BarroMetrics Views: ACT III
I received an email stating that the coverage I gave ACT was superficial.
I agree. The blogs are intended as an introduction, In ACT, I provided a link for an in-depth introduction. And, you can always ‘Google’ Acceptance & Commitment Therapy (also Acceptance & Commitment Training) for books and courses on the subject.
Today, I want to look at an example of ACT’s positive influence on my trading.
For many years now, I have sought to overcome the ‘ebb-flow’ volatility of my results. Periods of ‘flow’ (when I could do no wrong) were inevitably followed by periods of ‘ebb’ (when nothing I did was right). In the ‘ebb’ phase, I gave back too much. For example following a ‘flow’ period that ended in Jan 2014, I experienced a 15% drawdown that took the best part of nine months to recover.
My thinking was if I could reduce the drawdown, then I would not have to ‘chase my tail’ to recover the drawdown losses. This year I may have found the solution. I say ‘may’ because the measuring period has been only nine months – too short to draw any firm conclusions. But, the signs are very positive.
So, what has made a difference? I’d love to say I found a brand new TA tool – that way it would be an easy fix for everyone. Unfortunately, the answer lies in my psyche.
As a trader of over 30 years, I ‘knew’ that ‘leaving money on the table’, and ‘missing out’ are part and parcel of our profession. In the ‘flow’ phase, neither issue arises or if they do, arise rarely and are quickly forgotten because I am onto another ‘great’ trade. When the evitable ‘ebb’ stage occurred, both would occur with greater frequency. The way I initially responded was to reduce position size and hold onto to the position until stopped out.
The feelings I would experience – disappointment, regret – I would ‘force’ down by reminding myself of the nature of markets. And in that response lay the error.
ACT suggests that we allow ourselves to experience the feelings fully rather than suppress them. Opening ourselves to the feelings without fusion and judgment dissipates their effect. The ACT tools in the ‘acceptance process’ (Figure 1) were also used to experience and then dampen and remove the residuary, adverse effects of disappointment, etc. In doing so, I was open to the solution of exiting a trade if it did not behave in a manner I expected.
This did mean that on some trades I would miss out and leave money on the table – trades that would have been profitable had I waited for the stop to be hit.
It also meant that:
* I had to prepare diligently for the likely scenarios that could occur after I took the trade, and
* It also meant that the only way I’d stay in a trade during ‘ebb’ stage would be if it were an expected, positive (or neutral) response.
But, I can’t argue with the results. Since I adopted the approach, ‘ebb’ results are breakeven or a small loss. This means that when I move into ‘flow’ or ‘normal’, the profits don’t chase past losses.
I am curious to see if 2015 will prove to be a watershed year. It would be amazing if it were, and will go to show that old horses can still learn new tricks.