How to Develop best practices that help you sustain productivity and effectiveness in your work routines
Most of all, this book is about taking best practices – the ingredients of your trading success – and weaving them into best processes. The goal is not to change you but to help you more consistently tap into the drivers of your success.
In hindsight, it's not difficult to see that Trading Psychology 2.0 is a natural extension of my previous books. The first of these, The Psychology of Trading, focused on the emotional problems faced by traders and how these mirror common life challenges. It introduced a solution-focused framework to trading: identifying the patterns that underlie our success and becoming more consistent in enacting those. My second book, Enhancing Trader Performance, adopted a developmental view of trading success, emphasizing expertise development as an ongoing process of deliberate practice that matches skills, talents, and challenges. An important implication of that work was that there are many forms of trading, each requiring unique skills and learning processes. I continue to find that many of the emotional problems faced by developing traders are the result of bolting generic learning processes onto very specific performance domains, creating frustration and suboptimal performance. Finally, my most recent text, The Daily Trading Coach, created a cookbook of psychological techniques and approaches to help traders overcome common performance challenges. An overarching theme of that book is that a primary goal of trading psychology is self-coaching. By becoming better self-observers and catching best and worst practices as they occur, we can overcome market noise with enhanced self-determination.
Trading Psychology 2.0 differs from these books in one key respect: It breaks trading success down into those four ABCD processes and explores research-based ways of maximizing them in our personal and professional lives. The book's aim is to move trading psychology beyond the usual focus on discipline, emotional control, and trading one's plans to the broader context of sustaining peak performance. Most important, the book aims to nudge traders toward what might be called meta-processes: robust routines for changing our routines and adapting trading to ever-changing market conditions.
It is not enough to find an “edge” in financial markets; as any tech entrepreneur can attest, competitive advantages are perishable commodities. Those who sustain success continually renew themselves, uncovering fresh sources of competitive advantage. That requires processes for assessing and challenging our most basic assumptions and practices. It takes a good trader to create success, a great one to recreate it. Nothing is quite as difficult – and rewarding – as letting go of what once worked, returning to the humble status of student, and arising phoenix-like from performance ashes.
What makes any performance domain worthy is that none of us will ever completely master it. There is always room for improvement in dance or golf; chess players, brewmasters, woodworkers, and racecar teams can always hone their craft. For that reason, performance activities are the consummate psychological crucible, moving us ever closer to self-mastery. This is particularly the case with trading, where the rules of the game continually evolve. What other field demands the utmost of conviction and risk-taking, but also the greatest of flexibility and prudence? In adapting to change, we embrace change, we become change. We cannot rest on individual best practices; we need best processes that yield ever-improved practice. There will always be a gap between real and ideal: between who we are and who we can become. If this book can be a resource in bridging your gap, it truly will have fulfilled its aim.
Of course, no performance journey is traveled solo. Life is a team sport and success crucially depends on surrounding yourself with the right teammates. I owe many debts of gratitude to colleagues at Graham Capital, Tudor Investment Corp., Kingstree Trading, and SMB Capital; the ever-resourceful editorial staff at Wiley; Victor Niederhoffer and the Spec Listers; and Howard Lindzon and the supportive crew at Stock Twits. The book wouldn't be possible without the many talented traders who contributed best practices and inspired the case studies. As in my prior books, the names and identities of the traders in those case studies have been changed to preserve privacy, but I want my debt to the many fine people I work with to be as publicly voiced as possible. The greatest debt, however, is to the family that has offered constant love and support through all the not-so-constant financial markets: Debi, Steve, Laura, Devon, and Macrae; their families; and most of all to my wife, Margie. She, not markets, has been the love of my life, and that has kept me sane through many ups and downs in the business. Finally, to the many readers of the TraderFeed blog a hearty thank-you for your support and all you've taught me. I think you'll find many of those lessons in the pages that follow.
Introduction
There is a valuable tradition in academic scholarship called the literature review. A literature review is a survey of published research on a given topic, with an eye toward identifying what is known and what remains to be investigated. A good literature review is selective – covering the most important, methodologically sound studies – and it is integrative, highlighting areas of consensus and debate within a research field. Without such efforts, science would generate far more data than understanding. At its best, the literature review is a bridge between observation and explanation. If undertaken properly, it illuminates existing research directions and inspires new ones.
Although the exercise that inspired this book was a performance review and not a literature review, the aim was similar. I identified approximately a dozen of the very best traders I had worked with intimately over a decade of coaching and asked myself what made them tick. On the surface, they were quite different. Some were daytraders in the electronic futures markets; others were portfolio managers in currency and fixed income markets. A few were highly quantitative; others drew on pattern recognition in a purely discretionary manner. Some were outgoing, some introverted; some were highly emotional and passionate about winning and losing; others were relatively calm, cool performers.
When I looked at what these traders did, all I found was variety. When I examined how they did what they did, however – the processes underlying their decisions and actions – several common features leaped out at me:
• Adaptability. To a person, the best traders were adaptive and flexible. They were sensitive to market environments and altered their trading to fit changing landscapes. Often, they would quickly alter their risk exposure, sensitive to occasions when market action did and did not confirm their expectations. Even more broadly, they adapted to changing market regimes by learning new skills, broadening their trading universe, and reworking their analytics. What made them successful was not merely that they possessed a trading “edge.” Rather, they had found ways of continually honing and expanding that edge.
• Creativity. The ideal for any trading firm is assembling a group of traders, each of whom delivers superior risk-adjusted returns in a relatively uncorrelated manner. Thanks to the power of diversification, that provides the business with a relatively smooth equity curve and allows it to leverage its capital effectively. Wherever I've seen successful trading firms, I've encountered creative traders: ones who view markets uniquely, find original ways to generate ideas, and express their views in fresh ways that maximize reward relative to risk. Indeed, I would venture to say that I have never known an extraordinarily successful trader who was not extraordinarily original in his or her approach to markets. I refer to such traders as “idea factories,” as they develop robust routines for detecting opportunity where others see none.
• Productivity. My experience confirms the findings of Dean Keith Simonton's seminal work on greatness: The elite performers generate better ideas because they generate so many ideas. Their hit rate is not necessarily unusually high, but they go to bat so often that they get their share of good pitches and hit their fair share of home runs. Knowing that their strength is processing information and generating ideas – not just holding any particular idea – they are willing to toss aside less promising trades and hold out for truly exemplary ones. This productivity is readily apparent on a day-to-day, week-to-week basis: The greats simply get more done than their colleagues. They
