Reader statistics, courtesy of wordpress.com, suggest most of my readers consume this blog via RSS feeds, with Google (Google Reader and Google homepage) being the most popular viewer.
In an effort to be more efficient in my blog reading, I have also started using Google Reader and first impressions are very positive. But there is one major drawback that really stands out: RSS feeds do not directly include comments.
Because my journey has been guided by reader comments – for example, see the latest insightful comments from Tyro Trader on ‘Conditioning optimal trading behaviour III’ - I recommend RSS reader’s pop in once a week or so and check the ‘recent comments’ section for updates. I only get a handful of comments each week, but some of these are gold.
Monthly Archives: February 2007
Here is a collection of insightful quotes from trading legend, Larry Hite.
No matter what information you have, no matter what you are doing, you can be wrong.
One of the great things about the market is, the markets don’t care about you. The market doesn’t care what color you are. The markets don’t care if you are short or tall. They don’t care about anything. They don’t care whether you leave or stay.
… the beautiful thing about the markets, they don’t like you, they don’t dislike you, they just don’t care. They are there everyday. You want to play, you can play. You don’t want to play, don’t play.
We approach markets backwards. The first thing we ask is not what can we make, but how much can we lose. We play a defensive game.
There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you. You can also lose a good bet, no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you.
For more background on Larry Hite and Mint, click here.
In his post-Oscar interview, Martin Scorsese made the following comment:
“The winning for me, I got to tell you, is making the pictures.”
Take a look at this collection of wonderful street art from Mark Jenkins.
Also, I don’t know whether it’s commitment or insanity, but some dedicated fans of ‘Lost’ have created Dharma Initiative food labels that can be downloaded as pdfs.
“A monkey was carrying two handfuls of peas. One little pea dropped out.
He tried to pick it up and spilt twenty. He tried to pick up the twenty and spilt them all. Then he lost his temper, scattered the peas in all directions and ran away.” – Fables, Leo Tolstoy
Early in my career, I used to have a problem with quitting when I was behind. It was very hard for me to leave a game a loser. A lot of that was due to my competitive spirit. Far too many times, I’d lose way too much for one session. That’s a very bad habit for a number of reasons.
First, even though poker should be looked at as one long game, it’s much easier to motivate yourself after a loss if you have a good chance to make it up in the next session. A huge defeat reduces that likelihood. Also, the further behind you get, the more your opponents win. This affects your odds: Players who are losing usually play worse, while those who are winning play better. Frequently, when good players take big losses, one reason is that their level of play deteriorated as they fell further behind.
… At one time or another, almost every top player is susceptible to losing more than he should during a session. This usually occurs when you’ve been playing a long time, taken too many bad beats and know you should quit. You’re tired, but your competitive nature keeps you at the table. And that can prove costly.
… There are a couple of lessons here: One, always make sure you’re trading with a clear head. If you’re tired or distracted, have the discipline to pull up and continue only when the odds are more favorable. Two, calculate your risk carefully and set loss limits, which enable you to maintain acceptable levels of exposure. That’s important all the time, but it’s especially crucial when you’re trading highly leveraged contracts such as forex or futures. Set reasonable risk levels, then stick to them — and you’ll always be able to stay in the game.
(I’m not a fan of Trader Monthly, but it’s free to subscribe so I give it a quick skim through each month.)
It was a relatively boring week this week. I experienced a modest loss of -0.6%. My score for following the road map is a also middle-of-the-road 6.5 out of 10, although I think I may be getting stronger at the margin: for the first time in a long time, I didn’t feel compelled to trade just because ‘I’m a trader, and traders trade’.
This is the final note on the topic of behavioural conditioning.
In an earlier piece, I discussed the view among readers that using punishment to condition improved trading behaviour was unlikely to be effective. In the piece, I said ’… even though I’ll admit I still don’t really appreciate why punishment won’t work, there is an overwhelming consensus from experienced readers that it is not the way forward. So, I will stop venturing further down this potentially dangerous road …’
Michelle B has kindly posted a follow-up comment, providing a clear explanation:
Punishing yourself, especially via bodily pain, constitutes behavioural conditioning. I could be wrong but I think that behavioural conditioning and psychology has gotten a bit of a beating from cognitive psychology. Cognitive psychology changes behaviour by focusing on changing thought and thought patterns. You change the thought, you change the behaviour. Behavioural conditioning to me seems inadequate and ineffective because behaviour which has to be conditioned can become unconditioned through time and through lack of conditioning stimulus, while via cognitive changes, the actual neural connections are modified, therefore effecting a permanent change. To me, psychological conditioning is a quick fix, but not lasting. Cognitive changes are more challenging but certainly not impossible to accomplish, and though they may be more slow acting, the changes are lasting.
Making an analogy with dieting, the best approach is to change your approach to eating/exercise, not adhering or trying to adhere to a restrictive diet or a punishing physical regime, but to learn how to choose the best kind of nourishing food (low calorie, nutrient dense) and the amount of it which you can reasonably eat via greater knowledge of nutrition and energy expenditure via physical exercise. When the pounds come off, they stay off, because you have changed your environment surrounding eating. Same thing with the cognitive approach, you change your mental environment via brain changes.
Thanks Michelle. Your explanation makes perfect, logical sense. I can see why behavioural conditioning is unlikely to have a lasting effect: ‘behaviour which has to be (behaviourally) conditioned can become unconditioned through time and through lack of conditioning stimulus’. So, it’s back to good old, slow-burning will-power.
“I found that I cannot trade against myself”
- Globetrader (in making an earlier comment). This passing quote carries quite a bit of meaning for myself. While there are endless analogies between sports and trading, one big difference is that a large part of many sports (golf, tennis, squash etc) are about playing against yourself; you can create opportunities and make points through effort and courage alone. In one respect, trading can also be thought of as a game against oneself, because you have to be alert to your own weaknesses and strengths. However, I believe the big difference is that you cannot ‘trade against yourself’ in the sense that once you have your approach/strategy in place, you cannot really make opportunities from nothing. It is in this part of the game that we are reactive to the external signals of the market. Most of the time, I view trading not as ‘me against me’, nor as ‘me against the market’, but as ‘me and the market’. The market is what it is.
“The reality that you may need to earn income another way is just that, reality.”
- Michelle B. This point is really hitting home. Despite my progress, it does feel like I am just treading water at times. I will discuss this topic, along with the idea of “opportunity cost”, in my next post.
- Tyro Trader tells a tale of a friend who devised a highly profitable fx strategy that generated high returns on paper, but crashed and burned at the real money stage:
“… he woke up at 5:00am to trade what he calculated was the prime time for his strategy and made 20-50%/month for two months, risking only 2% of his capital per trade. He said that he made a couple mistakes and he should have made 80-100%.”
“Today I bumped into him and we went out for a drink. Far from making his $20k in January, he lost $7k. In the first week of Feb he lost another $3k, so his fund was down 25% in the first five weeks! When I found him, he was in the process of closing his account, returning what was left of his friend’s stake and sending out resumes for real work. In six weeks he went from having a system that printed money to being out of work and out of money.”
I recommend reading the full account.
Thank you to everyone who commented on ‘Conditioning optimal trader behaviour’. You have given me much to think about.
In this earlier post, I discussed how I have tried to use will-power to make behavioural improvements and discussed the possibility of accelerating this development process by incorporating possible carrot-and-stick techniques of rewarding good behaviour and punishing bad behaviour. What came as a surprise was the number of people who commented that punishing bad behaviour may not be very effective. Here are some snippets of comments from readers, along with my responses:
Chris G – Until you can excise the idea of “punishment” for failing to adhere to your market rules, you will continue to make the same mistakes. I know, because I continually punish myself and I never get better.
My first response to Chris G was: “Surely the carrot and stick approach can help to condition improved behavioural responses over time? It works with animals, and with children. I just think I need a big enough stick and a tasty carrot, to really make the incentives work properly. What kind of punishment do you use?”. But after more readers chimed in, I had second thoughts: “Chris G – It looks like many readers agree with your idea that self-punishment is not the way forward. I thought it was perfectly logical, but it looks like I may be mistaken. Time for a rethink…”
Chris Czirnich (Globetrader) – Don’t go head’s on against your mistakes. You make them for a reason. Punishment won’t rid you of your problems in trading, it will make you only stronger, so you will continue to make the errors despite the punishment.
Think of you split in 2 persons and now you as external observer would look over your shoulder while you were trading. Take this concept a step further. After you made a mistake, take the time and try to analyze in a discussion between yourself and your external observer what you were thinking in the trade. What the real reasons were, why you made the trading error. Maybe you will find, that something totally irrelevant to trading caused the trading error. (eg. You had a pressing chore to do, but you could not stop trading). Chris expands on his view over on his blog.
My response: “Chris Czirnich (Globetrader) – Many thanks for your advice. You are the second person to say that self-punishment won’t work, and I am starting to think there is something to this. Reading your post, I imagine you are a very rational trader. Personally, I find the ‘external observer’ exercise extremely useful in decision making. I also find a variation of this technique helpful: instead of creating an external observer, I project myself forward in time and look back the decisions I am making. I used this technique when I decided to leave my old job. However, I find that it’s all too easy to get lost in the moment when I am trading, and it is at these times that the gremlins come out to wreak havoc. Because I think I am weaker than you on this front, I believe I need to take more drastic action to modify behaviours and kick compulsive habits and other gremlins.”
Chris also makes the insightful comment that “I found that I cannot trade against myself.” This is going in to my trove of trading quotes. Thanks.
nonadamas - I am my own best diagnostician…I think you should be even-handed in your response to errors because you also need to keep your ‘animal spirits’ alive.
My response: “Nonadamas – I also believe I am my best diagnostician but I realise I am also vulnerable to moments of weakness, and I need to eliminate and become stronger. Also, your point on keeping the ‘animal spirits’ alive is noted. I think it is important to ‘cultivate’ the right emotions.”
The next comment is from an anonymous reader. It is a touching, honest account:
A reader – I have the similar situation, I believe yours is not unique. I have been struggling with it for 5 years full time and had my account wiped out many times, but these negative behaviours persisted. I know what they are, I have committed to correct them, including trying various forms of self punishment, but to no avail. I stopped trading since January 2006 and went to work for others, while continue to work on these issues, one of the things I do is to listen to Mark Douglas’s “Trading In The Zone” several hours a day, it was not easy but I on it, the “broken record” gradually sank deeply in my subconscious. It took me over 6 months of daily listening to the “broken record” until I started change, I still made mistakes, but I am improving bit by bit, one day at a time.
Just thought that I share this with you and your readers. I have not find the solutions yet and “Trading In The Zone” didn’t cure my problem, it helped.
My response: “A reader – Many thanks for sharing. Your journey of five years of full-time trading is something to behold. I congratulate you on your efforts, and on your decision to decide to leave trading, at least for the moment. Your daily listening ‘Trading in the Zone’ resonates with my own focus and pre-occupation with this road-map of mine. I use meditation to help the advice and reminders of the road map sink in, but I think I need to dedicate even more (time) to it. All the best, Caravaggio.”
Michelle B – In addition, developing the internal observer is very effective–you divert the mental/emotional energy from the gremlin realm to the internal observer’s–that’s what’s called self-empowerment.
You do not need to punish yourself to achieve any of this. And regarding your wanting to speed up the process, despite the fact that you have done very well with your road map and tripling your account in about a half of year, you want to speed it up even more?
The reality that you may need to earn income another way is just that, reality. That possibility does not warrant derailing your progress by wanting to speed it up in time so you can keep trading.
In addition, your gremlins are punishing you. You want more than what they are dishing out?
My response: “Michelle – Good to hear from you again. Your contributions always give me something to think about. I like your point about diverting energy from the gremlin to the observer within. I do find it difficult to stay removed from the ‘present’ action at times, but I will try harder. It is important – I never thought about it in terms of an emotional energy transfer from the negative to the positive. You are the third person to say that I do not need to punish myself. I take this on board, although I must admit I still don’t really understand why this approach won’t work. Also, your point about wanting to speed up my account growth is valid. I am content with the returns, but what I am not happy with is the behavioural difficulties I have encountered. Whether I succeed or fail in terms of my account growth, I want to be able to say I gave it my best from a behavioural perspective. That way, I can fail and succeed at the same time. It’s true that the gremlins themselves are punishing, but I do feel that I need to attack them from every possible angle.”
When I started this blog, my journey evolved in to one centered around following the advice of readers, and in this case, even though I’ll admit I still don’t really appreciate why punishment won’t work, there is an overwhelming consensus from experienced readers that it is not the way forward. Indeed, not one reader seems to have found it useful. So, I will stop venturing further down this potentially dangerous road, and I thank readers for their comments.
I will continue to work on a system of rewarding positive behaviour, however, because this seems to have limited downside and it could promote my general well being. So far, I have decided that I will only reward myself if I achieve a behavioural road map scoring of between 8 and 10 for following my road map. If my behaviour translates in to a trading profit, I will scale up the reward accordingly. However, I have decided to reward myself even if I turn a loss, because the aim is to reward correct behaviour and I realise that the correct behaviour will not always produce profit. This last point reflects my belief that a significant portion of traders do everything right but still end up as P+L losers.