor.
Here is a short Koan for you:
Nan-in, a Japanese master during the Meiji era (1868-1912), received a university professor who came to inquire about Zen.
Nan-in served tea. He poured his visitor’s cup full, and then kept on pouring. The professor watched the overflow until he no longer could restrain himself. “It is overfull. No more will go in!”
“Like this cup,” Nan-in said, “you are full of your own opinions and speculations. How can I show you Zen unless you first empty your cup?”
Trading is 80% emotional intelligence. If you are very intelligent the remaining 20%, the technical skills side, is going to be very easy for you to pick up.
If you’re very intelligent you are likely stuck in the very frustrating place of wondering why you aren’t getting the kind of trading results you want. After all you’re smart, you’ve always been successful in your life, you got top marks at school and university ever since you can remember. You were always in the top few percent of your class. You’re used to getting good marks and a achieving high percentages.
Now the tough bit: You Have A Massive Ego.
Trading is about managing risk and making high probability bets. The probability thing is a tough one because you only need a few of your winners to be big in order to cover the many small losses and still leave you with a very positive week, month or year.
Yet this is exactly the opposite to your prior experience. You are going to be wrong a lot. Your opinion, analysis, beliefs etc don’t matter one jot. The market doesn’t give a toss who you are or what you studied and it isn’t going to react to anything you do.
So you are really in this case ‘book smart’ and in order to cut it in the real world of the markets a whole other side of your intelligence is required.
Emotional Intelligence
Tell me I’m wrong in the comments but I warn you…. you’d be best thinking first.
If you have experienced this I’d love to hear in the comments what was the tipping point where you realized that your past experience was actually hindering your performance.
If you want a place to start with tuning up your emotional intelligence, I’ll give you two prescriptions:
-> Complete a trading journal: being very dilligent in writing about your feelings as you interface with the market. Review this journal at the end of every day, week, month and year. (More: here & here)
-> Make a meditation or breathing practice a central part of your day. Do this every day……………………………………………………………………. for ever. (More: here, here, here & here)
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.
The formidable Josh Brown The Reformed Broker posted this Dilbert cartoon.
Source http://dilbert.com/strips/comic/2012-11-20/
It made me genuinely laugh out loud because for all those frustrated by trading or who have been in the past this is so true.
I’ve written a number of posts recently that cover all the above things.
I’m not trying to be a smart ass but you do need all of these skills.
If you want to be a successful trader or investor:
One You need to be able to persist and keep committed to your goal of being successful for the long haul. If there is nothing that is going to stop you from being a trader you will get there.
Two You do need to know when to quit but not as relates to the above point. You need to know when to quit a trade, a theory, a strategy and you need the wisdom from your persistence at this business to know how and when to do this.
Three You’ve always got to be flexible. You have to duck and dive with the best of them. You’ve got to be able to change direction on a dime or you’re dead meat in this game.
Got something to say about this post? Go for it in the comments below.
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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice. I trade my own capital exclusively. I eat my own cooking as should you. If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.