Commitment?

Last night (around 10:00 pm HK), I got back from LA after attending Marisa Murgatroyd’s 3-day Message to Money.  You may think that the world of digital marketing and trading could not be further apart. On the surface, you would be right. But, dig deeper, and you find that the essential elements connecting those who succeed are the same.

For example, both spheres need the key values of honesty, accountability and integrity where:

  • Honesty is the act of never faking reality.
  • Accountability is the act of accepting responsibility for matters under our control and above all for our response to life.
  • Integrity is the act of keeping our promises, especially to ourselves.

There were around 300 attendees, and I spent as much time as possible listening to their stories. The more I listened, the more I realized just how alike the attendees are:

At one end of the spectrum were those who spent huge fortunes, going from event to event, looking for that magic bullet that would transform them into winners.

At the other end were those who committed themselves to their own success – the ones who lived the values of honesty, accountability and integrity.

If there is one factor that differentiated those who would attain their dreams from those who would not, it is commitment.  What Marisa called being ‘all in’.

The willingness to do whatever it takes – money, time, effort – to take the journey across the finish line.

  • The consistent taking of one small step at a time;
  • The willingness to take mid-course corrections; and
  • The willingness to say, “this is not working for me. What can I do so it will?”.

Where are you on the commitment spectrum? Are you making the usual excuses of ‘no time’, ‘it’s not working’…. with no forward motion? Or are you taking the micro steps and course actions…… that lead to holding your dreams?

 

 

The Bane of Unrealistic Expectations

What expectations do you have around your trading? Take a moment and think about the question. Take a pen, write down the answer. Ask yourself, are in aligned with the reality of trading.

The answer is not of academic interest. Indeed, it may make the difference between attaining and failing to attain your trading dreams and goals.

Let me tell you about Simon. He is in his mid-40s to early-50s and very successful in the business world. He took up trading about ten-years ago. Yet, despite his best efforts, he never made the mark in the trading world that he had made in the commercial universe.

Why?

Simon equates losses with failure, especially consecutive losses. Not the amount lost, but the fact that a trade was not in the black side of the ledger. His reaction to a loss was to double-down (think Martingale). The result was a series of decimations of his account.

My advice to Simon was to give up trading. He refused. He had succeeded in everything else in life; he did not see any reason why trading would be different. He persisted without changing his mindset about taking losses. A mutual friend told me the other day that Simon is no longer trading.

That’s the power of unrealistic expectations. They prevent us from accommodating reality and without accommodation, we are doomed to failure.

The belief structure we need to adopt to succeed?

As I see it:

  • On a trade-by-trade basis, the market is uncertain and random.
  • As a result, there is an inverse relationship between your average dollar win/loss and the time you hold a trade. So, the longer the timeframe, the larger your average dollar win needs to exceed your average dollar loss. Why? To compensate for your lower win rate. The shorter the timeframe, the higher your win rate has to be to compensate for lower average dollar win.
  • There will be times when you (and your method) will be so in sync with market conditions, that you can do no wrong. Recognize those times, press the opportunity, enjoy it while it lasts, and maintain your awareness that it can end at any time.
  • There will be times when you (and your method) will be out of sync. In these times, all you do will result in a loss. You need to find strategies to minimize the devastation this period will do to your account.
  • Sandwiched between the two, will be those times when your results will reflect the edge your method delivers over the large sample size.
  • Long-term success requires we continually add to our knowledge base and we continually convert the new knowledge into a skill. Market conditions change and so must you. Success comes with expending effort, time and money.
  • If you are a mechanical trader, no one system will cover all market conditions. You need to know the assumptions underlying your system so that you know:
  1. which system applies to today’s market conditions; and
  2. when the assumptions no longer apply.
  • Finally, recognize that you can break all the rules and make a ton of money in a trade or in a series of trades – but, not over the long-term. Inevitably, your mistakes catch up with you. This is why so many traders experience a humongous profitable experience only to blow-up.

So, my question to you: are your expectations aligned with the reality of trading?

 

In the Now Preparation

The last in series on the winning 10%’s mindset. We started with the brain’s structure, then looked at how that structure’s wiring lands us in the 90% losing camp. Today we’ll look at how to join the winning 10%.

The brain’s hard wiring responds to uncertainty by invoking our survival response: fight, flight or freeze (the ‘3-Fs’). And, it’s the worst reaction we can have when it comes to trading.  The counter we need? To assess market information employing our rational and emotional intelligences.  And, there are two practices that lead to that outcome.

The first is a daily practice of mindfulness meditation.

The benefits of mindfulness training for traders is now well documented. You need only Google “mindfulness for traders’ to see what I mean. There are even phone apps for both the IOS and Android to help us. Best of all, it takes only 20-minutes to 30-minutes a day.

For me, mindfulness leads to open awareness and acceptance of data that threatens my profitability. It allows me to engage both my left and right brains with the market information without raising the ‘3-Fs’. As a result, I make the best decisions possible.

If you have never meditated or tried and stopped, I’d recommend starting with 5-minutes and building from there. Use meditation music if music is your bag.  I’ve found a sensing headband (MUSE) provides additional benefits.

The other practice is preparation. Spend some time preparing and answering these questions:

  1. What’s the worst possible result for this trade?
  2. How would I feel if it happened?

It’s important to give the answers more than a passing thought. Many traders place stops with the attitude that they won’t get hit. As a result, when price action threatens the position, the survival response kicks in, and they cancel the stop!

A much better practice is to accept a loss before the trade is initiated fully. The practice will also tell you if you are taking too much risk.

So, over to you. What do you use to keep the 3-Fs away? Pop in a comment. We all can use new ideas.

 

Do You What It Takes to Succeed? The Mindset of a Winner?

 

You did the hard work last week; today, you begin to reap the rewards!

Let’s start with a quick recap:

  1. To be a successful trader, you know that the mind you need to trading is not the mind you bring to the commercial world. Why? Because……
  2. Trading is a probability game and on a trade-by-trade process produces a random result. You can do everything right and lose money on the next trade; you can do everything wrong and make a squillion dollars on the next trade. I call this the ‘the nature of markets’.
  3. The nature of markets goes against our brain’s hard wiring. It seeks certainty and control of outcomes.

Today, we’ll look at how our the brain’s responses plonk us into the losing 10%; next week, we’ll consider what we can do to solve the problem.

The key to understanding our brain’s response is to be aware that it’s designed to serve us by moving towards pleasure and away from pain.  Also, it tends to view losses as painful and profits as pleasure.

So when it’s unable to control a random process, it’s first responses are denial and suppression.

We take a loss. Rather than look at the circumstances giving rise to the loss, we deny it even took place. This fact was brought home to me when a coachee said:

I know I ought to keep a journal! Hey, it’s easy when I’m making money. The journals make me feel fantastic! But, who wants to feel even lousier by recording and analysing losses.?

But, denial and suppression have an even more insidious effect. Research has now shown that if you deny and suppress negative emotions long enough, they’ll eventually rear up and ‘bite you in the bum’! For traders, this usually means an exceptionally large loss.

The other subconscious way our brain ‘protects’ us is to ‘pretend we are profitable traders’. As Rande Howell says:

“…traders want to project a sense of I’m looking good rather than learning to be good”.

You don’t believe me? It’s easy to show…..just drop into any chat room and listen to all ‘fabulous’ trades. Whenever I’ve done this, I’ve counted the winning and losing comments – the former outnumber the latter by over 92%!!! And yet, the reality is losers outnumber winners by that margin.

The effect of the brain’s protection is to substitute an illusion for reality. The problem is in so doing, we effectively give up on our dreams. Today that may not be a problem for you. But, it will be in the twilight of your years. The biggest single human regret is this:

I wish I’d had the courage to live a life true to myself…” (5 Things People Regret on Their Deathbed)

And, I believe, that this regret acts under the radar to lure us into taking trades we otherwise would not.

Don’t miss next week! We’ll be examining a process that allows us to make an ally of our brain in our quest for success.

Your Mind – Needed for Trading!

Mind – the Mind we need for trading succe$$; it’s not the mind that brings us success in the world outside trading.

To understand why we need to consider two factors. But, before we get into that, an apology and a red flag. This post may prove to be a hard read – but persevere. The context it provides is necessary for the goodies that will follow!

I was saying we need to understand two factors:

  1. The nature of trading and
  2. Our human brain

The markets operate in an uncertain and random environment. On a trade-by-trade basis, no one can forecast what the market will do.  The longer the timeframe, the lower the probability we can accurately forecast the market’s next move.  For example, it may be possible with 90% accuracy what the next print will be. But, the probability of the forecasting the next day’s close will be considerably less than 90%. And, if we were to extend out to the weekly close, the probs would drop even more.

Let’s now turn to the human brain.

The conscious mind represents about 10% of brain capacity; the unconscious mind accounts for about 50% to 60%; finally, the unconscious mind accounts for the remaining 30% to 40%.

Think of the conscious mind as the driver of the car, the subconscious as the engine & car chassis, and the unconscious as the fuel.  The three parts have to work together to get us from point A (our current reality) to point B (our desired outcome).

The conscious mind drives our logical thoughts and communicates to both our inner and the outer world. It does this through speech, pictures writing etc.  Also, it directs focus and can imagine that which is not real.

The subconscious takes care of our recent memories and connects to the unconscious mind. It ensures that we have all we need for quick recall and access to memories when we need it.  Here, I’m talking about things like:

  • Memories: how to place a trade
  • Automatic recognition of chart patterns, etc.
  • Current programs: habits, moods, behaviours.
  • Filters: (beliefs and values)
  • Sensory data: what we feel, see, touch, hear. tats

The subconscious filters out all unnecessary information. It does this in a way that encourages excellent performance – by delivering only seven bits of information at any one time.  And, it does this ‘behind the scenes’ – just outside the reach of conscious awareness.

The unconscious mind keeps all memories and past experiences. From these memories and experiences, our beliefs, habits and behaviours are formed.  Sounds like the unconscious, doesn’t it? There is a major difference: unlike the subconscious, the conscious mind has no access to the unconscious.

For traders there are two critical points:

  1. As a rule, our decisions are made at the unconscious-subconscious level; they are then rationalised by our conscious mind.
  2. The other critical point…….

The function of the subconscious and unconscious is to keep us safe. They greatly favour the routine. Their biggest enemy is uncertainty.

With these ideas in hand, we are ready to consider what mindset a trader need for success. Congrats on arriving at this point. I promise next week will be full of fun and will bursting with goodies!

3 Essential Qualities for Success

BarroMetrics Views: 3 Essential Qualities for Success

I was reading a blog my Michael Hyatt about three qualities effective leaders have (What Ike’s Secret D-Day Letter…). And, I thought,

‘Yep, that’s also true for traders’!

Eisenhower wrote a secret letter ahead of the Normandy invasion – in case the invasion failed. In it he takes full responsibility for the ‘failure’: ‘The troops, the air, and the Navy did all that Bravery and devotion to duty could do. If any blame or fault attaches to the attempt it is mine alone.’

From that letter, traders can integrate three critical lessons:

  1. He practised ‘extreme ownership’. This phrase recently has come into vogue (just Google it and you’ll see what I mean). But, it has been around for aeons. Dad taught it to us, and I’m a septuagenarian!

Dad called ‘accountability’ – take total responsibility for actions within your control. As traders, we decide when to enter and when to exit. Trade-by-trade, matters will occur beyond our control; but, in the long run, we will be profitable if:

  • our plan has an edge,
  • we execute consistently and
  • we practise appropriate position sizing

2. He addressed the downside: Eisenhower succeeded not by ignoring the challenges he was facing but by meeting them head-on.

Mechanical traders do this by understanding the stats of their system:

  • the expectancy return,
  • the average dollar win & loss,
  • the theoretical consecutive loss probability,
  • the average ROI, etc.

Discretionary rule-based traders face the challenge this way: by understanding, not only the structures they are trading, but also the principles underlying the structures.  For example, in the Wyckoff model, we are taught the ‘buying climax’. The trader needs to know not only the pattern but also the conditions giving rise to the pattern.

3. He used contingent thinking: expect the best, prepare for the worst.  I use the ‘if-then’ approach. I adapted this from the goal-achievement material (see How to use if-then planning to achieve any goal). When coaching, I find getting traders to integrate this thinking one of the most difficult skills to teach. The question I seek to answer:

‘What do you have to see to tell you that your (trading) scenario is wrong? 

And then use the ‘if-then’ formula to generate action if that scenario comes about.  The answer often allows me to exit early, ahead of the stop-loss being hit.

If you think about it, you’ll see that the initial stop loss is a form of an ‘if-then’ statement. For the discretionary trader, exiting before a stop loss gets hit is a big plus – if done for the right reasons.

The problem is the student-trader is afraid to look into the question. Why? Because after asking that question, he encounters the fear: ‘what happens if I exit early and miss a humongous profit!??’ 

He doesn’t seem to ask: ‘how much will I save by exiting early rather than being stopped out?’ 

And he fails to look into the stats, to see if early exit costs or saves him money.

My question for you: how many of the three qualities does your trading exhibit?

 

The Trading Mind 2

BarroMetrics Views: The Trading Mind 2

When I last left off, we had just completed a consideration of the Reptilian Brain (Unconscious Mind).

We saw that it’s the oldest of the three brains and controls out biological functions and instinctive reactions. It’s designed to keep us safe, and it does this by looking to control outcomes. The problem is it was designed for a bygone era. Many of its solutions are out of place when it comes to trading. For example:

One of the hallmarks of trading is an uncertain outcome on a trade-by-trade basis. Seeking to control this outcome is doomed to failure.

Turning now to the Limbic System (Subconscious Mind)….

Its functions are well set out in the diagram above. I’ve also attached the image as a pdf file.

The unconscious and subconscious brains seek only the best for us. But, in their attempts to ensure our survival and to adopt the ‘right’ course, they prove to be a barrier to trading success. Our main adversaries are:

  • The desire to be right,
  • To stay with our within our comfort zone, and
  • The flight, fight or freeze response

Traditionally, in looking to defeat our nemeses, we have sought to control and reframe the impulses. In my experience, this approach has met with a distinct lack of success. Our most modern brain, the Neocortex (Conscious Mind), can’t control the other two, nor does it want to if it could. It needs to partner them for optimal results.

ACT (acceptance and commitment therapy) offers this option. I have written extensively about ACT in this blog.  (For past ACT articles, in my blog, do a search for ‘ACT’ and ‘Acceptance and Commitment Therapy’). 

Like anything else, the ACT processes need awareness and dedication until we integrate them. Once the processes become ingrained, they become part of us. Even better, we’ll see the results reflected in our trading bottom line.

Theory-of-the-Mind-Revised

The Theory of Mind (through the courtesy of Gemma Stone)

Essential Thinking and Success 4

BarroMetrics View: Essential Thinking and Success 4

Only two more elements to go, folks!

So far we have covered:

The penultimate element: entry

The function of entry is to buy us some time and space: after entry, the instrument moves favourably for some profit for some time. If it does this, it allows the room we need to manage our trade so as to ensure the worst result is breakeven.

Take Figure 1. There is a world of difference between an entry at 123.99 (green arrow) and one at 124.91 (red arrow). The latter gives us no time and space to manage a breakeven trade within the timeframe we are trading. Since I am trading a 5-day swing, I’ve found that the 60-minutes is the lowest timeframe I can expect follow-through to the end of day. Shifting down to lower timeframes exposes the trade an unacceptably high risk of whipsaw.

Finally, we have instrument selection. This element is especially important in FX. Over a large sample size, selecting the instruments to trade that result in profit is important. For example in Figure 2, the trader entered both pairs on May 12. The EURUSD is showing a profit of 302 pips, the EURJPY a profit of 40 pips.

So there you have it. What I view as the essential elements for success. In the piece, I wrote in order of importance. Let’s summarise in chronological order of a trade:

  1. Instrument selection.
  2. Entry
  3. Initial stop
  4. Position sizing
  5. Subsequent Trade Management
  6. Consistent execution.

Figure 1 EURJPY 60-min

FIGURE 2 EURUSD cf EURJPY (Daily)

Essential Thinking and Success 3

BarroMetrics Views: Essential Thinking and Success 3

Today I want to look at ‘Subsequent’ Trade Management i.e. how do we manage trades once they have started to become profitable.

The strategy has to be different for individual traders – the approach depends on our trading stats and personality.

My philosophy is best expressed by Trader Vic in Principles of Professional Speculation. In order of importance:

  1. Preservation of Capital
  2. Consistent Profitability
  3. Pursuit of Superior Returns.

As a result. I employ different trade management strategies when in Ebb Stage (than when I’m in Flow). When in Ebb, I take profits more quickly, and I am less patient when prices go against me.

For example, on Monday. May 15 I bought the GBPUSD at 1.2907. After rallying to 1.29560, it retreated to 1.28908. I exited the position at 1.28997. It’s now trading at 1.29618.

Any regrets at the early exit?

Nope: the only way I’d have captured the current move would have been to hang in. And, my stats show doing that in Ebb Stage, would produce a drawdown of between 15% to 21%.

Executing the current strategy keeps my losses tiny – I’m effectively flat until I have a winning month or two. But when I do have a winning run, my profits don’t have to chase losses. Applying this approach, I had my second best year in 2016.

Essential Thinking and Success 2

BarroMetrics Views: Essential Thinking and Success 2

Carrying on where we left off in yesterday’s blog.

Most retail traders ignore the next Essential – and it’s easy to understand why. When losses are viewed as unacceptable pain and profits as desired pleasure, trade management is seen as something to be ignored. Here’s the quandary trader’s face:

If I exit a position, and then it goes my way, I’ll feel bad. If I take a profit and the trade continues making money, I’ll feel bad. 

If I don’t exit a position, and I lose even more money, I’ll feel bad. If I don’t take a profit and the trade then reverses, I’ll have left money on the table, and I’ll feel bad. 

It’s damned if I do, and damned if I don’t.

To act on this Essential, we need to accept that losses are inevitable. I always dislike to lose money, but I accept the loss as a necessary consequence of doing business. With that acceptance, we can turn to a trade management strategy that best suits our personality and available time.

For me, I prefer to take small losses (with the risk of missing the occasional big profit). And, since I am a full-time trader, I can manage exits on an intra-day basis.

The result of the strategy is: most of my money is made in a month or two. The rest of the time my results tread water. The strategy calls for exiting on two levels:

  • a ‘soft’ stop – a situational exit. For example, if the trade fails to do ‘x’, I’ll exit immediately, and
  • a ‘hard’ stop – a price stop, placed in the market. If the price is reached, I am automatically out.

Figure 1 shows a swing strategy I employ:

  • This is a momentum trade. I buy on stop on the expectation that by day’s end, I’ll be in profit.
  • My ‘soft’ stop: by day’s end, the trade must not be in loss.
  • I took two trades both at the same price 123.97. The first I exited because, at day’s end, the EURJPY had failed to follow-through. I took the trade again the next day.

An alternative strategy is the Buffett type approach: we exit when the reasons for the trade are no longer valid. I know of some traders who are very successful using this method. But, it’s not for me. I’ve seen too many wipeouts to be comfortable with it

More tomorrow…….

FIGURE 1 60-min EURJPY