Tag Archives: Impatience

Social media and its impact on the mindset of a trader

Mentoring

I have been active in Twitter for the past 6 months and this side of world seems to be filled with overly-expressive folks, especially, when it comes to trading. Traders bicker with each other like kids for everything under the roof and keep fighting that their method is the best in the markets. Even a 5-year experienced trader knows that there are many ways to skin a cat and one method is not superior to other.

Open disclaimer first – right off the bat, it may piss some people off but in long run accepting and learning to deal with these basic tenets will definitely help us to move into the small realm of successful traders. Please adopt the supermarket approach. If you don’t like something in this post, please ignore this rambling. This post is not intended to hurt anyone as I do not know 99.99% of the traders in-person. So, not directed to any individual or group. The pointers that are covered below are few of the several reasons that hamper a trader’s progress if he is active in social media during market hours. Whether you are involved in bickering/ego-fighting or just a spectator, the end-result is same, albeit with varied intensity.

1. When one is trading profitably and wishes to teach it to others (the psychological urge behind this teaching could be many but let’s stick to the point), he cannot expect his students to understand it the same way as he has understood. As it is almost impossible to convince a bear to be a bull once he or she has taken a position, it would be even more unfathomable to convince each trader to trade a certain way. I also conduct workshops and I don’t expect my participants to understand the mechanics of my trading style in a day. Once they keep practicing the concept, it might get internalized well in the mind (after dedicated practice) and the idea can open up many possibilities.

While we are at it, would also like to mention that just because we don’t understand a method, does not mean it is not making money for others. ‘Lack of understanding’ cannot be construed as the ‘failure’ of the method discussed. On the flip side, there are 100’s of ways to make money in the markets and it would be childish of us to ridicule other methods. It would be more childlike if we say that my method is superior to others and start chest-thumping – this is so prevalent in facebook/twitter unfortunately. Market returns are cyclical and method A might do better in certain circumstances than Method B – vice versa is equally true. Please understand that everyone has different time frames, methods and objectives. It is also prudent to remind oneself that “every dog has its own day

2. Stop justifying your methodology or trades – who are we are trying to prove here? We don’t need to prove anyone that we are successful in anything. So, why to some strangers? If one is successful in trading, he will exhibit patience as patience is every successful trader’s virtue – without exception. Patience comes with a sense of calmness and confidence. You know you are doing the right thing. Thus, there is no need to justify excessively. On the other hand, stubbornness often comes with anxiety and over-justification. When you find yourself trying too hard to explain what you are doing, you are being stubborn.

Any successful trait needed for trading (like patience, emotional control and discipline) will definitely be reflected in our other aspects of life too. Our family/friends would definitely see the massive difference once we become successful (not only in our finances but also in our behavior) – One of the important perks of being successful in trading.

3. Actually, most of the traders know the reason (or set of reasons) that make them lose money in the markets. But taking corrective action and doing the right set of things to turn profitable is something that individual has to do. Please do keep in mind knowing, and doing are two very different things

4. While people are told they won’t be successful overnight, most new/struggling traders don’t actually believe that. Social media never lets them believe it completely as every other trader is supremely successful in social media 🙂 They have an idea in their head that they’re smarter (Lake Wobegon effect), have it worked out, and will be able to make money quite quickly. So, always in the urge to make money faster and lose it actually.

5. As Master Oogway tells in the movie Kung Fu Panda “One often meets his destiny on the road he takes to avoid it.” (this quote is actually from a french poet Jean de La Fontaine). Most of the traders are determined not to lose money (rather than having a determination to ‘make money’) and in the process, they actually lose more money. Am not saying we are pre-destined to results but this one needs to be taken seriously. Knew many folks who have the aversion for loss and unfortunately, end up in trading (trading needs that loss digesting stomach) and struggle for years.

6. False hope also keeps our enthusiasm going in trading. We can attribute this ‘false hope’ to survivorship bias – We are likely to hear more stories of people making a killing than hearing about people losing everything because the people who lost everything are gone from the public eye and are not talking about it. The few who make money are sure to let everyone know about it (or others talk about them a lot) and thus create a sort of illusion–intentionally or unintentionally– that anyone can do what they did/do.

7. Easy money lure – the lure of making money each day in only a couple hours gets people’s minds spinning with possibilities. They imagine stopping everything and just start trading for a living immediately (For example, lot of chatter happened on Sept 21 2018 EOD about people buying far OTM puts for pennies and selling it for 200s..this kind of chatter happens a lot when mkt moves violently..this also feeds the mindset that money is easy in trading)

As a matter of fact, they would start dreaming about trading in a beach while sipping pina colada. Unfortunately, sand, water, sun glare and laptops don’t mix. You are not gonna get paycheck every month and you must be absolutely at the top of your game without distractions to make money long-run (this is exactly why I keep advocating to get off from social media/forums during market hours). Distraction and ego fights can damage our psychological forte and eventually, we start focusing on things that does not matter.

8. Long story short – stick to a well-defined plan and trade that plan even when it is uncomfortable (and it often will be). The vast majority of the population, and thus the vast majority of traders, buckle under this uncomfortable pressure – the same way we reach for the ice-cream instead of the carrots.

9. On the other side, social media and forums can have a positive/lasting impact on a trader if he can figure out a virtual mentor(mentor does not have to know you but you can follow his principles/thought processes). It can be a great resource of authentic information for new traders as well. But overall, it has never served a trader well if he loiters around in social media during market hours. This is not even debatable any more as the negatives over-weigh positives by a huge margin.

10. So, if you are a losing/struggling trader, try getting off from the forums/social media (for few months) during market hours. See if it has changed your overall mental resilience/trading. I can bet that this will be a great trade to put on as Reward:Risk seems very high. Risk = not being able to participate in conversations/getting updated about latest news, Reward = profitable trading without outside distraction.

Happy trading !!

Trading Q&A Audio/Video 1

Audio/Video response to the tweet posted on April 26th 2018

Here is the A/V link:

Bouncing back slowly but steadily

Mentoring

A trader asked me a question about how to develop the discipline in following his trading plan. Am sure many of us can relate to the questioner’s mindset in ‘trying to recover the losses as quickly as possible’. It is clearly evident that the trader does not believe in bouncing back slowly. He is also well aware of the risks involved in trading stock futures on result days but he could not control the urge to put on a trade.

Here is the question (quoting it) and the complete reply

Question:

“Hello Madan – i know i have to focus on maximizing gain and have to stop weighing losses more than gains. If I look at my losses, have incurred heavy losses in trading stock future and that too on result days. I need to bury this desire to recover what I lost quickly. I find it difficult but would want to know if there is any mental drill to have disciplined approach.

I understand that trading in stock future on result days is very risky, after I enter a trade if it is in my favor it nurture my belief that being undisciplined at times helps u in profit but in the long run I am at loss due to these trades only”

Reply:

First things first – please do not answer these questions but just answer them to yourself.

1. Why are you trading the markets?

2. What is the need to trade on results day (knowing well that the stock can go either way)? If it is not part of the trading plan, why trade that day? For example, i don’t initiate new trades on RBI days. There is always another trade right? I know few traders trade on earnings announcements day but they have hedged strategies.

3. Why are you impatient to make back all the lost money back quickly? Why are we not respecting probabilities, distribution of trades and climbing up steadily?

4. We are aware that ‘profiting by breaking our system/rules can create havoc in the long run’ but we still take comfort in the fact that we are making profits by not following our plan. So, what thought process is giving us this pleasure?

5. Are our goals oriented towards P/L or oriented towards the process? Why are we so focused on P/L than focusing on the process?

Common observations about an undisciplined trader:

1. More often than not, traders do not trade to make money. Trading is not rocket science. It’s like making biryani – all the raw-materials and perfect ratio/sequence has to come into play. Once we figure that out, making a great biryani is just a process of following the routine. All the major restaurants follow routine in making their special dishes every day.

Most of the traders trade to regulate their emotional state. Once the trader becomes attached to the need to trade and make money quickly —and once his perfectionist voice of “I should have bought there” enters the picture–he is no longer grounded in markets. It’s when those frustrations build over time, becoming self-reinforcing, that traders sway away from their plan/system. What derails traders is that, at some point, we switch perceptual lenses and view the trade through the lens of profit/loss (P/L), not through the lens of probabilities, risks, and rewards.

Mentally rehearsing a mindset everyday (please read psychocybernetics and see how you can implement mental rehearsing in trading. It helped me tremendously) in which it is OK to miss moves–there will always be future opportunity–traders can prevent many of these train wrecks. The practice of taking a break during the trading day, reviewing one’s state of mind, and clearing one’s head is remarkably effective in this regard. Clearly identifying the parameters of one’s trade–the optimal size, a logical way to trail SL, stop loss points that put risk and reward into proper alignment–also ensures that you are controlling your trading, not the reverse.

2. Many traders formulate intentions for their trades and then wonder why they have veered from their trading plan. When we ask them about their trading plan, however, there is nothing written down nor is there anything specific that has been planned. Often, however, we will hear from traders that they’ve violated their discipline. When we ask which rules they’ve violated, they cannot give a definite answer. How can we violate a discipline that isn’t there to begin with? The problem is not that an excess of emotion interfered with their plans and rules. Rather, they were never sufficiently planful and rule-governed to begin with. So, there is no emotion involved (or progress to be made) when there is no plan to follow in the first place.

Essentially, in my opinion, the single greatest way to build discipline is to turn rules and plans into ‘resolutions’. That means that you have to give those rules and plans a life of their own. The more you think of them (mental rehearsing/writing them down in a piece of paper whenever you find time in a day), look forward to them, grade yourself on them and reward yourself for them–the more real they become. You are most likely to abandon rules and plans that haven’t been internalized as resolutions/commitments. This is where ‘mental rehearsing’ would help immensely. It enables us to internalize our plans/goals effectively.

Unfortunately, mere intentions are not strong enough to trap these trading errors. We need the emotional force of resolutions and the reliability of routines. Turning intentions into checklists and checklists into resolutions is a great way to ground yourself into best trading practices.

Last but not the least – being disciplined is a self-fulfilling phenomenon. The more you are disciplined, the more you will see stability in your trading and the more stability in P/L (bottom left to top right angle), the more disciplined we become. And the cycle continues.

Hope it helps. Good luck with your trading !!

Deliberate practice and patience

Mentoring

Few people have emailed me about ‘being impatient’ in executing their trades (both entry and exit) and I have already written a blogpost on patience few weeks ago. Here it is..

Why do we exit prematurely from a trade

Nevertheless, let me put some more thoughts to drive that point home again. As St. Augustine once quoted – “Patience is the companion of wisdom,” and if he lived in our era and had to say it about trading, he could have easily gone on to say that patience is a virtue that should never be disregarded when trading, nor ignored when learning how to trade. Proper patience is essential throughout the life-cycle of any given trade, and is of acute importance when learning and practicing how to trade. Unfortunately, patience is one of the most challenging skills to develop as a trader.

Deliberate practice is the key

In the book ‘Talent Is Overrated’ (I highly recommend this book, if you haven’t read it), Colvin cites research presenting that only through 10,000 hours of practice can world class performance be accomplished. He is not talking about ‘being there’ kind of practice but ‘Deliberate practice’.

Deliberate practice stresses repetition, but also stresses self-awareness and the ability to analyze how we are performing and acclimatizing accordingly. It is a crucial stage in the development of a trader because it is at this time when both good and bad habits are formed. If a new trader is not patient and hurries through the process, because of their over-enthusiasm or need to make money, the chance for developing improper skills is amplified, and the odds are the trader will become overly frustrated and either quit or attempt to accelerate their learning curve even faster.

Now, the question lingers in our mind – why are we impatient? Impatience usually stems from the underlying belief to prove oneself. If we have an underlying belief to “prove our worth”, we may find ourselves hastening through things, eager to accomplish things – in myriad number of ways to prove our worth. The “need to prove oneself” belief may be formed by any number of life experiences, where we may have felt inadequate, incompetent, defenseless, stranded or unappreciated.

Patience is vital to consistent success in trading because it allows us to be selective in our trading decisions. The experienced trader will not be anxious to make a trade, but will patiently wait until a setup with a high probability of success is exhibited. Once in the trade, a patient trader will give the position time to progress and will not get out of the trade too early, but will exit the trade according to a pre-defined/ ‘well thought-out’ plan. And the patient trader will not have to be concerned with over trading as well.

Creating the ‘patient identity’

Many of us have the problem of not waiting patiently for the setup to unfold. So, we basically muscle into the trade, see it collapse (or recover after our exit) and wonder what just happened. It is basically our survival instincts overriding rational mind to create a thought process incapable of trading effectively. Research unequivocally shows that our brain is not equipped to deal with uncertainty (the basic essence of trading).

Many a times, traders take the wrong approach of using will power to become a patient trader but come out empty-handed. One can talk to himself (self-talk) that ‘I am a patient trader..I am a patient trader’ but the same mistakes seem to crop up in frequent intervals. One can also put sticky-notes on the screen but ultimately one will become a patient trader only when they experience it themselves. Usually, it means that we practice/cultivate patience in our non-trading life as well. Forcibly putting ourselves in situations that require a person to exhibit patience. One can start a garden (will teach you lot of patience), teach physics (or some other subject) to their kids, babysit a toddler (lot of patience is required) or tutor a special child (great cause too).

By doing the activities that require patience, we create that ‘patient identity’ within ourselves and that will nicely manifest in the market. We will never be organized/disciplined in trading if we are not disciplined (one common example is lack of discipline in working out – if we are not disciplined in life-enhancing activity like hitting the gym, then trading will be no exception) in our daily lives. Everything in life, approached properly, is an opportunity to exercise the capacities we most require in our trading. I always say to my fellow traders that ‘becoming a better trader is a path to becoming a better person’

Final thoughts

As someone said – “People who do the common things in this life uncommonly well will command the attention of the world”. Trading is not rocket science – it is more of an art. It is the pint-size things we do well when trading and learning how to trade, that make the difference between success and failure. Novice traders must always be prepared to put in the practice needed if they want to achieve proficiency, and experienced traders must continue to exercise their skills if they want to achieve greatness. And that ‘elusive’ patience might be the missing link.

Hope this post resonates with some of your experience/thoughts and if it does, I would like to hear it !!

Why do we exit prematurely from a trade

Impatience

I had the privilege of meeting so many traders last weekend in a trader’s conference in Lavasa, Pune. It was an excellent eye-opener for me with respect to the struggle a budding trader goes through. Different traders had different issues and wanted to talk about a common issue among traders in this post.

Many traders have the issue of closing trades too soon. Especially, as it gets closer to their intended target (or trail too close if they dont have targets). Once the stock/future reaches certain level, they seem to trail the stop much closer only to have the market take them out and then reverse to their target (or taking its original path). This seems to happen over and over (in varied intervals). They are afraid to give money back to the markets and have seen traders going for counselling for this behavior in western countries. We all understand this is a problem but a little background will help us see it more clearly.

Analysis of the problem:

This is a classic example of ‘prospect theory’ which states that people are willing to settle for a reasonable level of gains (even if they have a reasonable chance of earning more), and are willing to engage in risk-seeking behaviors where they can limit their losses. In other words, losses are weighted more heavily than an equivalent amount of gains. An employee thinks this way every time he/she looks at the paycheck and sees how much money has been deducted for taxes. He/she doesn’t want to work anymore, and earn more money, because he/she does not want to pay more taxes. Although the employee would benefit financially from the additional after-tax income, prospect theory suggests that the benefit (or utility gained) from the extra money is not enough to overcome the feelings of loss incurred by paying taxes.

Cleansing thought:

Many traders wonder why consistently being profitable in stock markets is always elusive. The above mentioned problem is one of the main reasons that inhibits consistent profitability in trading. ‘Learning what to do, and actually doing what we learned (under pressure) are two different things’. And once again,it goes back to one’s desire to maximize the chance of gain, not to maximize the gain itself.Getting out of winning trades prematurely, is an obvious manifestation of this phenomena. This is also why most of the traders inherently look for ‘high winning rate’ system.

All it serves to do however, is make one feel better at that moment in time. In reality, it is to the severe detriment of our long-term performance. One has to realize that trading is a big-picture endeavor, and what feels good in the short term, is most likely counter-productive in the long term. Quite simply, leaving a large amount of money on the table, or worse yet; missing a major winning trade, is just as bad, if not worse, than a losing trade. The market however, lulls us into complacency, and even reinforces this natural behavior, because it spends more time in ranges than in trends, where small profits quickly vanish. We then learn to instinctively cover trades before they return to our entry point, or turn into losers as we would have seen this behavior many times selectively.

What makes matters worse, is that that our exits command top priority in the trade decision hierarchy (for obvious reasons), followed by trade size, and entry point. Liquidations (exits) are far more important than initiations, and harder to get right. When we enter a trade, it is the most hopeful point in the trade cycle, but come exit time, a trader is bombarded with stress, cognitive load, emotions and bias and they all have reared their ugly heads, just in time to distort our expected value of the trade.

Having a predetermined target and sticking to it is not the answer, in my opinion. If we have specific target based exits and if it works for us, that’s great. In most cases, people are going to get out early anyway, and it is tantamount to trying to predict the market. It is more important to concentrate on projecting losses, risk management, and finding signals that produce trades that are well defined, have a proven edge, and are reproducible, rather than trying to out-guess the market.

Essentially, if price action or our expectation dictates the market should continue in our favor, why get out? And, why use a target that we’re not going to follow as our exit point? Exit the trade when price action/indicator signal tells us the trade is not good anymore.

Parting thought on this topic:

Imagine that trade management is like grilling a steak. If we like our steak well-done, we are not going to take it off the grill after 4 minutes, because we’re hungry and can’t wait for it to fully cook. And we’re not going to take it off the grill at some arbitrary time, because some cookbook said a well-done 2-inch steak should be cooked for 10 minutes. Instead, we are going to observe the steak, maybe poke it with our finger, or cut it open a little to see if it’s done. And only when it is cooked to perfection, do we take it off the grill. This applies to EVERY steak we cook. Same applies to every trade we take in the markets.

Thanks for reading and happy trading !!