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The Pro’s Process - Michael Bigger

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/

***

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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[If you liked this please follow me on twitter]

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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 Pro’s Process - Greg Harmon

I am very excited to be able to offer the twelfth 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: Greg Harmon

1) How long have you been trading?

I have been trading one way or another since 1986. I started with very short term money market arbitrage type trades, repurchase agreements vs Commercial paper all over night and took over 7 years before moving to equities.

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

I am a top down technical trader.  So I start with identifying the trend and then look for how inter-market activity can influence that trend.  With a grasp of the big picture I then search for technical set ups within my universe of about 1000 names.  When I see something very interesting I then determine whether to play the trade in the stock or in options.

3) How do you feel when a trade goes against you?

It sucks when a trade goes against me.  Like every trader I know, I never want to be wrong.  But of course I am wrong a lot. 

4) How do you feel when a trade goes for you?

When a trade goes as good as could be hoped for it is a great euphoric feeling.  I would expect that most traders feel this way too. 

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?)

Now this is the crux of the matter.  Early on losing trades would be brushed aside and winners would have me puffing up my chest like I could do no wrong.  This had a lot to do with the market I was trading in the late 80’s.  As they market got more complex, trading equities and derivatives, losses, especially a streak, could really get me down.  I would sometimes feel that maybe it was time to stop and move away from it for a while.  Wins would still help to inflate an ego.  Now 26 years in I know that losses can be learning experiences and should be studied, even if only for a few minutes, but then let go.  You cannot let them be an anchor around your neck and give you any doubt at all about whether the next trade will be successful or not.  Yes they still suck, but next, move on.  Wins still feel great but with age i realize that they come from preparation and sometimes luck.  I am not some great invincible being but take the time to be ready for what the market presents. 

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

Really just recharging the batteries.  I like to spend time with family.  What my 5 and 7 year old see in the world and how they learn and experience life can show you the proper context for trading within your life and reset the emotional faculties.

7) Have you always done this? 

No, prior to the kids it was going out with coworkers and friends and talking about other things, playing sports or working out.  You adapt your coping mechanisms as your life circumstances change.

8) If not, how have you learnt to deal with the feelings that come up when trading?

Added time doing the same thing also allows you to recognize the same wins and failures and takes a bit of an edge off of them.  Repetition and experiencing the same things over and over is a good thing.

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?

For me it is a matter of a slow realization through experience.  Not a break through moment.  Recognizing patterns and then dealing with them works in trading charts but also helps in the way that you move through life.

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

Wake up every day prepared for the market with your analysis as well as with a good clean mental state.  If you cannot come into the day ready to accept both winners and losers and then move on, then do not go to work that day or do not trade.

***

I’d like to thank Greg Harmon 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 Greg Harmon you can find him:

On twitter: @harmongreg

At his blog: http://dragonflycap.com/ 

***

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

***

[If you liked this please follow me on twitter]

***

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 Pro’s Process - Brian Lund

I am very excited to be able to offer the eleventh 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: Brian Lund

1) How long have you been trading?

In 1985, one month after I turned eighteen, I walked into a Dean Whiter office at my local Sears department store and bought 300 shares of Altos Computers.  The broker took my check and told me to call back later in the day to see at what price I got filled.

I didn’t know anything about the company, although based on the name I thought it was a pretty safe bet that they did something related to computers.  Somebody on a local cable access show said it was the stock to buy, and since he was on TV, that was good enough for me.

Ironically, just last week I was reading an article in Fortune about Ron Conway who was the co-founder of Altos, and has gone on to be a well known superangel investor.  He remarked in that piece that Altos was once one of the fastest growing companies in America.  Huh, who knew?

I don’t know if you could call that position in Altos a trade since there was no real methodology associated with it, but I have been buying and selling stocks ever since, and always with a shorter time frame and more dynamic management approach.

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

99.9% technical.  I say that because I don’t screen stocks or trade them based on fundamentals, but I do have an underlying sense of what they are. Meaning I rarely if ever trade in small or micro cap stocks, though that is more of a function of lack of liquidity than any fundamental reason.

3) How do you feel when a trade goes against you?

I hate it!  I really, really hate it.  Something that is really interesting is that the quicker a trade goes against me the more I hate it.  

If a trade just lingers around, not doing much, and after a few days or a week stops me out, it’s more like “eh, who cares.”  But if I put on a trade and it reverses against me right away, the pain is way more acute.

4) How do you feel when a trade goes for you?

The sun shines brighter.  The flowers smell better.  The bird’s songs are lovelier.  And everything is “right” in the world.  I think if the Israelis and Palestinians could experience the bliss of a shared winning trade, the Middle East conflict could be wrapped up overnight.

Seriously though, I have noticed that when my positions are going my way I have a generally happier and more relaxed demeanor.  This of course is not good, because as we try to eliminate emotions from trading it’s just as important not to get too high from a win or too low from a loss.

It’s funny though, the happiness I feel from a profitable trade is never quite as intense as the pain I feel from a losing one.

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?)

My emotions related to winning and losing trades have changed greatly over the years.  For the longest time I had a very hard time when it came to losing trades.  Ironically, that had more to do with factors in my life outside of trading, than with trading itself.

I was always a skinny kid, something that I was very conscious of growing up.  Kids can be brutal, and in order to draw attention away from my slight build I developed some defense mechanisms early on.  One was a quick sense of humor, but the other was a sharp intellect.

I think subconsciously I felt that if I was the “smart” kid I wouldn’t be thought of as the “skinny” kid.  And to me, being the smart kid meant always having the answer and always being right.  Those two traits by their very nature of course are all about having control.

Trying to have control, having all the answers, and always being right are the worst character traits possible for a trader, and I had all three in spades.  

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

For me the most important thing to do when dealing with negative emotions in trading is to get ahead of them before you feel their impact.  That relates to how quickly you make your decisions and what objective criteria you use to make those decisions.

Always having a chart based stop and target in place BEFORE you enter a trade is a must.  That is the time when you are most emotionally detached from a trade and can think more objectively.  Then the key is acting quickly, almost without thought, when those targets are hit.

It’s like taking medicine that tastes bad.  If you slowly sip it down, it gives you time to notice how distasteful it is, and how much you hate it, and opens the door for you to say “screw it, I’m not going to finished this.”  Its best just to gulp it down, have a quick “shudder,” and move on.

The same goes with trading.  If your stop is $25.25, when the stock hits that price “BAMM,” close it out.  Don’t think about, don’t string it out, just close it, shudder, and move one.  It’s trickier when it comes to targets because price action might be indicating that there is more to the move, but generally it is best to stick to you pre-entry trade targets and take them as quickly and unemotionally as stops.

Nowadays when a stock hits my target I just close it or have an order in place that closes it and move on to the next trade.  The less thought I give it the better because it doesn’t give negative emotions the time to form and screw me up.

7) Have you always done this? 

No, it has evolved over the years, many of which were spent banging my head against the wall.  But it is true what they say, once you stopped beating your head against the wall it DOES stop hurting.

8) If not, how have you learnt to deal with the feelings that come up when trading?

I am a big believer in the concept that it’s very hard to change our basic character traits, but I do believe that you can channel them more productively or even in some cases override them with more positive traits.

For example, if you are an alcoholic or drug user because you have an addictive personality, you may be able to quit using, but you are not going to change your basic nature.  However instead you can replace the addiction for negative things with positive ones.  

My best friend is a recovering alcoholic, with an addictive personality.  He has replaced his addiction for booze with an addiction for fitness, and now runs tri-athalons.

But you can also use a more powerful positive personality trait to “override” a negative one.  In my case, I am lazy in general.  I love to lounge around with no schedule or obligations.  That’s in my nature, but it’s not a very good trait if you want to be a success in this world, so I override it with my sense of responsibility and obligation.

I never want to let people down whom I have committed to do something for.  That is a stronger personality trait for me than my desire to be lazy.  So in order to combat my laziness I commit to a lot of things, like writing answers to interviews for example, that force me to be more proactive and productive in my life.

So, after this longwinded pre-able, what I am getting at is that when negative emotions have come up in my trading, I try to override them with something I feel stronger about….perspective.

It’s a losing trade, but only one trade in thousands you will do in your career.  It’s a bad trade but your account is up for the day, week, month, year.  It’s a bad trade but you are sitting in the comfort of your home/office, not on top of a roof in summer laying down tar or digging up frozen pipes in the dead of winter while your A-hole boss yells at you.  It’s a bad trade but you have your health, friends, and family.  And so on.

It may seem silly but remembering perspective really allows me to put a bad trade in the context it belongs and move on.  I believe in this concept so much I wrote a post about it entitled, “Have Some Perspective.”  Trust me, after you read that you will have a very hard time getting worked up over a bad trade again.

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?

Yes, I call it “2008.”  That was a tough year for me.  In addition to one of the toughest years I have ever experienced trading; my wife and I were also trying to get pregnant with our second child.  Things were not going like we had hoped and we decided to go to a fertility doctor to help things along.  Problem was, we had to go three days a week, in the morning, in order to have the best shot at success.

I felt very strongly about being with my wife at all these appointments so I would be there in the doctor’s office, trying to be supportive of her and the situation, while also trying to manage trades on my Smartphone, in the most volatile markets we have ever seen.

It was very tough on my P&L and very tough on me and my family emotionally.  I honestly don’t know how I got through that year intact, but in retrospect I realized that even though I had thought I was a “pro” at trading, I still had many “amateur” traits, mostly relating to my emotions.

I learned a lot about myself that year.  Sometimes it takes intense, acute, or painful moments in your life to have a “breakthrough” and that is what most of 2008 was for me.

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

I think the number one piece of advice would be to trade in a style that fits your personality, not a style that you THINK fits your personality.  And of course the catch to that is being honest with yourself about what your true personality is.

Often people will get into trading with a preconceived notion of what it is about.  They’ve seen “Wall Street” and identified with the Gordon Gekko character.  They think trading is about huge risks, massive rewards, and an ad hoc trading style.  

They fancy themselves that Gekko type trader and try to emulate the same style and bravado, when in fact their real personality runs one-hundred and eighty degrees opposite.  And of course they end up blowing their accounts out.

Successful trading is about making money, that’s it.  It’s not about ego, or being cool, or having great stories to tell your friends at the bar.  The more closely your trading style fits with your personality, the less conflict it will create, meaning the less negative emotions it will generate, and the better chance you have to be successful.

***

I’d like to thank Brian Lund 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 Brian Lund you can find him:

On twitter: @bclund

At his blog:  www.bclund.com

***

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

***

[If you liked this please follow me on twitter]

***

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 Pro’s Process - Ivan Hoff

I am very excited to be able to offer the tenth 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: Ivan Hoff

1) How long have you been trading?

I’ve been trading for 9 years; U.S. markets for 7.

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

80% technical/20% fundamental. When I say fundamental, I don’t mean that I also drink cherry coke just like Warren Buffet. I do look for earnings and sales momentum for the simple reason that historically most big market winners have exhibited strong growth characteristics. Price is the ultimate indicator that matters to me though. If the market doesn’t agree with me, I won’t make a cent and price action is the only  indicator that confirms that market agrees with my thesis. 

3) How do you feel when a trade goes against you?

No emotion whatsoever. I accept that I will be wrong 30-50% of the time depending of the market environment. I just take my loss and move to the next signal. Market is an opportunity machine. The next good trade is always around the corner. Being wrong is not a choice. Staying wrong is.

4) How do you feel when a trade goes for you?


I smile. Who doesn’t like making money? I also realize that I’m most vulnerable to making big mistakes after a period of being right a lot. Overconfidence has put an end to a lot of promising trading careers. 

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?)

At the beginning, I paid attention to absolute returns and I was looking at my P/L way too often. With time, I learned not to look at the score board and to think in terms of percentages. This is the only way to actually grow money under management and maximize my returns.

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

I like to run and take long walks on the beach. It helps to clear my head. I also listen to classical music when I go over my charts.

7) Have you always done this? 

I started running actively a couple years ago. Before that I was into group sports - soccer, volleyball, tennis.

8) If not, how have you learnt to deal with the feelings that come up when trading?

Feelings are not necessarily a bad thing. At the beginning of any trading career  your intuition will probably mislead you. But what is intuition actually. In my mind, it is a set of connected memories. We all think differently, because we have had different experiences (memories) in our life. Once you’ve been successful in the market long enough (meaning you have actively learned from your mistakes), intuition could actually become a powerful weapon. Nowadays, all I need is 30 seconds to look at a chart and I could make my mind on the spot if the stock deserves any further attention or not.  When you’ve seen a 100,000 charts, you learn how to recognize good from bad setups and when to sit on your hands and do nothing. 
Here are a few posts I wrote on the subject: one, two and three.

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?

It wasn’t one particular moment. It was a collection of experiences that lead me to the conclusion that successful trading is 80% psychology and 20% knowledge about the stock market. We are all students of the market.

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

Realize that there’s a huge difference between knowing and doing. It is called empathy gap and everyone suffers from it, some more than others. Everyone knows what needs to be done in order to lose weight and yet, so few are disciplined enough to do it on a regular basis. It is the same with trading. Once you have accepted your weaknesses, you will devise a good plan to handle them properly.
Unfortunately, the best way to learn is from your own mistakes. Having a good mentor could also accelerate your learning curve, but keep in mind that “you can’t teach a man anything; you can only help him to find it within himself.”
Keep a journal and go over your old entries frequently. It will help you to connect the dots faster.

***

I’d like to thank Ivan Hoff 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 Ivan Hoff you can find him:

On twitter: @ivanhoff 

At his website: http://ivanhoff.com/

***

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

***

[If you liked this please follow me on twitter]

***

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 Pro’s Process - Derek Hernquist

The ninth 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: Derek Hernquist

1) How long have you been trading?

I’ve been trading 20 years in one role or another

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

I’m a technical trader, everything I do revolves around price and how people react to it

3) How do you feel when a trade goes against you?

I’m human, I feel better when I’m winning and worse when I’m losing. But trade planning based on 20 years of lessons supersedes any present feelings, so I always act on my trade blueprint. 

4) How do you feel when a trade goes for you?

It’s basically the same answer as for the last question, but, trade planning based on 20 years of lessons supersedes any fleeting moods, and my mood is best when I execute according to my plan regardless of outcome. 

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?)

Unlike my early years, I spend zero time on questions like “why would anyone be buying or selling here?” There are all kinds of players with different motives and different timeframes, and when any of them combine it’s best to go with it or at least wait until the moment passes.

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

I play with my kids, that’s certainly a positive distraction. I love to read, I often just pop open a trading book and read a few pages to re-center myself. 

7) Have you always done this? 

I’ve always worked out to de-stress, even if just 30 minutes on an elliptical machine with a book. With so much online content, of late I’ll listen to an interview or book during a brisk walk after the market closes.

8) If not, how have you learnt to deal with the feelings that come up when trading?

Feelings are there, I no longer try to block them out. I do my best to use acknowledge them and use them to consider what others may be experiencing. I make written and verbal notes all day long, and review them each night.

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 don’t see how anyone can downplay the psychological and social aspect of markets. I embraced that belief fairly early but saw it manifest itself though the dot-com era watching pigs fly and smart people lose money on arbs like Long COMS/Short PALM. There were so many lessons to learn in such a short time, truly a gift.

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

Find a mentor. As much as I love trading, I could have saved myself years of misdirection had I sought and found a successful mentor. I took timeless lessons about human behavior and eventually made them my own, but to have a teacher/coach helping set the path would have been a gift.

***

I’d like to thank Derek Hernquist 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 Derek Hernquist you can find him:

On twitter: @derekhernquist 

At his website: http://derekhernquist.com/

***

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 

***

[If you liked this please follow me on twitter]

***

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 Pro’s Process - Anthony Crudele

The eighth 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: Anthony Crudele

1) How long have you been trading?

14 years 

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

I’m a complete day trader.  My strategy uses the current volatility for strategy signals.  I don’t live and die by every strategy signal that I get.  The strategy signals are support and resistance levels.  Once I get the levels from strategy I use my market awareness to decide big, small, or not all. 

3) How do you feel when a trade goes against you?

I trade ranges not one price.  So when a trade is against me and still in my execution range I am deciding to either add to position or decrease the size of my position. I have excepted my loss before I even get into the trade because I believe a trade is not wrong until the stop is triggered.

4) How do you feel when a trade goes for you?

Until I’m out I remain focused on whats happening around me. Once again…adding or decreasing my position size.  Risk per trade allows me to accept the loss before I even begin to execute the trade.  This gives me the ability to focus on whats happening in the market.

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?)

Initially I was a cowboy and felt nothing but greed and aggression.  Then I was humbled and I started to feel hesitation and anxiety in every trade…I turned into an over trader…a scared trader.  Once I buckled down and created a risk per trade and allowed my contract size to vary based upon the risk of the trade…then I was able to focus on the market and remove feelings.  I was finally a trader.

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

Stay in shape.  I work out 4 days a week.  Golf or any other sport 2 days.  Eat right and get right amount of sleep.  On the mental side I got rid of computers in my house…no more trading from home.  When I am not trading I focus on living my life and not trading.  I need that separation.   I also cook a lot.

7) Have you always done this? 

No.  I was lazy before.  I started to feel anxiety and I hated it more than anything.  I had to fix it and it started with fixing my physical shape. Then I learned to separate my trading life from personal life.  Once I figured out how to do both of those things my focus dramatically increased. 

8) If not, how have you learnt to deal with the feelings that come up when trading?

When feelings come up in trading I just flat out walk away.  I go over my trading rules and regain my focus.  Traders need to know when to stop trading…when feelings come up while im trading it is a big flag to take a break.

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?

When I was walking off the CME floor after a bad day of trading and I felt like I was about to die.  I went right to the nurse telling her that I felt pain in my chest and nausea.  They checked me out and said I was fine.  I left the building and it went away.  

I never blamed the market, but I couldn’t figure out why I felt this way when I loved the business so much.  I realized that I was hurting myself because I didn’t have the proper mindset.I thought I could just trade my way out of it, but all I did was create a bigger mental hole.  I had to have the proper process from mentality to preparation to execution if I was going to make it.  

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

When traders first start to trade they only think about making money and they forget the most important part of trading…managing the risk.  The number one thing that a trader can control is their risk. Traders need to execute their trades with a risk per day and per trade…then they can approach the market with a clear head.

***

I’d like to thank Anthony Crudele 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 Anthony Crudele you can find him:

On twitter: @EminiExecutors

At his firms website: http://eminiexecutors.com/

***

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

***

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 Pro’s Process - Mike Dever

The seventh 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: Mike Dever

1) How long have you been trading?

33 years

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

After starting out as a discretionary trader, I quickly evolved into using systematic models for trading decision support. Following a multi-year research project in the late 1980s – early 1990s, during which I systematized my trading methods, I’ve traded pursuant to a fully-systematic, multi-strategy trading model.

3) How do you feel when a trade goes against you?

I assume you mean “when it loses money.” I never look at a trade as having gone “for me” or “against me.” That’s far too personal and anthropomorphizes each trade. As long as we’re “on model” I feel fine. It doesn’t matter whether any given trade is losing or making money.

4) How do you feel when a trade goes for you?

The same as I do in response to the question above.

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?)

For the first ten years or so of my trading career I definitely felt an emotional pull that changed with the outcome of my trading. After making the full commitment to systematic trading I instead felt emotional satisfaction over developing sound trading strategies, and no significant emotions based on the outcome of the trading itself.

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

Enjoy my family. But nothing designed specifically to make me a better trader.

7) Have you always done this? 

No. I was far more involved with my work life throughout most of my career. I enjoyed what I did for work and that’s why I spent so much time on it, but it was behavior that some may have viewed as “workaholic.”

8) If not, how have you learnt to deal with the feelings that come up when trading?

N/A

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?

Too many to list all here. But I discuss one in chapter 11 of my book (Jackass Investing: Don’t do it. Profit from it.), where I describe an S&P trade I made in October 1987. But the main point I learned is the importance of reducing the effect that psychological factors have on trading. For me, following a disciplined, systematic trading model achieves that goal.

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

Trade to make money, not to fill some other unfilled emotional hole.

***

I’d like to thank Mike Dever 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 Mike Dever you can find him:

On twitter: @mikedever

At his firms website: http://www.brandywine.com/

On the books website: http://www.jackassinvesting.com/home/ 

He is also the author of the excellent Jackass Investing: Don’t do it. Profit from it. You would be wise to check it out (click here)

***

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

***

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 Pro’s Process - Brian Shannon

The sixth 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: Brian Shannon

1) How long have you been trading?

I started as a full time trader in 1993 with a proprietary trading firm based in NYC.  

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

I am 95% technical in my determination of entry and exit points (except for rare emotional reactionary trades- which usually don’t work!) and I am generally aware of what the company does or I may skim some stories about the company but I try not to let my opinion of the business affect how I trade the stock.

3) How do you feel when a trade goes against you?

Initially I feel like my timing wasn’t as good as I had hoped it would be, so I am on very high alert to make sure I do not allow it to turn into a larger loss.  When I am trend trading I am very quick to take a small initial loss and then get back in if the stock recovers, but avoiding large losses is a very satisfying feeling and helps keep me focused so I don’t mind getting back in soon after taking a small loss.

One of my weaknesses in the past has been to buy a little more  of a losing position in an attempt to average lower because I think the stock is “down too much” and I tell myself that if I sell I am probably hitting it out at the lows.  This type of loss typically comes when I am attempting to catch a “bounce” in a stock, and they usually end up being my largest losers!  Yet…. there are a few times a year I will find something that looks so compelling that I break my trend following rules and end up getting what I deserve for breaking discipline.  When I have a large loss, 99% of the time it is because of my actions, not because I was “unlucky”  After making this type of error I refocus, trade smaller size and get my money back!

4) How do you feel when a trade goes for you?

I feel relieved not to deal with the stress of a losing position and I then begin to focus on making sure that 1- I dont allow the trade to turn into a loser and 2- that I can maximize the gains as much as possible.  I am always on the alert for potential levels where the momentum may slow and often trim partial size when those levels are obtained .  Some of the common levels I look for are intraday pivot levels (mainly R2 or S2) or a prior level of consolidation in the stock.

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?)

I have always had a  strong aversion to losing money and taking small losses has come more naturally to me than many other participants I have seen, I feel lucky for that and it has definitely added to the longevity of my trading career.  Over time, I have become more skeptical of some of the more speculative stocks which I am attracted to and that has helped me.  I used to have a greater tendency to swing for the fences, but my defense has become much stronger.

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

Stress from trading doesnt affect me as much as it used to but it is still a source of it and I am much better at recoginzing it that I used to be.  The quickest, most effective thing I can do when I need to emotionally recharge is to workout, a run is usually the best way to accomplish that emotional balance.  I am very fortunate to have a very smart, supportive and understanding woman (twitter users know her as Bond Girl) who really has a great talent for simplifying things and putting them into perspective.   I also can get lost in music sometimes and that brings me back to a more even keel if i need it.  And on occasion, I drink more beer or wine than I should, alcohol never makes me feel better in the long run, but it has its soothing moments…

7) Have you always done this? 

No.  it used to be much more difficult for me to recognize when I am stressed.  I prided myself on being an “unemotional trader” and going back in to fight.  Over time the urge for battle with such a difficult opponent (the market) on a tick by tick basis has diminished as I have matured and become more patient and introspective of the process. 

8) If not, how have you learnt to deal with the feelings that come up when trading?

Largely the school of hard knocks!  I have benefited from  one on one training from mental coaches.

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 cannot remember specifically, but I think it is something which has evolved over time.  I like the phrase “the market doesnt care what you think.”  That is so true, we need to understand and get in synch with the market, it will not bend for us.  My work focuses on technical analysis but not because I think it is important to recognize patterns and expect them to repeat.  I look for patterns in the market and try to understand the motivations and feelings of the participants who might be; long, short or in cash watching.  I try to gather what the collective emotion is and where there are low risk turning points and I can participate in an established trend.  Psychology (both personal and the collective emotion of the participants) is definitely one of the most important factors for successful trading, especially on shorter timeframes.

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

Here is another phrase I love.  ”If you don’t know who you are, the market is an expensive place to find out.”  You cannot learn trading using a simulated account, you need to have your money in the game, because you WILL have your emotion involved, like it or not.  Emotions have been referred to as the enemy in trading but I think they can be a good warning for us as well, but only if we are capable of really understanding what we feel.   I think that to succeed in the markets you need to have a unique mix of confidence (but not cocky) and skepticism (but not cynical).  You also have to have a quick mind which is capable of letting go of an opinion when your thesis changes, because the market does not care what we think.  Last point, have a partner who really understands what you do and find ways to separate the hardcore trader personality during market hours to the kind caring person that people want to be around when the market isn’t open.  

***

I’d like to thank Brian Shannon 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 Brian Shannon you can find him:

On twitter @alphatrends

Or on his website: http://www.alphatrends.net/

He is also the author of Technical Analysis Using Multiple Timeframes which you would be wise to check out.

Brian is also an investor in http://www.stocktwits.com

***

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

***

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 Pro’s Process - Mark Holstead

The fifth 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 add to the great line up this week with a UK trader: 

Trader: Mark Holstead

(Mark kindly recorded his answers.  I’ve trimmed them a little but left it in long form so that all can gain full value from it)

1) How long have you been trading?

I started trading in 2001, March 2001, so it’s 11 years.

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

I’m a short-term trader, very short-term, very, very, very rarely hold positions overnight and my strategy is based basically on reading order flow. And in a nutshell without getting too complicated, I look for either institutional price action that I want to join, or I look for emotional order flow from retail to fade.  As I said I read order flow, from tape reading and from the charts, so nothing really fundamental there, it’s pretty much - I’ve got a bank of setups that I use depending on market conditions I use specific market setups for those conditions, and when those setups occur I know my risk management I’ve got a trading plan in place, and I pull the trigger and the trades are up and running. 

3) How do you feel when a trade goes against you?

You know I think a lot of people will be answering this question with, “I’m not concerned, thousands have and thousands more trades will go against me,” and that was really my knee-jerk initial reaction because I don’t really get concerned when a trade goes against me.

However, what I would want to point out is that if I find I’m getting a cluster of trades that are taking more heat – now by the way I’m assuming you mean here taking heat on a trade, losing trades is probably a separate question, but how do I feel when a trade goes against you – generally I’m not concerned, you know the odd trade goes against me if I take the amount of heat that I’m expecting on a trade, I know pretty much I’ve got a good idea, I’ve been trading long enough to know, and not trading my specific setup and strategies to know how much heat is expected, and obviously my personal stop-loss is beyond my expected heat in a trade. So if I start getting a cluster of trades that are taking perhaps more heat or stopping me out more than usual, then that will concern me and I know that I’ll need to take a closer look at what’s going wrong. If I get the odd 1 or 2 I really am generally not concerned because I know over the course of the week or whatever that it’ll be good, it will work out, it will come out in the wash.

If I have a cluster though, of trades that take some heat, start going against me, perhaps get a few stops in a row, that does start to concern me a bit because I need to take a step back and stop digging myself a hole, need to make sure the strategies I’m using are still working, am I analyzing the marketing conditions correctly, am I using the right strategies and setups for the market conditions, am I reading the take correctly, and just make sure that I’m doing everything right because quite often we can drift along, a trade goes against me, you get a cluster of trades going against you and if you don’t stop that damage early – and all you need sometimes is a little tweak, you need to say, “Okay well I’m taking too many of these continuation type strategies and really the market conditions of the moment are counter trend,” so knock those on the head and let’s concentrate on those, sometimes that’s all it takes.

So really in a roundabout way of answering your question, not concerned when it’s 1 or 2, but if I get a cluster of trades that are taking a lot more heat or stopping me out then at that point I’ll become a little bit concerned, I’m not overly bothered about it but enough to make me step back a step and reassess my process and mind the way I’m trading.

4) How do you feel when a trade goes for you?

To be honest, I expect trades to work. I know it may sound a little arrogant, almost cocky, and I generally don’t want it to come across that way, but honestly when you’re trading for a while, you expect your trades to work, I don’t know if the next trade is going to work or not but I expect over time that they are, most of them are going to work for me.

So we’re humans we feel emotions, of course we do, but the longer I trade the more those emotions become less and less and less, you know like anything, racing driver… Take for example a race car driver, you know first time he does a high speed lap he’s probably really excited but after that all he’s looking to do is get a quicker lap time, he’s not interested in the acceleration or the breaking.

So how do I feel when a trade goes for me, you know, I expect it to happen, I’m pleased that it does, pleased that I end the day positive and the week positive, but I don’t go out and start jumping up and down for joy because that’s my job so I’m expecting it to happen. 

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?)

Well I sort of touched on that a moment ago, really when you’re starting out trading you you’re emotions are swinging quite wildly and they’re also related to position sizing and bits and pieces.  You tend to put a lot of worth on each trade and it really doesn’t matter, you’re got to put in perspective. First of all you’ve got to put trading is (in?) perspective, it’s not the be all or end all, it doesn’t matter, and each trade really doesn’t matter either. As long as your position sizing isn’t crazy, it isn’t swinging one lot or 100 lots and magnifying the damage of one losing trade.  As long as you’ve got relatively consistent trading size and your risk is acceptable then your emotions really shouldn’t play a part in it.

You know, I like to think that… or like to describe it as a rev counter and I know I’m going on about the racing car analogies and car analogies but I like to think of it as monitoring your rev counter, you know you want to just be… just above… you want to be in a place where your turning over enough to ensure you are really focusing enough but you don’t want to be red lining because that’s too emotional, that’s too excited, you just want to have a nice in the peak power band, you know, in between the two.

If you want to just think of it as a thermometer swinging back and forth, you don’t want to be too hot, you don’t want to be too cold. And so I’m always looking to keep gauging my emotional thermometer, and when I first started out, you know, that would swing wildly from happy to sad, but over time you learn to put things into perspective and not put so much emotions on things. And if you do, you know we’re all human and from time to time you’re going to feel emotions coming in, then you learn to step away, you learn to step away and say, “You know what I’m starting to feel a little bit anxious about this, or something’s not quite right or I’m not feeling quite right about things”, and step back before you can do any damage. 

So I think to answer to question a bit more directly how these feelings change over your trading career - you know you tend to be more in tune, there don’t tend to be wild swings, obviously you’re still a human, but you tend to be more in tune and you know, doing it more methodically but if you are feeling your emotions, you’re quicker to step back and not let it affect your trading decisions. 

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

You know I just try to live a balanced life; I try to do things that involve both sides of the brain. Now I know that trading is draining when the markets are volatile and active, it’s really emotionally draining, so I like to spend time with the family, I like to do things that get my pulse racing, I mean, I like to drive cars, I’m into motorsport, besides that I do jogging, bits and pieces like that. Just try to live a bit of a rounded life and I think that helps in trading. If you’re too focused on it and you’re constantly thinking about trading it does more harm than good, even though you think you need to be completely focused on trading, you do when the time’s right but I’d call it working smart, I don’t want to take credit for that, someone said it, not me, but working smart not hard, I think that really applies to trading.

You know, you need to focus your energies 100 percent when you’re trading, but when you’re not trading, completely step back, do something different; go race cars, go ride horses, go to the gym, whatever floats your boat, do it. And that’s what I do, I try to do things I enjoy, at the end of day I’m trading so that I can enjoy other things, I know I like to travel and do things like that.  

I’ve always done this… but I think I’ve gone through spells over the years where I’ve become too immersed in my trading and actually when I look back on it, it’s done more harm than good, and really sometimes you need to step back for a week or step back for a few days and it does you a world of good.  Step back for a few days, come back in, watch the markets for a day, step back again, and I think that does a world of good and I didn’t do that initially, I would… If I was struggling with certain things I would focus and focus and focus on it, and actually sometimes you see it a different way around when you just step back.  So I think it’s important to have a balanced life and I do.

I don’t have any rituals and such, I mean obviously when I’m going to drive into the office, the trading office, certain music I like to put on in the car from time to time to get me in the mood and that sort of… I’d add in the word thing if you’re working from home I think it’s important to have a ritual of separating family from trading, but if you’ve got a trading office obviously you’ve got to walk to the office or drive to the office, you’ve got the separation so that does help. 

7) Have you always done this? 

(Answered above) 

8) If not, how have you learnt to deal with the feelings that come up when trading?

I think I’ve probably answered that already in terms of emotions and in terms of trying to live a balanced life.

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 think quite early on I realized that it’s nothing to do with strategies and setups, although over time I’ve realized the importance of using the right tools for the right job, which is where a lot of traders go wrong, they’re using the wrong strategies in the wrong type of market even though, and then they throw the strategies away then the market comes around again to those strategies being good, they’re using the old strategies and they’re always one step behind but anyway that’s not the question, (I’d make a full stop here) the question is describe a point in time in which rammed home trading is psychological… just really when you go through patches where you think, “Hang on I’m feeling emotional about this trading and why can’t I hold a trade longer, why do I feel the need to snatch profits, why…?” you know and then I start to realize actually it’s a discipline issue, we are the best traders, you know, we’ve got the ability to take in so much information and process it and it’s not black and white trading, so we can make a judgment, we can make a decision, which make us great traders, but at the same time understand that there are part of our brain that are hard wired to cut winners, to let losses run (I’ve seen the experiments where this facet of human nature is shown). So it does take time to understand it and sort of approach the way you approach trading, and I don’t really think there was a specific time, I think just actually as I was going through the years and I realized that it really is down to… I guess when I went through times of not being able to do something I wanted to do, not being able to follow a rule that I’d written down, and I just thought why can’t I follow this rule, why do I keep not doing this? And I got processes to break through that and it took me a while to develop those processes, to break through those, which is then when I took leaps and bounds and then I started to realize actually focusing on specific problems with the way I was handling it in my psychology was the better way to commit time to trading or commit focus on trading. 

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

One piece of advice… I’ll give you a couple and you can pick the best that suits you.

First of all, there’s no right or wrong way to trade, so if a textbook tells you to do something and you don’t like to do it, don’t do it. You do what you think is the right way to trade. Now there are some times when people are going to guide you and say, “Hey got your stop, manage your risk,” and they’re talking sense, and it would make sense to follow that advice, but if someone says to you, “You should be trading trends or you can’t trade trends,” don’t worry about it, just trade what you can do and don’t get your head in a twist about trying to combat your weaknesses, just focus on your strengths, enjoy trading.

Put it all in perspective, put each trade in perspective, reduce the size if your emotions are going crazy, reduce your size down, accept your risk… I think if there was one piece of advice – I know I’ve talked lots here – but if I could give one piece of advice it’s accept your risk because that’s the one thing that… once we’ve accepted our risk, if we write down our position size, our max loss for the trade, our max loss for the day, our max loss for the week… once we’ve accepted them, put a boundary and we’ve said, “Are we happy with that, if it happens are we happy? Yes. Then when a trade loses we’re not going to feel a problem about it, we’ve accepted the risk, we’ve put that on the table, and we’re trading.” I think when losses become more than we expect or when things don’t go the way we want to that’s when we get emotionally too involved in it, but I could talk hours and hours about this subject, it’s a big subject, but anyway, that’s just a few things that have helped me in the way I’ve approached trading but as I said before, there’s no right or wrong, guys, you just got to do what’s right for you – focus on your strengths and just try to avoid your weaknesses and stick at it, and at the end of the day you need capital to trade so just keep your size small and you get your trades right and the size can increase later on and the profits will flow there. Thanks a lot. Bye-bye.

***

I’d like to thank Mark Holstead 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 Mark Holstead you can find him:

On twitter @TapeReadTrade

Or on his website: http://www.thedaytradingroom.com

***

Previously in the series:

Charles Kirk - read it…..here

Matt Davio - read it…..here

David Blair - read it….here

Mike Bellafiore - read it….here

***

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 Pro’s Process - Mike Bellafiore

The fourth 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 particularly special as I have Mike Bellafiore Co-Founder of SMB Capital. Not only is Mike a long term trader himself but is central to the training, mentoring and managing of traders at his firm.  So without further ado….

I’m doing a series of blog posts looking into how professional traders actually go through the psychological processes of trading but also some of the aspects that they might do outside of trading which people don’t typically think of. I remember in Mike Martin’s book The Inner Voice of Trading that you have a thing for running round the big loop in Grand Central Park and I know others have yoga and other things as a way to balance their trading. So I’d like to delve into that a little bit.

Yes let’s tackle that. You don’t want to make trading too important in your life. Not that it’s not important but you need to have other things outside of trading that are important to you. You’ve got to have good friends, you’ve got to be close to your family, you want to have hobbies that interest you whatever they are. So for example after the close I kind of like reading up on politics, I’ll watch Morning Joe or a hardball that I DVR. I certainly like my sports so I’ll catch a bunch of Yankee games. I just got married so my wife and I will make sure that we at least once a week go and find a restaurant that we haven’t gone to. We’ll travel – we’re going to France in the fall, last year we went to Italy. So whatever the things are that you enjoy you want to spend time after work doing that because what happens is you make too much of each trade. If there aren’t things outside of your work that give you gratitude, that bring you happiness you can find yourself placing way too much importance on your trading, on that one trade, and that’s not good, it’s not healthy. It’s a performance sport and you’ve got to keep it in perspective – it’s important but it’s not everything.

And Mike can I ask you if that is something you have always done or is it something you have learnt to do having been in the business a long time, or were you always quite active in making sure you had a holistic outside life alongside your trading?

 Before I started SMB and I wrote about this in One Good Trade I used to actually close up shop after the close walk across Central Park from the East Side to the West Side and spend a couple of hours playing hoops and then head home and get a little dinner and then maybe watch a Yankees game. Then brushing up on some charts and maybe talking to some of my friends and then getting ready for the next day. And then when I started SMB I got away from that. It was 24/7. It took up every bit of energy I could muster. It still takes up a tremendous amount of effort but you know I have recognised that there is only so much good work I am going to get done during the day and if something doesn’t get done today it doesn’t get done today. It’s better for myself to do some of the things I want to get done during the day, have a little bit of downtime for myself, and then go about tackling the next day the next day. So I definitely noticed when I started SMB that I was spending too much time working and I was starting to burn out a little bit and I had to get back to doing some of the things that I enjoyed which I did when I was just a trader.

With your role of obviously having traders working for you is the importance away from the screen and having other things in their lives, maybe like shooting hoops, doing yoga etc something you actively try to enforce with them?    

Yeah. What we actually try to do after the close is when one of our guys starts to be profitable I start to work with that trader one on one every day. So what they will do is they will send me a daily review in our proprietary review format of what they did well and what they didn’t do well and I will ask them along the way to take the temperature of their psychology and it will push them along the way to building their strengths. But I will see, and I have seen over the last couple of months, that there are two guys on my desk who have been talking a lot about doing things outside of work to improve their work. And I have one guy on my desk who is probably going to become one of our best really terrific traders who gets very tired during the day. He has to be careful about just putting too much into it. So like the Miami Heat coach might take out Lebron James for a blow, well he actually needs to take a blow and maybe take a walk at ten o’clock, maybe go for a walk at two thirty, maybe instead of staying every night until seven o’clock head out at five o’clock one day. Make sure that you grab your buddies for Happy Hour on Thursday and head to the bar and have some fun. So yeah we watch for that.

Otherwise in his situation he could over cook himself; is that what you are on the watch out for?

Yeah absolutely. We actually experienced this in the past. From my book one of our really terrific traders we called Doctor Momentum, he was the same way. We actually had him work with Doctor Steenberger on this very issue which was he was so bright and he cared so much that it was actually getting in the way of his trading and we needed to teach him how to care but not care so much. It’s kind of like in baseball where you don’t want to squeeze the bat too tightly.

So these are the kinds of things people don’t expect to hear from people on Wall St you know. That you are conscious of the psychological side, conscious of having relaxation factors in place, that you have psychological skills central to your trading set up. It’s one of the reasons I wanted to speak to people and perhaps put it out there for people who are starting out as it’s not necessarily something that is seen as going hand in hand with trading and the finance world.

Absolutely. So we’ll do things like teach our traders how to do visualisation exercises. I was actually with John Locke and Seth Freudberg. John created an options strategy trade for our options trading program and Seth runs our options trading. John has a lot of experience in coaching people how to be better and we were talking about the things that we teach on our desk to teach people how to visualise. So yeah it’s part of our training program. You have to learn how to get better at certain things. The most important thing, the most typical thing that an intra-day trader faces is that they trade on tilt. They just get angry. There is so much rejection in the type of trading that we do, we’re wrong so much that you have to get used to being wrong. And for guys who are incredibly ambitious and have always been successful in everything they’ve done it’s hard to come to work and potentially be wrong 60-70% of the time and still understand that they are in a position to have a really good day. So we’ll teach them visualisation exercises. We’ll make sure that every day guys are taking their temperature on how they feel. You know we stress you’ve gotta get some rest, you gotta get your eight hours – people perform better if they are well rested. You know we will make sure if they are struggling with certain psychological issues…..another one is a fear of getting too big in a certain stock. We’ll work with them on that. It’s a very important part of trading. A lot of times traders, particularly new traders spend too much time on the things they are actually not that good at and they don’t spend enough time on the things that they are good at and pushing themselves to be better. I was screaming at our desk last week. They were all pumping their chests out because they thought they had a really good day and honestly they should have made a lot more.

So Mike for someone who is not in a prop firm what would be your one bit of advice that you would say people would have to do to emotionally handle trading? For an aspiring trader if you could give one piece of advice?

So I think you want to keep a list of the things that cause you to trade off your game. So if you for whatever reason get upset a bunch while you are trading you want to sit down and make a list of the things that are setting you off. If there are reasons for why you can’t get big in a particular stock or market you want to sit down and write out what those things are. Then you want to start to work on conquering that under performance. A lot of times the answer is visualisation exercises. A lot of times the answer is just practice. I think a lot of people don’t understand that trading is a performance based activity. It’s not just knowledge based. So you could know a lot about a particular set up or the market but that doesn’t mean that you can actually execute in real time.

So you have to serve your screen time to have enough repeatable experiences to make it work for you.

Yeah and you have to have developed the mental skill to actually execute in real time. So let’s say you get angry too much. You make a list of all the things that set you off. Then you do visualisation exercises one by one on each activity. So for myself I get upset when things are unfair. So if there is too much slippage in a particular stock that can upset me. Some of the things I have had to do are, identify that, write it down….writing something down on paper is a very important powerful part of learning. You make a nice connection with under performance when you do that. Then you spend a couple of minutes in a quiet place breathing and getting calm. Then in as much detail as you possibly can you visualise yourself getting upset because there is a bunch of slippage in a stock, what are you wearing, what does it sound like around you, what do you see, what do your screens look like, what does it look like to the guy to your left and right, and the ceiling and the TV’s……everything that is going on around you you want to replay to put yourself back in that position. You want to get mad. You want to get yourself mad like you were before. Then you want to expose the logic of getting mad by saying: look this isn’t really going to help me, there’s no reason to get upset, I’m going to make a bunch of trades during the month one trade isn’t necessarily going to make my month and then you’re going to breathe and get yourself to calm down. So before that activity you are just going to have one response to when there is too much slippage in a stock which is you are going to get angry. Your brain is only wired to one response. But you have to actually train it to have another response. So that after you do that you will have a choice. I can be angry like I was in the past or also now I know how to get myself pretty calm pretty fast and let me try that approach. But you can’t just say to yourself Richard it’s immature of me to get upset because there is too much slippage in a stock and then when there is too much slippage in a stock think that in real time you are just going to be calm. It’s not the way it works.

You’ve given me some great answers thank you. So that I don’t take up much more of your time and so that I cover most of the questions I have asked the other traders can I ask you how do you now feel when a trade goes against you?

The way that I’m thinking when I’m trading is what’s the right thing to do? Today’s a perfect example of this (04/06/12). Friday we were very weak in the market and we noticed today that 128.20 on the SPY was a market resistance level intra-day and that 128 was another important trending technical level for us. So all I’m thinking about is as long as we are below 128.20 I’m going to stay short. If we get below 128.20 and we are holding below there my job is not to be a wuss and not get shorter, my job is to get shorter and whatever happens happens. That’s the way that I look at the markets. What’s the right thing to do?

So have you managed over the length of your career to be completely pragmatic and calm with the experience of when a trade goes for you or against you? Or do you have differing emotions? Obviously some people get very excited when the trade is going their way and very distraught when it is going against them. Are you completely balanced or do you still get that kind of adrenalin rush when something is going your way and the anger perhaps of it not going your way?  

I think it is impossible to always be calm and I’m not sure it’s a good thing to always be calm. I think you want to actually learn to use your emotions as well. So one of the things that you are going to want to learn to do as a performer is take your anger and use it as fuel to do better. So if for whatever reason I get angry at a particular trade,which I do, then I start blaming all the other people I can blame: the market’s rigged, Goldman Sachs those guys are dishonest, JP Morgan they stink, this stock is no good… well I’m not really using that anger in a constructive way. But if I say wow I’m really p**sed off that I now put on this huge market trade at 128.20 and added at 128 when it went against me. Well I want to use that anger to be like well why did it go against me? What were the things that I could have done better? Was I in the wrong stocks? Did I actually make something of the market that wasn’t really there? I’ll go back and replay the trade and do work and that’s positive. That’s really positive. Look there are certain times when you just kind of feel a position isn’t really working the way that you want it to and that might upset you a little bit and you need to probably learn to take that position off a little bit, lighten up in that position when you feel that way. So I think the big picture is that generally you want to be as calm and as Mark Douglas says trading in the zone as much as possible but as Denise Shull has recently written you also want to learn how to use your emotions and use it as fuel to get better.      

***

I’d like to thank Mike Bellafiore 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 Mike Bellafiore you can find him:

Or on his website: http://www.smbcaptial.com

On twitter: @smbcapital 

Or read his excellent book: One Good Trade

***

Previously in the series:

David Blair - read it….. here

Charles Kirk - read it…..here

Matt Davio - read it…..here

***

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.