The Daily Trading Coach Read online

  The magic of relationships is that they provide us with our most immediate experiences of visibility. I recently took a phone call from a reader of the TraderFeed blog. Many readers have provided valuable feedback about the blog, but this caller went far beyond that. He read every single post and then explained to me why he was drawn to the site. He put into words the very values that have led me to publish some 1,800 posts in the space of less than three years: the vision that, in cultivating our trading, we develop ourselves in ways that ripple throughout our lives.

  At the end of that conversation, I felt understood: I was visible to another human being. When my mother died, I kept my composure until I approached her gravesite; then I lost it. My two children instinctively reached out to comfort me. It’s something I would have done for another person in that situation. At that moment, I saw a bit of myself in my children. Once again, I was visible.

  An unfulfilling relationship is one in which we feel invisible. We can feel invisible because we’re misunderstood or mistreated. We feel invisible when the things that matter most to us find no recognition among others. I recall one particularly unfulfilling relationship with a woman. We were on the dance floor at a club and I suddenly stopped dancing altogether. She didn’t notice at all. She was in her own world. It was a perfect metaphor for everything I was experiencing at the time: I was there as a kind of prop, a rationale for being on the dance floor. No one was really dancing with me. The profound, wrenching emptiness that I felt at that time was a turning point; never again would I settle for invisibility.

  In Iggy Pop’s classic song, invisibility is a kind of “Isolation.” But if there’s anything worse than being isolated—crying for love—when you’re with someone, it’s being isolated from yourself. We are truly lost when we’re invisible to ourselves.

  Many traders don’t really know what they do best; they’re invisible to themselves.

  All of us have values, dreams, and ideals. How often, however, are these explicitly on our minds? To live mired in routine, day in and day out, estranged from the things that matter most to us: that’s a form of invisibility . To compromise the things you love in the name of practicality, to settle for second best out of fear or convenience: those, too, leave us in isolation—from ourselves. Strange as it may seem, we spend much of our time invisible to ourselves. The day-to-day part of us dances away, oblivious to the other self, the one that thrives on purpose and meaning.

  It’s a real dilemma: How can we possibly coach ourselves to success if the very strengths that would bring us success are invisible to us? After all, the single best predictor of change is the quality of the helping relationship. What, then, is our relationship to ourselves? If we are to be our own trading coaches, the success of our efforts rests on our ability to sustain visibility and draw on the magic of a fulfilling relationship with ourselves.

  To coach ourselves successfully, we must be visible to ourselves and sustain the vision of who we are and what we value. But how can we do that? There’s a simple strategy that can build a positive, visible relationship with your inner trading coach: identify a single trading strength to express as a goal for the coming day’s trading.

  One way I do that when I coach others (and when I work on my own trading) is to ask traders to identify what they did best in yesterday’s trading that they want to continue today. Set a positive goal, based on strengths, to keep you in touch with the best within you. It affirms your competencies and keeps these visible, even during challenging market times. Too many of our goals are negative: we declare that we won’t do X or that we’ll do less of Y. Instead, frame a goal for today that says: “Here is what I’m good at, here’s what I did best yesterday, and here’s how I’m going to make use of that strength today.”

  Trading goals should reflect trading strengths.

  In the relationship between you the trader and you the coach, the quality of the relationship will play an important role in your development. The best relationship is achieved when goals are linked to values and express distinctive strengths. Relentlessly identify, repeat, and expand what you do best—even (and especially) after the worst of trading days. Only through repetition can we turn positive behaviors into habit patterns. When you are in the habit of identifying and building strengths, you will then be truly visible to you. The magic of that relationship—and the confidence it brings—will sustain you through the most challenging times.

  COACHING CUE

  Review the last week’s entries in your trading journal. Count the number of positive, encouraging phrases in your writings and the number of negative, critical ones. If the ratio of positive to negative messages is less than one, you know you aren’t sustaining a healthy relationship with your inner coach. And if you’re not keeping a journal, your coach is silent. What sort of relationship is that?

  LESSON 3: MAKE FRIENDS WITH YOUR WEAKNESS

  The notion of change is a challenge and a trap. It challenges us to aspire to more than who we are, but it can also trap us in self-division. When we entertain the notion of change, we divide ourselves into qualities we like and those we don’t. We parcel ourselves into strengths and weaknesses, good and bad, acceptable and unacceptable.

  Once we make such a division, it is only natural to embrace the good and avoid the bad. We dismiss our shortcomings as mistakes, bad luck, or exceptions. That helps us identify with a partial image of ourselves and keep our frailties from our conscious awareness. Thus banished from the front of our minds, those frailties cannot guide our learning. We do not sustain the motivation to grow, because we only contact the parts of ourselves that are relatively whole.

  Suppose I manage a position poorly because of frustration and I exceed my loss limit on the trade, leaving me in the red for the day. I finish flat for the week, however, and instead focus on that fact. The loss is soon forgotten. It doesn’t bother me, but I also don’t learn from it. The next time frustration hits, I repeat my earlier behavior and lose even more money. Disgusted, I decide to take a break from the markets and come back with a positive mindset. In reality, however, I merely return in denial, once again banishing the losses from my mind. Eventually those trading shortcomings catch up to us, forcing us to face them squarely.

  Such self-division is often maintained with the fiction of positive thinking. By focusing on positive thoughts, we don’t have to think about what we’ve done wrong; we don’t have to achieve contact with the parts of ourselves we don’t like. We become like rooms where the clutter is increasingly swept under the rug. Eventually our rooms bulge with mental clutter, making them uninhabitable.

  The motivation for much positive thinking is a denial of weakness.

  Our daughter Devon was born with a “strawberry” beside her nose: a hemangioma that was a bright red bump on her skin. We were told that it would eventually recede on its own, that no surgery was needed. During her early years, however, baby Devon had a large red mark on her face. We could have put a patch over the mark or insisted on surgery, but we didn’t. It was her mark, and it was part of what made her who she was. When you love someone, even her personal blemishes become endearing. Before I was a parent, I used to wonder how I’d tolerate changing dirty diapers. When the time came, I actually enjoyed it. It was something I was doing with and for my child. The changing of the diaper became an opportunity for bonding.

  So it should be when we deal with our own dirty diapers. Your weaknesses are part of you; someone who loves you will love the whole package, frailties and all. And if you love yourself, you can reach that point of acceptance in which you are fully aware of your shortcomings and appreciate your very humanness. Indeed, as with the diapers, those shortcomings become opportunities—to reach out to yourself and guide your own development. For the longest time, I was unsure of myself in social situations and avoided most of them. Then, in a college dorm party I pushed myself to organize, I noticed a few people standing around not talking with others. In a flash, I saw myself in them. I made a beeline fo
r the stragglers, included them in the gathering, and introduced them around. Ever since, I’ve been able to reach out to that reticence in myself and use it as a prod to engage others. My development occurred not through positive thinking, but through an embrace of my vulnerability.

  Have you lost money recently? Have your trading weaknesses cost you money and opportunity? Consider embracing your flaws: every losing trade is there to teach you something. At the close of today’s trading, create a chart with three columns. The first column is a description of the losing trade you made; the second column will be what you can learn from the losing trade; and the third column will be how you will improve your trading the next day based on what you learned. What you learned from the losing trade might be an insight into the market—perhaps it was range-bound when you assumed it was trending. That insight could help you frame subsequent trades. Alternatively, what you learn from the losing trade might be something about yourself; perhaps an insight into how you can manage risk more effectively. Either way, your losing trade is never a total loss as long as you embrace it and learn from it.

  Much of self-coaching success is finding the opportunity in adversity.

  When you create a trading diary, you bring yourself face to face with your worst trading and turn it into opportunity. It doesn’t matter if blemishes mar your account statement. It’s your account, red marks and all. You make yourself stronger when you reach out to your flaws. Embrace who you are and you take the first step to becoming the person you are capable of being.

  COACHING CUE

  As we’ll see in the next chapter, the research of James Pennebaker suggests that giving voice to stressful events—in a journal or out loud—for at least a half hour a day is instrumental in our putting those events into perspective and moving beyond them. When you experience a horrific trading day, give it voice. Talk it through and sear its lessons in your mind. If you’re in touch with how badly your trading makes you feel, you’re least likely to repeat your errors. There can be gain in embracing pain.

  LESSON 4: CHANGE YOUR ENVIRONMENT, CHANGE YOURSELF

  Human beings adapt to their environments. We draw on a range of skills and personality traits to fit into various settings. That is why we can behave one way in a social setting and then seem like a totally different human being at work. One of the enduring attractions of travel is that it takes us out of our native environments and forces us to adapt to new people, new cultures, and new ways. When we make those adaptations, we discover new facets of ourselves. As we’ll see shortly, discrepancy is the mother of all change: when we are in the same environments, we tend to draw upon the same, routine modes of thought and behavior.

  A few months ago I had an attack of acute appendicitis while staying in a LaGuardia airport hotel awaiting a return flight to Chicago. When I went to the nearest emergency room at Elmhurst Hospital outside Jackson Heights, Queens, I found that I was seemingly the only native English speaker in a sea of people awaiting medical care. After some difficulty attracting attention, I was admitted to the hospital and spent the next several days of recuperation navigating my way through patients and staff of every conceivable nationality. By the end of the experience, I felt at home there. I’ve since stayed at the same airport hotel and routinely make visits into the surrounding neighborhoods—areas I would have never in my wildest dreams ventured into previously. In adapting to that environment, I discovered hidden strengths. I also overcame more than a few hidden prejudices and fears.

  The greatest enemy of change is routine. When we lapse into routine and operate on autopilot, we are no longer fully and actively conscious of what we’re doing and why. That is why some of the most fertile situations for personal growth—those that occur within new environments—are those that force us to exit our routines and actively master unfamiliar challenges.

  In familiar environments and routines, we operate on autopilot. Nothing changes.

  When you act as your own trading coach, your challenge is to stay fully conscious, alert to risk and opportunity. One of your greatest threats will be the autopilot mode in which you act without thinking, without full awareness of your situation. If you shift your trading environment, you push yourself to adapt to new situations: you break routines. If your environment is always the same, you will find yourself gravitating to the same thoughts, feelings, and behaviors. We are mired in repetitive patterns of thought and behavior because we are mired in routines: the same emotional and physical environments. Indeed, we repeat the same patterns—for better or for worse—precisely because those patterns are adaptations to our current settings.

  So how can we change our trading environments? The key is recognizing that our physical settings are only a part of our surroundings. Here are a few routine-busting activities that can alert us to risks and possibilities:1. Seek Out Divergent Views. Conversations with traders who trade differently from you—different time frames, markets, or styles—can often help cement your views or question them. Similarly, reading materials from fresh perspectives puts your ideas in a different light and pushes you to question your assumptions. I remained relatively bullish on the stock market’s longer-term picture into the final quarter of 2007. Only when I pushed myself to read informed views that clashed with my own—and consulting data that did not fit my framework—did I modify my perspectives and avoid significant losses.

  2. Examine the Big Picture. It’s easy to get lost in the market’s short-term picture; how it is trading that minute, that day. I find it important to periodically zoom out to longer-term charts and place the current action into context. Indeed, some of the best trading ideas start with a big picture view and then proceed to shorter-term execution. I especially find this to be the case when looking at longer-term support/resistance, trading ranges, and Market Profile value areas. Often, shifting my field of vision will help me avoid an ill-informed, reactive trade based on the market’s last few ticks. If something seems obvious in the market, switch time frames and generate an entirely new perspective. What looks obvious from one view may well be obviously wrong from another.

  3. Examine Related Views. Sometimes the action of a single stock or sector will illuminate what’s happening in the broader market; one currency cross will break out ahead of others. Are we seeing a broad fixed income rally, or is the yield curve steepening or flattening? Looking across instruments and asset classes keeps us from getting locked into ways of thinking. I find myself tracking sector ETFs during the trading day to see if stocks are moving in a single direction (trending) or are taking different paths within a range. If I see bond traders fleeing to safety or assuming risk, I can anticipate selling or buying stocks. Seeing the entire financial playing field helps keep us from becoming wedded to preconceived ideas.

  4. Take the Break. Just as we take vacations to return to work refreshed, a break from the screen can help us generate fresh market views. It is easy to become focused on what is most dramatic and salient in markets. Pull back and clear out the head to help you see what’s not obvious and then profit by the time it’s recognized by others. I find breaks especially helpful following losing trades, enabling us to reflect on the losses and what can be learned from them.

  If your environment is comfortable, it probably isn’t conducive to change.

  In short, it’s the mental routines—the mental environment—that we most need to change to break unwanted and unprofitable patterns of thought and behavior. When you’re your own trading coach, you learn to think, but also to think about your thinking. Incorporate a fresh look at self and markets each day to inspire new ideas, challenge stale ones, and tap sources of energy and inspiration that otherwise remain hidden in routine. As with my adventure in Queens, you may find that the most exotic changes bring out your finest adaptations.

  COACHING CUE

  Many times it’s the market views we most scorn that we need to take most seriously, because at some level we’re finding them threatening. Seek out commentary from those you most disagree
with and ask yourself what you would be seeing in the markets if that commentary proves to be correct. If you’re quick to dismiss a market view, give it a second look. You wouldn’t need to be so defensive if you didn’t sense something plausible—and dangerous—in the views you’re dismissing.

  LESSON 5: TRANSFORM EMOTION BY TRACE-FORMATION

  When traders seek coaching, they are usually troubled by a particular emotional state that affects their decision-making: anger, frustration, anxiety, or doubt. Their goal is to change how they feel, but they don’t know how to accomplish that. Sometimes traders even view their emotions as fixed and unchanging aspects of personality: “It’s just the way I am.”

  It is true that our traits and temperaments affect how we experience the world. They also play an important role in defining the range of our emotions. Some people feel things—good and bad—very strongly; others are quite even-keeled. Neuroticism, the tendency to experience negative emotions, is one of the big five personality traits identified by researchers. Like all such traits, it has a strong hereditary component. Though we like to think of ourselves as masters of our fates, the sobering reality is that much of our emotional experience is hardwired.

  Does that mean we can’t change how we feel in particular situations? Not at all. If psychological methods can help people overcome post-traumatic stresses and anxiety disorders, they certainly can help us master our feelings in normal life situations. For the most part, we cannot change personality, but we can change how our personalities are expressed.

  The trap many traders fall into is trying to control feelings with thoughts. We attempt to talk ourselves into feeling better or differently. Rarely does that work. When people are grieving over losses, telling them they’ll be okay doesn’t really touch what they’re experiencing. The feelings express a psychological reality; asserting a logical reality ignores the personal meaning and significance of the situation. Feelings are surprisingly refractory to willpower: if wanting to feel different—and talking ourselves into feeling different—were possible, there would be many fewer psychologists in the world.