LESSON 15: PRESSING: WHEN YOU TRY TOO HARD TO MAKE MONEY
Traders call it pressing: forcing trades in an attempt to make money. Sometimes it takes the form of trading too large; other times traders press by trading too often. The hallmark of pressing is trying to make things happen. This is 180 degrees from a mindset in which you trade selectively, when odds are with you. In the latter frame of mind, you let the market come to you and wait for your opportunity. In the mindset of pressing, you want things to happen and you want it now.
The irony of pressing is that it is often the most successful traders—those who are competitive and driven to succeed—that fall victim. They so hate losing that they’ll do anything to win—including trading poorly!
Trading is a bit like flying a fighter plane or playing chess: it requires highly controlled aggression. In trading, the control element comes from knowing when markets present opportunity and when they don’t. One of the best ways of instilling this control is to trade with rules. These may be rules related to position sizing, stop-loss levels, when to enter markets and when to stay out, trading with trends, etc. When rules are repeated and followed over time, they are internalized and become mechanisms of self-control. We can observe this process among children. They so often hear rules about respect for elders or cleanliness that (eventually!) those behaviors become automatic.
The right trading behaviors start as rules and evolve into habits.
These automatic behaviors are important because they don’t require effort and a dedication of mental resources. If we have to make ourselves follow rules each time we confront situations, we will be taxed—and our full attention will not be on those situations. One of the great strengths of the human mind is its ability to automatize rules, so that mental and physical resources can be fully devoted to challenges at hand. This enables us to face those challenges under self-control (i.e., under rule governance).
So how do we make our trading rules automatic? The answer is to turn them into habit patterns. At one time in our lives, “brush your teeth in the morning” might have been a rule that our parents had to impress on us. With repetition, it became habit; most of us need no reminder of the rule or special motivation to follow the rule. This is the kind of automaticity we aim for in trading: where our rules become so much a part of us that they require no special attention or effort.
When we’re pressing to make money, the need to put on trades overwhelms our rule governance. Pressing normally occurs in situations in which we’re frustrated with our performance. Perhaps we’ve lost money, missed out on opportunities, or are just going through a period of flat equity curve. The frustration leads us to try to create opportunities rather than respond to those presented by markets.
In our dance with markets, we want the market to lead. When we attempt to lead the market—when we try to anticipate what may happen instead of identify what is happening—we’re most likely to be out of step with the next price movements. When we are pressing, we are trying to lead the markets, and that has the potential to turn normal losses and flat periods into veritable slumps.
So how do we make trading rules automatic? As with the tooth brushing, it is through repetition. By repeating your rules many times, in many ways, you gradually internalize them and turn them into habits. You will still experience the normal stresses of markets—no one can repeal risk and uncertainty—but you will be so grounded in your decision-making that you cannot fall prey to distress.
When you coach yourself, you can create opportunities for repetition before and during the trading day. This is a several step process:1. Make a list of your most important trading rules. These rules should include, at minimum, your rules for risk management; taking breaks after large or multiple trading losses; entering at defined signal points; and preparing for the market day. You can’t expect to internalize trading rules if you haven’t first made them explicit.
2. Create a routine before trading begins to review the rules. Mental rehearsals are powerful vehicles for creating repetition. Every one of your trading rules can be captured as a visualized scenario that you walk yourself through mentally while you keep yourself calm and focused. You actually visualize yourself in different trading situations reminding yourself of rules and following those rules. The more extended and detailed the visualizations, the more likely it is that you’ll internalize them as realistic experience.The more you think about rules and rehearse them, the more they become part of you. Repetition creates internalization.
3. Create a break in your trading day to review your rule-following. Midday break, when markets tend to slow down, is a perfect time to clear out your head, assess your trading to that point, and remind yourself of what you need to do in the afternoon. By turning your list of rules into a checklist, you can simply check yes or no for each rule depending on whether you followed it during the morning. If you did not follow a particular rule, you jot down that rule on a separate piece of paper, tape it to the monitor, and make it an explicit focus for the afternoon trade.
4. Use the rules at the end of the day as a report card. An end-of-day review will tell you how well you performed in your preparation for trading, your entries, your risk management, and your exiting of positions. Each rule should receive an A, B, C, D, or F grade. Anything less than a Bis a candidate to become an explicit goal for the next day’s trading. In this way, the rules you most need to work on are assured of getting the most attention.
This approach undercuts the tendency to press during periods of frustration by helping you catch yourself in the act of deviating from rules. As a result, frustration is unlikely to escalate into ever-greater violations of sound trading principles. When you cement your rules through repetition, however, you also serve as your own trading coach by preventing frustration from affecting trading in the first place. After all, we can start our day on a frustrating note (perhaps we oversleep), but that won’t lead us to shatter our rule-habits of morning personal hygiene. Behavior patterns, once overlearned, stick with us regardless of our emotional state. That is true self-control.
Good self-coaching is the ability to correct trading problems. Great self-coaching is to develop routines to prevent problems from occurring in the first place. You’ll see the results in your mood—and in the dramatic reduction of large losing trades, days, and weeks.
COACHING CUE
Don’t work at internalizing too many rules at one time. Start with the most important rules that will keep you in the game: entry rules (getting good prices); position-sizing rules (limiting risk per position); and exit rules (setting clear profit targets and stop-loss levels). These three, along with the basic rationale for your trade, can be written down or talked aloud as a trade plan that becomes your guide for trading under control instead of pressing.
LESSON 16: WHEN YOU’RE READY TO HANG IT UP
One of the most difficult manifestations of distress that traders face is despair. I’ve seen it happen to the best of traders: you work hard, you feel as though you’re on the brink of a positive breakthrough, and then you take several steps backward. It feels as though you’re getting nowhere. You’re tired of being wrong, tired of losing money. That excitement that used to greet the start of the market day is replaced with dread. It’s difficult to sustain the research and the morning routines of preparation. If your body could talk, its posture would say, “What’s the use?” You’re ready to hang it up.
Let’s face it: for many, there is a time to give up trading. I know quite a few traders who have been at it for years and have never developed the skills (and perhaps who never had the talent) to simply reach a point of competence where they cover their costs. If you are meant to do something—something that speaks to your talents, skills, and interests—you will display a significant learning curve in the first year or two of effort. If such a learning curve is not apparent, it’s probably not your calling. Hang it up and pursue something that genuinely captures your distinctive abilities. It’s not quitting, it�
��s not being cowardly. It’s cutting a losing position and getting into something better: a course of action that is as sound in life planning as in trading.
If, however, you’ve progressed steadily and have displayed genuine ability over time, discouragement and depression are your emotional challenges during difficult periods. Becoming your own trading coach requires shepherding yourself through the dark times.
One of my professors in graduate school, Jack Brehm, theorized that depression is a form of motivational suppression. When we perceive that meaningful goals are within our reach, we naturally experience a surge of optimism and energy. This surge helps us make those extra efforts to achieve our goals. Conversely, when we see that valued goals are beyond our reach, nature has provided us with the means to suppress that motivation. After all, it would make no sense to redouble our efforts in the face of unachievable ends. That motivational suppression, taking the form of discouragement and even mild depression, is unpleasant, but it is adaptive in its own way. It turns us away from ends we should not be pursuing, which frees us up for more energizing efforts.
In that sense, the feeling of wanting to give up contains useful information. It is not just a negative emotion to be overcome or minimized. Discouragement tells us that, at that moment, we perceive an unbridgeable gap between our real selves (who we are) and our ideal selves (who we wish to be). We no longer perceive that we have control over our future: our ability to attain goals that are important to us. If we are going to be effective coaches of our trading, we need to address this perception.
Our real selves are always distant from our ideals: the question is whether we perceive ourselves to be competent to bridge the gaps.
The first way to address the real-ideal gap is to consider that, in its context, it may point to something based in reality. Perhaps an edge that we had counted on in trading is no longer present. Perhaps market patterns have changed, such that what was once working for us no longer has the same potential. In that event, our hang-it-up feeling is alerting us that maybe, temporarily, we should hang it up and instead focus our efforts in figuring out what is working in our trading and what isn’t. The key word in that last sentence is temporarily. Just because we’re discouraged doesn’t mean we should feign optimism: perhaps there’s good reason for our motivational suppression. By stepping back, we can investigate possible market-based reasons for our feelings.
Other times, our discouragement may be providing us with information that our expectations are too unrealistic. If, in the back of our minds, we’re hoping or expecting to make money each trading day, we’re setting ourselves up for considerable disappointment when we undergo a streak of losing trades or days that is entirely expectable by chance. In such cases, our motivational suppression provides a clue that we need to investigate, not just markets, but ourselves. When we expect the best, we leave ourselves poorly prepared for the worst.
There’s a third source of reduced drive and motivation, and that’s burnout. Psychological burnout occurs when we feel overwhelmed by the demands that we face. Very often, among traders, burnout signifies a lack of life balance: becoming so immersed in the stresses of trading that recreational, social, creative, and spiritual outlets are lost. While such immersion is possible—and sometimes necessary—for short stretches of time, the immersion leaves a trader impaired over the long run. This is not so much motivational suppression as motivational exhaustion. It is difficult to sustain energy and enthusiasm when we’re operating on overload.
Burnout occurs when we feel that the demands on us exceed our resources for dealing with them.
In each scenario, the trader who serves as his own coach treats the lost drive as information. Maybe it’s a reflection of changes in markets; maybe it’s a sign of unrealistic self-demands or a signal that life is out of balance. If you feel discouraged about your recent trading, your first priority is to identify what that feeling is telling you, so that you can take appropriate action.
If market trends, themes, or volatility have shifted, altering the profitability of your trading setups and ideas, then your action should be a reduction in your risk-taking while you see which patterns, markets, and ideas are working, so that you can focus efforts on those. You also want to review your most recent trading performance to see if you can identify markets and patterns that have continued to work for you, even as others have shifted. Reduce your risk, reassess your trading, and you preserve your capital and turn discouragement into opportunity.
If the feeling like giving up is more a function of your own self-demands, then your challenge is to redouble your efforts at goal setting, making sure that each day and week starts with realistic, achievable goals. When basketball players get into slumps, their coaches will set up plays for high-percentage shots to get the players back on track mentally. Similarly, you want to set yourself up for psychological success by setting achievable goals that move you and your trading forward.
Finally, if burnout is contributing to the lack of optimism, then the challenge is to consciously structure your life outside of trading by ensuring proper time for physical exercise, social activity, and overall time away from markets. An excellent strategy for achieving psychological diversification is to have significant life goals apart from trading. If all the psychological eggs are in the trading basket, it will be difficult to sustain energy and enthusiasm when profits are scarce.
Being your own trading coach doesn’t mean talking yourself into feeling good. Sometimes there are good reasons for lacking positive emotion. The superior coach will listen for those reasons and turn them into prods for constructive change.
COACHING CUE
How psychologically diversified are you? How much stress and distress are you experiencing in your social life, your family life, and in your general emotional state? How much satisfaction are you experiencing in each of these areas? What sustains you when trading goes poorly? What problems from your personal life creep into your trading day? How is your physical fitness? Your quality of sleep and concentration? Your energy level? It’s worth evaluating the nontrading aspects of life as well as your market results with monthly reviews. If the other parts of your life are generating distress, it’s only a matter of time before that compromises your focus, decision-making, and performance.
LESSON 17: WHAT TO DO WHEN FEAR TAKES OVER
Fear is a normal emotional response in the face of danger. Under conditions of fear, we are primed for flight or fight: running from the source of danger or confronting it. As we’ve seen, sometimes the dangers we respond to are not objective sources of threat, but ones that we interpret as threats. When we are prone to perceiving normal situations as threats, fear becomes anxiety. We experience the full flight or fight response, but there is nothing to run from or fight. The danger is in our perception, not in the environment.
When we feel nervous in a trade or feel nervous about putting on a trade, it’s important to know whether our response is one of fear or one of anxiety. Is there a genuine danger in the market environment, or is the danger in our head?
Let’s say that I am short the S&P 500 index (SPY) and we get to a prior level of support. There is a bout of selling as the NYSE TICK moves sharply to -500. SPY hits a marginal new low for the move, but I notice that other indexes—the NASDAQ and Russell—are not making fresh lows. The -500 TICK is well above the prior lows in the TICK for that move. I see signs that the selling is drying up. Nervously, I wait to see if any fresh selling will come into the market. My order to cover the position is ready to go, and my finger is poised over the mouse to execute the order. A few seconds go by and the market moves down a tick, up a tick, down a tick. Volume declines, my nervousness with the trade increases. In a flash, I act on my emotion and cover the position. The odds of the support holding, I decide, are too great to risk losing my profit in the trade.
In this scenario—based on a trade I made just a day ago—fear was adaptive. There was a real danger out there. (The market subsequently m
oved significantly higher over the next half hour). I knew to trust my feelings and act on my fear, because I could point to specific sources of danger: the established support level, the drying up of volume and TICK, and the nonconfirmations from the Russell 2000 and NASDAQ 100 indexes. Years of experience with intraday trading told me that moves are unlikely to extend in the short run if they cannot carry the broad market with them on increasing downside participation (volume, TICK).
Fear is the friend of trading when it points to genuine sources of danger: a felt discomfort with a trade will often precede conscious recognition of a change in market conditions.
Note that had I identified fear as a negative emotion and tried to push past or ignore it, an important discretionary trading cue would have been lost. When you are your own trading coach, your goal is not to eliminate or even minimize emotion. Rather, your challenge is to extract the information that may underlie those emotions. This means being open to your emotional experience and, at times, trusting in that experience. Blind action based on emotion is a formula for disaster, particularly when what we’re feeling is anxiety and not reality-based fear. But to ignore emotional experience is equally fraught with peril. When you ignore feelings, you cannot have a feel for markets.
So what do you do when nervousness enters your decision-making process?
In The Psychology of Trading book, I liken such feelings to warning lights on the dashboard of a car. The nervous feeling is a warning, a sign that something isn’t right. When you see the light go on in your car, you don’t ignore it or cover it up with masking tape. Rather, you use the warning to figure out: What is wrong? What should I do about it? Depending on the specific dashboard light, you might want to stop driving altogether and take the car into a repair shop. That’s like exiting the market: the risk is just too great to proceed.
The Daily Trading Coach Page 8
