BarroMetrics Views: What is Emotion (Success Series)

BarroMetrics Views: What is Emotion (Success Series)

Before beginning, a little housekeeping: I have included the words ‘Success Series’ for each of the articles in the series. In this way, by searching for ‘Success Series’, you will easily find the relevant blogs.

Well, here we are. I have provided a context, and I have outlined the problem: because of the brain’s hard wiring, when we encounter uncertainty and ambiguity, the limbic and reptilian system s are likely to kick in, producing the 3 Fs effect (fight, flight or freeze). In turn, the 3 Fs produce sub-optimal decisions.

If the 3Fs are the problem, how does the brain handle it? The brain’s solution is to avoid, deny, and/or control. Unfortunately, this solution does not work.  Avoiding, denying, and suppressing our emotions does not work because they inevitably come to life to create even more problems. Moreover, even if we could use the brain’s solutions, we would not want to – given the recent findings that show that excluding emotions from our decision-making process results in poor decisions.

I concluded the last blog by asking, given the context, what is the solution?  We’ll now turn to these ‘solutions’. In essence, solutions fall into two camps – those falling within the purview of our unconscious mind, and those falling within the conscious domain. I’ll be looking at the latter today.

But first a word of warning. The solutions assume:

  • the trader has a method with a positive expectancy return; and
  • a money management approach that is optimal for the method.

Alone, the best Psychology in the world will not enable us to climb to the ranks of the successful because the truth is this: if we are to experience success, we need not only effective Psychology (Mind) we also need Method and Money to be in our corner. With that caveat, let’s look at conscious solutions.

The first solution calls us to be aware when emotions arise. We have the capacity to do this because emotions are initially a biological response (see Rande Howell). Howell suggests that by the time we ‘feel’ our emotions, it may be too late to manage the 3f because by the time we feel the emotion, the probability is we are DEFCON 1.  The only solution is to walk away to allow our emotions to subside. This will be anywhere from 30 mins to 60 Mins.

It doesn’t have to be this way.

To prevent the 3Fs from taking control, the first step is to learn to be aware of and to recognize early, the biological responses that signal the onset of the three Fs. In this way, we have a better chance of preventing a sub-optimal decision. The works of Randy Hall suggest to me that there are stages in our emotional (biological) response:

  1. early-stage – easy to manage
  2. adolescent stage – still easy to manage
  3. beginning of intense stage – manage it with difficulty
  4. intense stage cannot be managed, time to walk away.

The question of course immediately arises how do we acquire the necessary self-awareness to identify the early stages of the biological response? We’ll go into this in the next blog.

Why Traders Fail II (Success Series)

BarroMetrics Views: Why Traders Fail II

In the last blog, we looked at:

1. The reasons why at least 90% of traders fail.

2. To establish the context for success, we said there were two pre-conditions for success.

In this blog, we’ll continue with establishing a context, and consider why it’s so hard to success and change.

If you think about it, profitable trading should be relatively easy.

Assuming trading results are a random process, we should, over a large sample size, have an even money chance of being profitable. That being the case, all we need to be consistently successful, is to ensure that our trading produces a positive expectancy return (see ‘Why Traders Fail’)

That being the case, why do so many fail?

The answer lies in the way our brain is hard-wired. Our brain consists of the older reptilian and limbic systems (I call them the ‘survival brain’), and the newer ‘neocortex.’  The older system is responsible for our evolutionary continuance. It was designed to protect us from external threats. When aroused, the survival brain focuses in on the perceived threat (what I call ‘tunnel vision’) and responds with either ‘flight, fight, or freeze’. The survival brain is also the source of our emotions.  This distinction between emotions and survival instincts is important – as will see in a moment.

But first, let’s turn to the third component of the brain I want to address, the neocortex.

The neocortex is responsible for our evolutionary development. It’s in charge of our complex mental activities like reasoning, conscious thought, language, etc.

Trading folklore promotes the idea that to trade successfully we have to control our emotions. For example, from a recent blog in tradeimo

“Emotions are inevitable – especially for a new or unskilled trader and they can prevent you from making an objective decision. For this reason, learning how to control emotion becomes paramount to successful trading over and above everything else.”

And in a new book “A Wealth of Common Sense”, Ben Carlson writes:

“Ït’s all about harnessing the power of thinking long-term, cutting down on unforced errors, and having the patience to allow compound interest to work in your favour.”

The question is: How does one go about this?

Here is some standard investment advice that is both simple and effective:

 1……….

4. Keep your emotions in check….”

The only problem is the advice is just plain wrong.

The works of Antonio Damasio (and others) show that not only are emotions advisable for good decisions, they are also necessary. (see Antonio Damasio on Emotion and Reason). Damasio clearly shows that “emotion and feeling are not in opposition to reason but provide essential support to the reasoning process.”

And, as we’ll see later on, attempting to control our emotions seems inevitability to lead to the unwanted results  But, here’s the rub. The survival brain sees certainty and status quo (i.e. staying within our comfort zone) as absolutely necessary for continued existence. Also, the survival brain sees anxiety generated by the unknown, and by change, in the same way, as it views physical danger. Its solution is to seek to control outcomes or by denial, or avoidance – strategies that research has shown are doomed to failure.

Our job as traders is to manage the anxiety that generates the flight, fight or freeze emotions leading to tunnel vision and sub-optimal trading decisions. But, we know that control, denial and avoidance don’t solve the problem; we also know that, to make good decisions, we need to allow other emotions in.

What then is the solution?

Why Traders Fail (Success Series)

BarroMetrics Views:  Why Traders Fail

Let’s start with the all-important question: why do traders fail?

They fail because:

They don’t know what is needed for success i.e. they lack the foundation for success. For example, let’s say you wanted to be a world-class chess player. This first step would be to learn the rules so you would know how the King moves, the Queen moves, et cetera. Then you would learn the rudiments of chess strategy; then you would learn the strategy relating to the open, the middle game, and endgame. And so.

In trading, the foundational concepts are:

1. mind (the psychology of consistent execution),

2. money (the sides of position sizing and risk management), and

3. method (the plan that delivers a positive expectancy).

‘Positive expectancy’ refers to the formula: (average dollar win x win rate) – (average dollar loss x loss rate)

The formula (i.e. your trading result) must give a positive result. We shall be returning to this concept later in the series. At this stage, it’s enough to say that too many newbies attempt to trade without first acquiring a solid foundation.

Traders also fail because they don’t do what they know. For example, in chess, the norm is to castle and protect the King as soon as practicable. Yet many new chess players failed to do this. So too it is with traders. They learn that to be successful you need to manage your risk. But, time and again, they overtrade: in terms of position-sizing, and in terms of frequency.

Again, we shall be returning to these ideas later in the series.

There are two skills that I shall not be considering in any detail.

The first is skill acquisition. There have been great advances in this field. If you are interested, you should study the ideas of Anders Ericsson and his deliberative practice method of skill acquisition.

Effective skill acquisition is necessary for learning any new skill – and it’s essential if we are to learn to trade well.

The second prerequisites are the values of honesty and integrity. By honesty I mean “never consciously faking reality”; and by integrity I mean, “keeping my word.”  And, in the case of trading, it’s ‘keeping my word to myself.’

Without these values, we can never become successful traders.

Leave the 90%! (Success Series)

BarroMetrics Views: Leave the 90%!

Happy New Year Folks! I hope you have the best ever year!

Leave the 90%? What 90%?

The 90% of retail traders that anecdotal evidence says fail at trading. Personally, I think that 90% is flattering – it’s more like 95%.

The question why this is so has bedeviled me for over twenty years.  Despite advances in psychology, technology and modern learning theory, we have seen the failure rate remain constant.

From my own experience, the stats provide a clear picture:

  • 5% of attendees to my courses will succeed;
  • 20% or so will fail no matter what help they are given.
  • But I felt that I ought to be able to help a much greater percentage from the remaining 75% than I had been doing. To the end, I invested in bettering my understanding of human nature, communication and transferring knowledge. All to little avail. 

At this point, enter Paul. You remember Paul, I introduced him in ‘Coaching Paul‘. For new readers, Paul (a pseudonym) is a friend who has been trying for seven years to become successful. His pattern has been ‘success, followed by massive failure, followed by a retreat, followed by success’ and so on ad infinitum……

In a conversation with Paul, he made a comment that got me thinking about a possible solution. From there I developed and commenced a coaching program. It’s been only six weeks, but in that short time, Paul has made more improvement than in the prior seven years!

So, now I’m ready for the next step. Coaching a larger group – five. If you have taken at least the Barros Swing course, you’ll be receiving an invitation. No fees charged, but you will be asked for a commitment, details in the email.

For my other readers, I’ll be publishing the content of the process in this blog, each Monday, and Tuesday.  Hopefully, the content will assist some of you.

It begins tomorrow.

Coaching Paul

BarroMetrics Views: Coaching Paul

Let’s say you were coaching Paul, what would you say? What would you be your processes?

Well, the first principle, is you would avoid negative judgments. For example, ‘you were lazy’, ‘you lacked discipline’, etc. The reason is a judgment, negative or positive, fails to advance a trader’s goals. Much better is to describe the disempowering behaviour and elicit empowering alternatives. For example, ‘your entry’ timeframe is the hourly, given your lifestyle, is the hourly the best entry timeframe for you?

The next thing is to identify what we know and what we don’t now about the behaviour.

In Paul’s case, we know that he has some sort of trading plan. We know that he failed to execute the hourly entry, We know that he shared that he experienced negative emotions about the entry. That done, we look at what is behaviour is under Paul’s control and what was beyond his control.

The failure to execute the hourly entry was within his control. What the market did after entry was beyond his control.

Finally, we look at the behviour under his control within the overall context of his goals and steps he has undertaken to attain his goals.

Once the diagnosis stage is complete, we turn to the prescription phase.

It’s most important that solutions come from Paul rather than you, the coach.  When coaching ourselves, this is not an issue. What is an issue, is most traders do not follow an effective review process. Hopefully, the series of blogs will have given you some ideas on how to do this. 

Competition Conclusion

BarroMetrics Views: Competition Conclusion

The results of the competition are posted at the conclusion of this blog. Congratulations to the three winners!

But, the competition was more than helping Paul. Its main objective was to help you effect a more effective review process.

Recently, a well-known institution for whom I do some consulting conducted a survey to determine what factors contributed to consistent losing trades. It provided food for thought in that it revealed some lesser known factors leading to losses.

One of the less-known reasons was an ineffective review process.

An effective review process has: 

  1. A well-defined goal. 
  2. Identifies the essential steps to attain the goal. 
  3. Identifies the elements that contribute to success, and identifies what elements are within our control and which are not.
  4. Creates a plan to attain the goal.
  5. Executes the plan.
  6. Reviews the results of the execution.
  7. Changes actions that fail to lead to the goal seeks to improve actions that advance our goal. 

One of the key findings of the survey was successful traders, in their review process, focus on describing the behaviour, They may make a ‘judgment’ entry, but that is always supported by a behavioural comment. For example, Wolfie said: 

”Another lazy habit of his perhaps.’ 

This is a judgment. 

According to modern psychological theory, judgments are not very useful. They may make us experience negative feelings but do little to point the way to effective change. Much better would be to identify specific behaviour. Again taking a comment from Wolfie as an example: 

Although Paul put in extra efforts to wake up earlier hoping to get a better entry price, he did not follow through subsequently. His habit of waking up late and assumption of the market will “wait for him” caused him to lose the opportunity.” 

 Tomorrow, I’ll use the ideas above to critique Paul’s case.   

COMPETITION

Winners: I was looking for two main comments.

  1.  What behaviours (not judgments) contributed to Paul’s lack of success; and
  2. Whether these were or were not in his control. 

Quite a few mentioned (1); one mentioned (2).  I have to say I had a difficult choice to select only three. In the end, I chose:

  •  Sunny
  • Manish and
  • Eng

The email with the prize download link will be sent out once I complete this blog.

Thank you all for participating!

 

Competition So Far

BarroMetrics Views: Competition So Far

Thanks to all who have contributed. If you are planning to take part, do so quickly. I said I’d chose the three I liked best (i.e. came closest to my answer).

A couple of things:

  1. Read the facts I presented. For example, Paul failed to look at the 60-minutes in a timely fashion. Some have suggested he lacks discipline, perhaps and perhaps not (e.g. he may have had an emergency).  One suggested he was lazy – perhaps and perhaps not, (he got up at 4:00 am. Not too many lazy persons would do that), etc.
  2. To win the competition, you need to identify the Cardinal Sin. As traders, at some time in our career, we all commit this sin.

Some really good answers so far – I may have to increase the winner’s podium (G)

Oanda Trading Competition

BarroMetrice Views: Oanda Trading Competition

Today, I was going to review the S&P recommendation and in the process reply to a few emails. Instead, I’ll postpone that until tomorrow.

Today I want to speak about an interesting item that has hit my desk.

How would you like to exchange a bit of time, and effort but no financial investment for a chance of making SGD25,000.00 to SGD 10,000.00?

The attached flyer shows you how.

In essence, Oanda is holding a trading competition for its clients in SINGAPORE. 

You’ll be trading a demo account (‘pretend money’) and if you are chosen to be one of Singapore’s 3 top traders, you’ll win:

  • Top Trader: SGD 25k
  • Runner Up: SGD 15k
  • Top Young Trader (21 years to 30): SGD 10K. 

Also, there are weekly cash prices worth SGD 1,500.00 for the two most profitable weekly traders.

Note Oanda advises that: “All prizes are credited to live accounts. Can withdraw prizes only after end of Jan 2016 and must place at least 1 live trade”.

So why not join? Your only risk is time and effort. Your return is knowledge (amazing how much you learn when taking part in these events) and perhaps some cash!

ACT Final

BarroMetrics Views: ACT Final

As the final post in the series, I had planned to give an example of how ACT had changed my trading. Well, Friday’s trading provided such an opportunity, but not quite in the way I had in mind!

Friday saw a reversion to trading governed by the 3-Fs with the result that I lost 1.7% (largest loss of the year in one day!). Still, that’s better than blowing my account. Those of you who have heard me tell the story of that eventual night’s trading many, many years ago will know what I mean.

I have recorded a video about Friday’s trading. You can find it here:

 https://dl.dropboxusercontent.com/u/10422981/Blog%202015-10-01.mp4

ACT IV

BarroMetrics Views:  ACT IV

Ryan asked:

Two related questions

I) whilst in a trade how do you distinguish between new information and a FFF type emotion? Is it possible that the uncertainly and discomfort simply forces an FFF to be rationalised as new information?

II)The values and committed actions are also integral – could you explain further his you integrate these concepts as part of the application of ACT?

————-

I) There is no one-size fits all answer to this question. I can only share my experiences. 

My 3 Fs have peculiar characteristics:

  1. There is an overwhelming feeling that ‘I must act NOW’; 
  2. I less my sense of context because I focus only the timeframe I am watching. 

Let me explain. In my trading, I seek to take trades where:

  • the structure and zones of the higher timeframes 
  • line up with the structure and trigger of the lower timeframes.  

When my 3Fs come into play all I focus on is the entry timeframe – totally losing sight of the structure and zones of the higher timeframes.II) The science of goal achievement is as relevant to trading as in any other field. We need to set goals (Long-term, medium-term and short-term), plan our strategies to get to our goals, taken action, review the results and re-orientate i.e. change what is not working.

ACT suggests that is goals and actions are in line with our values, we take effortless action. To that, I would add, that by the conscious creation of value based habits, we attain our goals with less conscious effort.