No issue so pervades the trading psychology literature as that of “discipline”. It is very common for traders to lay their plans and define their setups, only to find that their actions undermine their careful preparation.
A good deal of the advice dispensed by trading coaches and psychologists addresses this discipline problem.
But what if the lack of discipline is not a problem? What if we view departures from trading plans and intentions as *information*, not as weakness? As it turns out, those departures can be quite informative.
You see, we naturally gravitate toward the nexus of our values (interests), talents (native abilities), and skills (acquired competencies). On average, we tend to enjoy doing what we’re good at and we tend to build skills when there is a foundation of talents to support them. The artist who spends long hours at the canvas doesn’t have to draw upon “discipline” to sustain an interest in painting. The hard work is hard play: the discipline stems from a devotion to a craft–and to the ability of that craft to crystallize the artists’ interests, talents, and skills. (more…)
Archives of “talents” tag
rssMaxims of Baltasar Gracian
Baltasar Gracian (1601-1658) wrote many popular maxims:
33. Know when to put something aside– One of life’s great lessons lies in knowing how to refuse, and it is even more important to refuse yourself, both to business and to others…it is worse to busy yourself with the trivial than to do nothing…All excess is a vice, especially in your dealings with others.
51. Know how to choose– Most things in life depend on it. You need good taste and an upright judgment; intelligence and application are not enough…Two talents are involved: choosing and choosing the best.
89. Know yourself-– The key to everything.
104. Have a good sense of what each job requires-– “Far better are the jobs we don’t grow bored with, where variety combines with importance and refreshes our taste.”
110. Don’t wait to be a setting sun. Similar: Quit while you’re ahead; don’t wear out your welcome
121. Don’t make much ado about nothing-– “Few bothersome things are important enough to bother with…Many things that were something are nothing if left alone, and others that were nothing turn into much because we pay attention to them.” Similar: Take it easy.
139. Know your unlucky days – “On some days, everything goes badly; on others, well, and with less effort…Take advantage of such days, and don’t waste a moment of them.” (more…)
What makes an expert?
What makes an expert? And how can traders develop their own expertise? Three elements:
1) “Measures of general basic capacities do not predict success in a domain”
Experts cannot be distinguished by superior intellects or other cognitive talents.2) “The superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited”
Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Think “niche” — the successful trader has found a particular sphere of success that expresses his skills and interests.
3) “Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training”
The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills. (more…)
What makes an expert? And how can traders develop their own expertise? Three elements:Trading Expert
What makes an expert? And how can traders develop their own expertise? Three elements:
1) “Measures of general basic capacities do not predict success in a domain”
Experts cannot be distinguished by superior intellects or other cognitive talents.2) “The superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited”
Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Think “niche” — the successful trader has found a particular sphere of success that expresses his skills and interests.
3) “Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training”
The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills.
So what might this mean? Here are the good conclusions:
1) The majority of traders are looking for expertise in all (more…)
What makes an expert? And how can traders develop their own expertise? Three elements:Optimal Thinking
Rosalene Glickman, Ph.D. offers views on “Optimal Thinking”:
“The quality of the questions you ask determines the quality of your life. When you ask the best questions of yourself and others, you invite the best answers. You can discover what “the best” means in whichever context you choose. You simply create the best path to your most desired outcomes.”
Most Profitable Questions:
* What’s my most profitable activity?
* How can I maximize the profitability of this activity?
* What’s the most profitable use of my time right now? (more…)
What is the Purpose of Trading?
It seems clear, doesn’t it? The purpose of trading is to make money. The trade is planned, entered, and exited with the goal of increasing the size of one’s trading account. What other purpose would there be?
The dictionary says this about purpose:
“something set up as an object or end to be attained : intention b: resolution, determination”
What about:
The purpose of trading is to not lose money.
The purpose of trading is to practice discipline.
The purpose of trading is to use my talents.
The purpose of trading is to grow.
Or how about:
The purpose of trading is to express my true nature. I was meant to be a trader.
Maybe the purpose of trading is simply to trade. Because that is what you have been called to do, or what you are meant to do, or it’s the highest expression of your nature as a producer rather than a consumer. When you trade successfully, you are disciplined, you are growing, you are using and developing your talents, you are making money, and you are creating wealth from scratch. But most of all, you are trading because it’s the right thing to do for you.
Hard Realities for Traders
* If you don’t save a good portion of your earnings in successful years of trading, you won’t last during the less successful years;
* If you don’t have a solid nest egg of savings to support you while you’re learning trading, you won’t survive your learning curve;
* Everyone has a passion for trading; if you don’t have a passion for learning to trade, take a pass on financial markets and find the field of endeavor that offers intrinsic reward;
* If you’re living for your trading, you won’t make it trading for a living. Other things need to sustain you in the lean times, particularly the things that are more important than markets;
* The ratio of time spent working on your trading to time spent actually trading is predictive of long-term career success;
* In any performance field, the percentage of participants who can sustain a living from their craft is under 5%; always have a Plan B;
* No one can make you successful as a trader if you lack the requisite talents and skills; a mentor can, at best, help you make the most of the talents and skills you possess;
* Even if you are very successful as a trader, your annual income will be a fraction of your leveraged portfolio size;
* Your risk and reward will always be proportional: count on drawdowns of at least half of what you hope to make in markets;
* Psychology alone cannot make you a successful trader, but it can make you an unsuccessful one;
* Quiet markets reveal the best traders;
* Over time, your risk-adjusted returns are more valuable than your absolute returns;
* Trading is a business and, as such, must always adapt to changing market conditions;
* If you can’t make money consistently when paper trading, you won’t be successful when your capital is on the line;
* If someone promises you trading success, keep a close eye on your wallet.
Twenty Six Market Wisdoms from Warren Buffett
1. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
2. Chains of habit are too light to be felt until they are too heavy to be broken.
3. Risk comes from not knowing what you’re doing.
4. Only when the tide goes out do you discover who’s been swimming naked.
5. If past history was all there was to the game, the richest people would be librarians.
6. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
7. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price
8. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful
9. Time is the friend of the wonderful business, the enemy of the mediocre. (more…)
Emotions
Emotions are at the root of trading problems. Yes, emotions can interfere with concentration and performance, but that doesn’t mean that they are a primary cause. Indeed, emotional distress is as often the result of poor trading as the cause. When traders fail to manage risk properly, trading size that is too large for their accounts, they invite outsized emotional responses to their swings in P/L. Similarly, when traders trade untested patterns that possess no objective edge in the marketplace, they are going to lose money over time and experience an understandable degree of emotional frustration. I know many successful traders who are fiercely competitive and highly emotional. I also know many successful traders who are highly analytical and not at all emotional. Trading is a performance field, no less than athletics or the performing arts. Success is a function of talents (inborn abilities) and skills (acquired competencies). No amount of emotional self-control can turn a person into a successful musician, football player, or trader. Once individuals possess the requisite talents and skills for success, however, then psychological factors become important. Psychology dictates how consistent you are with the skills and talents you have; it cannot replace those skills and talents.
Key Lessons For All Traders
Find a Trading Method That Fits Your Personality
Traders must find a methodology that fits their own beliefs and talents. A sound methodology that is very successful for one trader can be a poor fit and a losing strategy for another trader. Colm O’Shea, one of the global macro managers I interviewed, lucidly expressed this concept in answer to the question of whether trading skill could be taught:
If I try to teach you what I do, you will fail because you are not me. If you hang around me, you will observe what I do, and you may pick up some good habits. But there are a lot of things you will want to do differently. A good friend of mine, who sat next to me for several years, is now managing lots of money at another hedge fund and doing very well. But he is not the same as me. What he learned was not to become me. He became something else. He became him.
Trade Within Your Comfort Zone
If a position is too large, the trader will be prone to exit good trades on inconsequential corrections because fear will dominate the decision process. Steve Clark, an event driven manager, advises, you have to “trade within your emotional capacity.” Similarly, Joe Vidich, a long/short equity manager warns, “Limit your size in any position so that fear does not become the prevailing instinct guiding your judgment.”
In this sense, a smaller net exposure may actually yield better returns, even if the market ultimately moves in the favorable direction. For example, Martin Taylor, an emerging markets equities manager, came into 2008 with a very large net long exposure in high beta stocks in an increasingly risky market. Uncomfortable with the level of his exposure, Taylor sharply reduced his positions in early January. When the market subsequently plunged later in the month, he was well positioned to increase his long exposure.
Had Taylor remained heavily net long, he might instead have been forced to sell into the market weakness to reduce risk, thereby missing out in fully participating in the subsequent rebound. (more…)