When we first learn anything, we need to do it consciously, deliberately and intentionally. Think back to learning to write in cursive in 2nd grade – each letter was formed with much focus right? (Did you know they are leaving that OUT of grade school curriculums these days?). Then by the time we got to high school, we didn’t give a squiggly A or Z a thought but they started teaching us to think – to justify and create in classes like English and Sociology. College extends the process of teaching us to think and grad school – at least outside of the professions – is all about original analysis and thought.

At each step of the way, the information we learned earlier goes underground. Again, we don’t consciously, deliberately or intentionally THINK about each item of information that five years earlier we did not know.

Now tell me, if succeeding at trading is one of the most difficult endeavors on the planet, why would the process of becoming more learned and sophisticated be any different? More importantly, why should it?

Trading education, especially outside the “prop” world (OPM or other people’s money) is not like progressing through levels of formal education. There is no standard curriculum, if you switch from one school to another you might not even recognize the lingo and even in OPM situations much of what the junior traders are asked to do is sit at the screen and lose money.

What are they doing – what is that form of learning called? Experience right? And why is experience important? As dictionary.com defines it “the ability to judge, make a decision, or form an opinion objectively, authoritatively, and wisely, esp. in matters affecting action; good sense; discretion”.

But ironically most trading education tells you NOT to use judgment. “Trade what you see, not what you think” for example – well now tell me, how on earth are you really supposed to do that?

There is this bizarre overlooked contradiction in much of what passes for trading wisdom – or at least smart trading psychology. On one hand, developing a trading strategy/tactics and a plan are OF COURSE the foundation to work on but on the other, the most successful firms ask their traders to spend years learning judgment while the independent/retail world is taught not to think!

The answer to this lies in re-thinking thinking altogether. How do I look at the markets? What do I believe about how they work (on my timeframe), what style of trading suits me? And then once those questions are answered, how do I put together a strategy, tactics that embody that strategy and systematically inject my judgment – or my brain’s extraordinary ability to recognize patterns – into play in order to take money out of the market (or really from other people who are trying to do the exact same thing)?

In short, without an exceptional money-making mentor (and they are very hard to come by), traders have to create the learning progression of high school, college and grad school themselves. I submit that if they look at the thinking/judgment process and institute a program for themselves that they will do much much better than if they just try to rote follow what some other “trader” teaches them.

Is it work? Yep? Is it a LOT of work? Yep. But c’mon does it hold water at all to think that competing with other motivated traders across the planet, some who will do ANYTHING to succeed, is (or was) going to be easy?

…and one more thing, this is also the process of belief and confidence building – which is exactly what you need when things go wrong – which in the markets is a whole bunch of the time! In other words, most will tell you to go back to your plan. I will tell you to go back to your judgment – judgment you have honed through a systematic process.

What is this blog about anyway?

In short, it is supposed to be immersion in thinking about trading and behavior from a totally radical perspective – one where your emotions and feelings matter more than anything else. They will influence your perception of risk and in turn influence your decision making and the trades you take.

We get a little zealous about it because we see how powerful this realization is to so many traders. It also applies to all traders – from the newbie to the quant in Greenwich. How can that be? Well the underlying idea of you can’t make any decision without emotion is a human reality. The idea that we like to rely on numbers and probabilities MORE than we like to rely on squishy mushy feelings is well proven.

Why? Well for one – and it is a big one – it is easier. We know what to do with numbers while the qualitative aspects of feelings are something we have assiduously and theoretically wisely avoided for as long as we can remember.

That fact doesn’t change the real fact that without those feelings you can’t decide what to wear. It doesn’t change the fact that there is emotional motivation in every trade. It doesn’t change the fact that there is impulsive emotional energy in every deviation from the plan.

What it does do is mean that if you really want to make it in this business – regardless if you recently started or if you were laid off from JPM or even if you are at one of my friendly funds in NYC, the key to more effectively assessing risk is to get in line with your psychological capital. Or better put, get your psychological capital in line – front and center – and always the thing to be managed alongside of the probabilistic or mathematical risk.

ALWAYS.

It is all too easy to forget that trading (not to mention life) is a physical experience. (See Descartes’ Error “I feel, therefore I Am” by Damasio) The path of least resistance is believing that risk decisions are mainly, if not exclusively, cognitive (thinking) events.

My just-ended golf weekend in Amelia Island reminded me how true this is. On certain chip shots I thought about things like ball placement and whether I wanted a full-swing or not. On others I “thought about” what felt right. I looked at the distance to the hole and just focused on the physical experience. Ditto for putting. Which do you suppose led to better shots?

If you said “thinking shots”, you are wrong with one exception.

I tried a whole new way to hit a sand shot and it required that I consciously execute each step. I couldn’t do it by feel because I had none. And true to the intent of this letter, the response of the much better golfers I was playing with was “great, now you have the FEEL of it.”

Trading is like this. At first you have to intellectualize a risk situation. But the best results come when you arrive at the place where on top of that cognitive activity you can effectively layer an awareness and integration of the physical experience – the data that exists in your body not your head.

This is what is meant by the term “art and science”. Trading by definition cannot be a science as it is only the sum total of all human risk decisions but its numerical nature allows it to pass as a reasonable facsimile. The idea of financial engineering btw is kind of an over-statement. There is no engineering of markets. Anyway, as for the art part, the thing that is missing from almost all trading advice is how to research and interpret data that isn’t presented in statistical form. Or put another way, how to leverage the qualitative along with the quantitative.

The vast majority of experts will still tell you not to try.

The irony of that is your brain is going to interpret market data via pattern matching regardless if you want to use that input or not. Most importantly, the holistic system communicates the result of the pattern match through the physical feeling-sensory-dimension of our existence. The reason the conventional wisdom is so wrong is that it never learned to distinguish between the feeling of an impulse and the feeling of an intuition or what comes to feel like instinct. That however isn’t a good enough reason to stick with the old earth is flat/intellect is all approach.

The way we see it, the brain will always win in the end so why not get started as soon as possible on working in concert with a brain and a body that work together to assess and address uncertain situations – price movement or sand traps. The job might be as hard as learning to shoot a 90 but did you really think other traders or money managers were going to let you take their money without a fight?

Bring all your faculties to the game!

Everyone thinks the market is a game of numbers. We use complex models, umpteen oscillators or retracement calculations and even a fundamental analysis of supply and demand – all based in numbers and about numbers.

But in reality, the numbers of the market are but an illusion.

Markets are only the vacillating prices that other human beings, using the same mathematically based tools, are willing to pay. For example, what can be expensive one day can be very cheap the next if a trend has ensued.

It is only a matter of perspective. And perspective is a matter of the judgments you make.

Judgments on the other hand will be influenced by both impulsive feelings and by intuitive feelings – or pattern recognition. The trick is to have all the data on the table so you can tell the difference.

In order to do this, us market participants need to do a couple of things – give up the notion of a iron-clad trading plan based purely on historical probabilities and replace it with a trading plan based on historical probabilities (yes you read that right) AND a systematic way to leverage your judgment under uncertainty. This way you can make a decision about factors that may now be in play for the future probabilities. I mean who thought the VIX could stay over 30 for 6 months? … I am just askin.

Now in order to do this successfully, you have got to learn to optimize your judgments – which means spending more time focused on deciphering and understanding them than you spend on deciphering and understanding the charts.

This is revolutionary trading psychology – and it works.

CNBC – fast, accurate, actionable…. (never mind the middle one)…. BOOK EDITOR – “but what are they supposed to do?” MAG EDITOR ” – but they need things to act on” …………..

UGH>>> doesn’t anyone understand the value of thinking before acting anymore? Doesn’t anyone understand that understanding is key to accomplishment? … and most of all, doesn’t anyone get that most of trading is NOT trading?

— END OF RANT —

– Never mind.. not done –

Most of the time we are doing because it is hard (boring, uncomfortable) to just BE.

But there is a ton of info inside if we stop and listen to it. Some is prickly and some is positively brilliant. We have to stop and listen to know the difference. This applies to the judgments demanded by the markets too.

What ever happened to learning? Why does everything have to be doing? Why does everyone want to be told what to do?

As you can tell, I am annoyed and mystified. I believe in knowing my spots and waiting for them

…Isn’t it overtrading that kills most accounts?

April 7, 3:23 PM

Dear Denise,

I feel like I have stepped into a new area of understanding. Tracking my emotions by writing down what I am feeling during trading, is making a huge difference for me! I mean, it is FANTASTIC! I am amazed at how many emotional adjustments I do (or desire to do) to my trading. Things I never even realized, except that now I am making a conscious effort to write it down. Like realizing this morning, after I was short YM from 7807… that I had went to “deactivate” the trade as the market jumped back up, but it filled me before I could do that… literally as I was moving the mouse. At the time, I completely forgot the “impulsive” because I was so elated to be short from that area, as it immediately started going my direction… However, had I acted on that impulse, I wouldn’t have been in a beautiful trade as it tumbled 50 plus points.

But now, I realize what was happening to me. My emotions were dictating my trading in ways I never even knew. Especially in high frequency trading. Reading your work, applying it, monitoring myself, writing down my feelings, is really paying off. I am trading less, and making more money. This week and last week have been incredible.

I feel like the light just went on, the eureka moment has happened, and that I am learning to listen to my emotions, instead of trying to be the “Iron Man Trader” with cold, disciplined psyche. Am I emotional, as I write this? You better believe it! I am pumped at what I am learning.

Thanks, thanks, THANKS!

#1 (Wed, April 1): There surely can’t be anything worse in trading, than setting up a trade… entering it…. but then getting psyched out to close it with a small loss… minutes before it drops 60 pts and does exactly what you forecast. Like shorting YM at 7706. (Always enjoy your blogs)

ME: Would you like me to post this to the blog?

#2 (Later, April 1): Would it need to include me yelling and beating the steering wheel of my truck as I drove away post 4:00 close?

ME: It would be more interesting if it did

#3 (Even later, April 1): Sure, I actually did that after I emailed you… LOL. But the reason I continued with it, was your teaching on “verbalizing the emotion”. I consciously remember thinking that…

—

Point being? Counter-intuitively and certainly counter pop psychology is the power of being totally aware of what emotions are occurring. Putting them into words serves as the best risk management tool for derailing impulsive trades which are born out of acting out feelings that aren’t so conscious or are being purposely “controlled”.

To the Tpsyches way of unconventional thinking, this is the advanced trader psychology of managing psychological capital as carefully, if not more carefully, that you manage your cash capital. Addressing the first automatically takes care of the second.

…because a few have asked where on the blog they can find info yet I would prefer to keep the blog as a discussion, here is the link to the info on the new self-driven study course.

http://traderpsyches.com/selfdirected.php

A more complete description and the download of an introduction is available here.

Merci beaucoup for inquiring – DKS

Every trader devises a strategy for interpreting their markets. It might be Peter Steidlymayer’s original Market Profile (now taught so eloquently by Tom Alexander), it might be a global macro perspective for a discretionary hedge fund or it might be hyper high-frequency day trading. Whichever, it pays to understand WHY one has a strategy and what the strategy (or lens as I like to think of it) is supposed to accomplish.

Which is what? Buy low and sell high? Make money? Predict price movement? What if I told you – NONE of the above?

Aren’t all of these just proxies for the real question? Any time you take a position – regardless of why you took it – what are you expecting to happen? I mean at the most basic level. Isn’t the only thing you want to happen is for the price of the stock or ES contract or gold or whatever to change – and change in the direction which will make you a profit? More importantly, what will make it change? Again, at the most basic level.

The only thing that changes price is if another human being is compelled – for whatever the reason – to pay that different price.

This means the real question you are trying to answer is what the behavior of other people will be given the knowledge, analysis and lens they will have in a moment, an hour, next week or next year. This might not seem like it matters and that just thinking in terms of supply and demand or overbought and oversold is good enough. It may be. But answering the real question is better.

Evidence shows that those who perceive markets in terms of “Theory of Mind” or the ability to have a theory about another person’s thoughts and feelings do better in predicting stock markets. (Bruguier, 2007)

Answering the real question provides both trade ideas and risk-management tools.

What would have happened if someone had sat down and really mapped out the likely human scenarios coming to a head last summer – might they have been short AIG. It works just as well in day-trading particularly in a trend. You can always bet on that fact that most traders are fighting it. They use overdone indicators and they are driven by the feeling of having missed the first big impulse move. So they take the other side and put stops just outside the extremes … and then the market tests, takes out their stops and continues in the original trend direction. This usually works until sometime late in the afternoon when they all give in and go with the trend and for a period of time, it reverses.

Either timeframe, it pays to understand your market perception and judgment in light of the question who is going to pay my different price and why? Where are people caught? What are the humans (who use similar intellects and analytical tools) likely to do in MY TIMEFRAME.

Last night’s post resulted in a bit of chastisement directed at me for calling myself an idiot and this brings up a fundamental difference between? the Trader Psyches/Psych Cap approach and that of cognitive-behavioral psychology, the best selling The Secret and most other popular theories about psychology.

Language DOES NOT make reality. Language DOES NOT change how you feel. You feel how you feel and that influences your language.

Want the absolute quickest way to work through a negative feeling? Verbalize it! Put it out there in full-view – for yourself (and even others if you care to). This works because feelings are the foundation of our existence, we can’t decide what to wear in the morning without them and there is no point in wasting energy on trying to change them using JUST language or the intellect. In other words, if it is NLP – it doesn’t work – and I do not care that Tony Robbins is a gazillionaire for espousing the idea that it does work. Don’t believe me? Check this out -

http://en.wikipedia.org/wiki/Neuro-linguistic_programming#NLP_and_science

Trader Psyches #1 mission is to help traders of all sorts make better decisions. The only way to do that is to help them understand the reciprocal role between acting, feeling and thinking …. and then to help them learn how to deal with, manage and even LEVERAGE their emotions.

At the extreme, how are you ever supposed to recognize gut-feel or what is called experiential knowledge if you cut yourself off from your feelings? In the interim to learning this, you have to feel what you feel, use emotion analytics to understand the message and not waste any energy on trying to change how you feel.? When you handle emotions this way, everything – LITERALLY everything – particularly in trading – will take care of itself.