What a year! There have been so many major social, political, environmental, business, economic, and financial “upheavals” that you may be feeling a bit anxious regardless of where you stand on the spectrum, right, left, or center. What is also worthy of attention is that the prospect of more of these highly significant and disruptive forces coming in the New Year may be no less distressful.  Because of this it is now more than ever important for you to have a compass to guide you through the myriad challenges that crowd your landscape and obscure your vision as you aim to make decisions that can and will affect you at every level of your life.  The compass that I am referring to is a “principle compass” that will point you to the “true north” of what is in your best mental, emotional, financial, and spiritual interests.  In a directional compass true north or geodetic north points the way to the North Pole and assists in taking you to your geographical destination.  This also is a metaphor for your trading and life by ensuring that you are both going in the direction of and making prudent choices about the those things that matter most to your journey as a trader and a human being.  These are the “interesting times” that is referenced in the proverbial Chinese curse and it behooves us not only to recognize them but to navigate through them as best we can.  This is more likely to happen if you incorporate principle centered trading as a guiding compass to your efforts.

A principle is defined in the Cambridge English Dictionary as:   “An accepted or professed rule of action or conduct: a person of good moral principles.  2. A guiding sense of the requirements and obligations of right conduct: a person of principle.”  A principle is unchanging and steadfast as a standard of conduct that will always support you in doing and being your best as in “the law of cause and effect is a principle.” On the other hand, a “value”, which people often think of as the same as a principle, can be transient and idiosyncratic; as in, “do the right thing” because “right” is subjective.”  Also, principle centered conduct is not a guarantee of things going your way or keeping you from misfortune; but it will support good choices when circumstances and conditions out of your control threaten you.  At these times of turmoil and trauma it’s not what happens to you, it’s what you do about it; and principle centeredness will inform your decisions in the tough situations.

Principle centered trading is about how you can increase overall effectiveness and success by making fundamental changes in your underlying paradigms.  Paradigms are conceptual patterns used to form a mutually exclusive choice or theory.  For example: “the scientific method became the basis for expanding knowledge; i.e., to form hypotheses and gather evidence in an experiment aimed at supporting or contradicting a theory.  This became the paradigm of successful science; as opposed to being haphazard and unfocused which is often driven by fear of loss.  My aim here is to briefly explore principle centered trading as a way to become a consistently successful trader.

Here are a few tenants of Principles Centered Trading:

Seek to be effective rather than efficient.  Being fast or having a strategy that allows you to trade a number of trades simultaneously can create an advantage; but the downsides can hurt you more than the upsides can help you.  Establish a routine and a method for all phases of your process that support not only your ability to focus fiercely on what-matter-most but causes you to consider each step as a deliberate act which engages and optimizes all of your internal and external resources. In other words be willing to slow down in order to speed up.

Cultivate gratitude.

Gratitude for what you have will support you in a number of essential ways.  When you are genuinely thankful for the cornucopia of good that you enjoy it anchors you to the purpose for which you trade; remember this is where you take the what-matters-most in your life and connect it with the what-matters-most in the trade.  Additionally, gratitude helps you maintain a healthy humility which can keep you from harboring conceit that causes revenge trading, premature exiting, placing inappropriate size, and operating out of a need to be right.  So many people, circumstances, and conditions have been instrumental in your growth and development … don’t forget them.

Embrace change as your key to cultivating curiosity.

Stagnation and complacency are the harbingers of mind-numbing mediocrity and curiosity is a strikingly strong harness of energy and resolve.  Cultivating curiosity and approaching change as a constant will help you to maintain flexibility in thought and action.  It causes you to search for different ways to not only approach difficult and complex trades but to do so with your journal firmly in hand. Information is the coin of the universe.

Resolve to eliminate an attachment to the outcome of any particular trade.

Emotional attachment is a death knell to Principle Centered Trading.  When you look to P&L as a scorecard for each trade it drastically shrinks your ability to pay 100% attention to process.  Because it is of paramount importance to have at your disposal all of your wits and mental energy to plan, follow rules, keep commitments and track each trade it is critical to become detached from the outcome in any particular trade.  The markets are totally unpredictable and your aim should be to identify the high-probability trade.  You must focus entirely on your process.  Anything short of that will put you at greater risk of being fragmented and makes you susceptible to rule violations and breaking commitments.  So it is in your best interests to release your fixation on the result and celebrate every instance of complete attention to how you are trading.

These are but a few of the building blocks of developing as a Principle Centered Trader.  This approach to trading will help you tremendously in navigating so many of life’s issues as you become a better trader.  The New Year promises to be quite difficult indeed if it continues to play out as it has in 2017; and there is no evidence to believe that it won’t.   Continue reading “Principle Centered Trading” →

Hello everybody! Our new podcast is now out and this week we are talking about our two different brains ad their differences. This podcast is a light-hearted but rigorous look at the unlimited resources that we have called our brain/mind. Dr. Woody Johnson, Vega Karlsson and other associates explore these resources through conversations and interviews with thought leaders and innovators that are finding new and fascinating discoveries that help us to get more out of our brain/mind resources.

Listen with iPhone and iTunes here
Listen with Android and Google Play here

What does winning in the trade mean to you?  Most people would probably say that it involves making a profit.  Well, although that would not be a wrong answer, it wouldn’t include “all” of the story.  The story would also include what you’re doing to ensure that you in fact will “consistently” win.  So many traders say that they want to win, but so few are willing to invest the effort by either finding out what is required or once they know then following through to consistently get desired results.  And, before going any further, we must define what it means to be a winning trader because a large number of traders are laboring under a false premise that winning “only” has to do with making a profit in a trade.  That couldn’t be further from the truth.  Although profit is important, it is not the end all and be all of “successful trading”, which is much more about following a sequentially ordered series of steps, we’ll call them “essentials” without which you will only experience the same odds of winning as those of a Las Vegas one-arm bandit; because you’ll be gambling.  

So, let’s begin at the beginning.  After you’ve tapped into your retirement account or you’ve realized that you can relieve your savings of enough money to open a brokerage account; there is a list of  “essentials” that you “must” follow in order to get the results you want, in other words to “win.”  These essentials begin with market knowledge; you must identify an asset class that you intend to trade.  Secondly, you must develop and use a trading (macro) business plan that outlines your purpose, goals and the strategies you’re going to utilize; what time frame you’ll use, and your financial objectives, to name a few.   Next, you need a set of rules listing guidelines for entries and exits, setups etc., and these rules mostly stem from your macro trade plan.  Fourthly, a money & risk management strategy must be in place for every trade.  Of course you must include appropriate position sizing.  And, lastly you must have self-discipline, without which you will not make it as a trader.  These are all critical elements of successful trading; and now we’ll take a closer look.

Getting the knowledge to be a successful equity, futures and/or currency trader can be a tough task; because your internal stories about your ability to learn can be either a boon or a bane.  You can become your own worst enemy due to those internal stories.  For instance, you determine what you need to learn and to do; then you get the story (from yourself) about how difficult it’s going to be, or how you screwed it up the last time. In many cases negative internal stories can disrupt and dislodge your ability to learn and stay on course.  Negative internal stories most often are established in childhood and built upon the negative messages you received about yourself from authority figures, family, and peers. These negative internal stories or limiting beliefs have been playing and replaying in your thoughts —phrases like “You can’t do that”, “You’ll never make it”, “You dummy”,  “You’ll never amount to anything”, and other types of abuse.  Statements like these may have left you with low self-esteem, a poor self-image and, in some cases, self-hatred. However, with self-knowledge and learning how to successfully handle the negative triggers when they surface, your self-image is lifted, and the process of rewriting old negative stories has begun.  So, one of the important points to getting the knowledge, is getting the knowledge of yourself as well as the market.

After market knowledge, you must develop your trade planning.  Here you will identify and formulate strategies that will increase your trade probabilities.  On a macro level, it’s about organizing and planning your trading business; on a micro level, it is about organizing and planning each trade.  Your focus will be to figure out how to accomplish the goal and what actions it will take. You’ll want to get a picture in your mind (a vision) of the outcome.  Here is where the vision of your intention is brought to life and turned into a practical process, a step-by-step action plan.  Dreams are a dime a dozen. Everybody has them. But it is their execution that is most important.  This plan, then, is a logical map showing where you want to go and how you will get there. 

 Successful trading involves rules and these rules form the foundation of your behavior.  Early on most traders get their rules from books, teachers, mentors, etc.  This is fine, but the thing to remember is that some of your most important rules come from the pain and hard knocks of experience; and your trading is affected by the rules in your life.  In fact, as humans grow, they develop a set of typical responses to reoccurring events.  These responses or patterns of behavior can be termed a list of rules that you live by.  These lists of “rules” or cultural myths are reflected in every decision of your life and trading. Many of these rules revolve around money, power, worthiness, competency, and winning and many of these rules never see the light of day in your awareness.  In other words, if your choices go unchallenged, then the underlying motivation of that thought or behavior remains out of conscious touch.  However, once the rule is identified, it can be challenged and changed.  And, be careful about following “fool’s rules”; these are the ones to be challenged and changed.  For example: 

• Stops only take me out too early; it will always come back
• Big position size makes big money
• I can trade as many times a day as I want; the more I trade, the more opportunities I have to make money

So, identify your rules carefully and make sure that you are following effective rules and not “fool’s rules.”

Of course you must have a money management and risk management plan.  This would also include appropriate position sizing; that is, having the number of lots, contracts or shares appropriate to your trading account.  Putting on 5 contracts in a position that represents over 2% of your portfolio is sheer folly and will separate you from your money pronto – it would only take a few sour trades to blow up your account.  Additionally, you’ll want to have a risk/reward ratio that makes sense.  Most successful traders will use a 1:3 ratio, meaning that they are willing to risk $1 to gain $3 in any particular trade as a minimum; and the greater the risk/reward ratio the better the return when you do have a winner.

Now, by far the most important “essential” element of trading is self-discipline.  Without this it doesn’t matter how much market knowledge you have or how strong your set of rules are or your money management strategy.  The critical factor to being successful in the financial markets is to follow your plan and your rules.  The first order of business is to protect self.  Effective self-discipline is not as much about will-power as it is  about harnessing and managing your thoughts and emotions.  You’ve got to have mental and emotional tools in your tool belt in order to bring your “A” Game to the platform. 

As the green candles were rising faster than space shuttle Endeavor toward his stop, Jim’s eyes were no less impressively wide while he fought a compelling urge to move his stop-loss.  The price action belonged to the YM E-mini 5 minute chart, which had been trending downward however in a highly volatile manner.  Jim knew better than to tinker with his stop in violation of his trade plan, but no matter what he told himself he really wanted to avoid getting stopped out.  He had identified what to him was a supply zone on the 60 minute chart and had executed a short on the 5 minute chart.  Just then, as if a phantom hand grabbed his mouse hand, he had clicked the stop to move it a couple of points higher.  A few moments from that it happened again and again until Jim had done it several times leaving him with a hefty loss by the time he closed his position.  A considerably larger loss than he would have experienced had he followed his plan and simply allowed his stop to do its job.  Now Jim felt angry, stupid and sick to his stomach as the realization that he had gone down the very road that he swore he wouldn’t.  Jim was caught doing something that was intuitive; that is, to attempt to avert a loss by keeping the price action from canceling what he hoped would be a winning trade.  Of course, the behavior that is required for consistent successful trading, which in this case is based in allowing a small loss to avert a bigger one is “counter-intuitive.”  

Trading is a counter-intuitive process.  In the above we looked at how the  fear of failure can and often does drive decision making as described in Prospect Theory also known as “loss-aversion” theory as proposed by Kahneman and Tversky, two psychologists in the early 1980’s.    They state that people value gains and losses differently and will base decisions on perceived gains rather than losses.  As we saw in Jim’s case his compulsions to move his stop and keep the hope alive for a profitable gain outweighed his desire to keep his losses small.  In other words if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose possible gains.  Some other “intuitive” trader mistakes are holding losers to long and exiting winning trades prematurely.  Here we have another instance of the importance of holding and following through on counter-intuitive thinking, emotions and behaviors.  Additionally, Terrance Odean in a paper written in The Journal of Finance, October 1998, discussed in his research that traders and investors have strong inclinations to “follow the crowd” and either jump impulsively on poorly planned trades or put money into popular stocks that do not merit investment.  Similarly, it is counter-intuitive to “wait to buy” in a demand zone as the price action is screaming straight down when the natural tendency is to jump in on the short or to fearfully stay out due to an inability to pull the trigger.

So, what do you do when your body, mind and emotions in their natural tendencies tell you to disregard plans, violate rules and break commitments to yourself?  One way is to embrace an approach that is emerging as an important field of thought regarding the financial markets; that is, behavioral finance (accepting and tracking markets as more than cash flows, earnings, and interest rates that are commonly researched, when more-to-the-point these variables are actually psychological thermometers that are indicative of the current mood of traders and investors).  According to James Berman, a behavioral finance expert, this notion of “counter-intuitiveness” is extremely important when preparing, analyzing, processing and executing your investment strategy or trade.  Considering a behavioral finance approach means dropping the traditional assumption that the markets are driven by rational decisions and realizing that cognitive psychology (how people think…and often the irrational quality of thought processes) drives much of the inefficiency of the markets.  This realization that the markets are unpredictable will help you, if you are counter-intuitive, to avoid the frequent bubbles that surface from time to time like the dotcom bubble that left many investors out in the cold when it burst.  Or in the words of Warren Buffet, counter-intuitive trading and investing in part means, “Be greedy when others are fearful and fearful when others are greedy.” 

Another approach to employ that uses the information from the psychological thermometers of the markets is to extricate yourself from “herd mentality” as a novice trader and investor.  You must be able to track the order flow and identify when the losers will quit which means the market will retrace or reverse.  The order flow is created from a natural imbalance between buyers and sellers; this imbalance becomes the price action.  Your order must be ahead of the next wave of orders in the direction of the price action. You must understand what prevents you from seeing where the loser is…because as a novice you “are” the loser at this point.  In many ways your thinking is the same as every other novice out there.  This is paramount to your trading because these changes in the markets, and the beginning of substantial moves, are where trading and investment profits are realized. In order to remove yourself from the crowd you must monitor your thinking. Leaning how you think gives you clues to how they (the herd) think.  Identifying those times when you feel the urge to do something that is out of line with your stated plan or a violation of your rules is to be documented.  Remember, you can’t change what you can’t face and you can’t face what you don’t know.  You must track your thinking, emotions and behavior.  This is key to getting the results that you want.   

Clarity of thinking and emotional patience precede counter-intuitive behavior.  Furthermore, your A-Game depends on it.  Master your mental game by first becoming aware of what you are thinking and then you are in a better position to change in the direction of growth in your trading outcomes. 

How you perceive your trades is critical to your ability to execute in a way that will get you closer to the results that you seek.  In other words what you are choosing to pay attention to is going to either take you closer to your objectives or further away from them.  How often have you seen something that upon closer examination turned out to be something very different?  Or, have you ever looked at the price action and acted upon what seemed to be a perfect price pattern; then wrote your plan, executed the plan, and summarily were stopped out; only to go back to what you thought was the price pattern that now looked entirely different?!  It was like a dream.  What you perceived was predicated upon how you “filter” information.  You interpreted what you saw through mental models of how the world appears to be.  In other words, what you “see” and interpret as reality is created by internal working “models” in your mind.  Mental models of the world are formed in your earliest years of development and continue to expand throughout years of living.  These mental models or paradigms are built around everything that you have learned and make up the conscious and unconscious beliefs that motivate you to both good and bad behaviors.  Additionally, these mental models or programming also involve how you perceive the world; in other words, the lenses we use to “filter” information.  There are as many ways to filter data coming into the brain/mind for processing as there are people on the face of the planet.  And, it’s important to understand some of the more general ways that filters work.  In this way, you will be able to promote changing “what” you do through “how” you do it.  If you are getting results that you don’t want then you must change something.  But, it is very difficult to change in the “right” direction, if you aren’t clear about objectives and the direction to begin with.  Doing things differently as a result of seeing and experiencing things differently is what we are talking about and this is the beginning of making changes in your trading in order to get better results.

Let’s look at some of them:

Internal/External Filters

Internally-referenced people rely on their feelings, thoughts, images and voices as evidence of being correct, appropriate or being fulfilled.  Externally-referenced people look to evidence outside of themselves for validation of their opinions and ideas.  Your preference will play a big role in the way that you trade.  If you are externally referenced, you are more susceptible to the influence of the “experts” and prone to heed the opinions of others while in a trade.  People who are independent in style are usually internally referenced.  They may listen to the opinions of others but rarely do they depend on them for validation of their own proclivities.  When they have analyzed a trade, they feel confident.  Conversely, people who are more driven by an external perspective will place a substantive portion of their confidence in what the pundits have to say.  Again, the important thing is to be aware of how you think, embrace reality and find a balance that honors your own analytic abilities, but appreciates outside resources as beneficial modes of additional information.

Associated/Disassociated Filters

Associated filters are distinguished by your perception of an event and imagining it from being “in” your body.  Think about one of your most recent trades.  If you are able to experience it again by hearing the sounds through your ears, seeing the charts through your eyes, and touching the keys of your computer with your fingers, you are filtering the event in an associated way.  If on the other hand you saw yourself as though you were an outside observer and experienced yourself as if in a movie, then you are dissociated.  

Why is this important?  The ability to associate or dissociate is a fundamental skill, with each state offering different benefits in order to at times experience feelings, emotions, and events as though you were there in an associated fashion, or to distance yourself from unpleasant, or traumatic situations. Difficult events can sap your strength and compromise your resolve.  It is not only helpful but also empowering to be able to dissociate and distance yourself from those events.  When you distance yourself, you are actually detaching as well from the intensity of the emotions; which can be very supportive in honing your focus in the trade.  This is quite helpful if you are dealing with a trade that went sour, or the memory of a past trauma.  Additionally, you can manipulate the filter by exaggerating the distance as you see yourself far away and hear the sounds of the experience from a distance.  Conversely, uplifting and supportive visions of what you want can be used by associating into the experience and feeling, touching, tasting, smelling and seeing what it will be like when it is achieved.  And, in this instance, dissociation can be used as well to “see” and otherwise experience yourself in the future reality in order to clarify it in your mind as “you are achieving it.”  And here’s something you probably didn’t know: with regard to stress and trauma, those that relive the memories in an associated way add to their stress and experience longer lasting and more intense emotions because they inflict the intensity of the event as though it were happening again and again.  Those with the lowest levels of stress are able to dissociate and detach from the experience.  

Towards/Away From Filters

If you envision a goal, personal or professional, short or long term, it’s important to be aware of how you are thinking about the goal.  Are you envisioning what it would be like to have the goal (how it feels, looks, smells, tastes, and sounds)?  Or, are you inundated by all the ways that it might fail and haunted by what that failure will feel, look, smell, taste and sound like?  This is a very important filter to be aware of.  A towards filter engages your subconscious, especially if it is sensory rich, and the subconscious relates to it as though it were real.  Those who have this filter are much more likely to attract and achieve their goal.  Those who think of what they don’t want (especially in a sensory rich way by feeling, seeing, smelling, tasting, and hearing) are more likely to attract or achieve just that.  This is especially important when putting your purpose, mission, goals, and profit objectives together.  

The important thing here is to become aware of your filters and when appropriate to deliberately and by design use those filters to more easily direct you to the results you want.  For instance, identify your goals and make them specific, measurable, achievable, results oriented and time bound.  Next use a towards filter to catapult you in the direction of the goal with focused intention.  Then associate, that is, float down into the body of your future and see, hear, and feel through your body’s senses what it will be like to experience achieving that result.  This is living by design and not by default.  Take control of your trading and your life one event, one tool and one deliberate action at a time.