PARADIGM SHIFT
HOW TO CULTIVATE EQUANIMITY IN THE FACE OF MARKET UNCERTAINTY
By
YVAN BYEAJEE
Copyright © 2015
http://www.tradingcomposure.com
Includes notes and references at the end of the book.
Cover by Emily Dechant
www.emilydechant.ca
What people are saying…
"A great introduction to the awareness that is needed to become a profitable trader." ---- Dr. Van K.
Tharp, Author of the classic Trade your way to financial freedom, Founder and President of the Van
Tharp Institute
"The lessons and perspectives shared -- in Paradigm Shift -- are which many could find of value." ---Charles E. Kirk, The Kirk report
"Trading success starts when a person is willing to look inward. In "Paradigm shift" , Yvan shares his
journey of building self-awareness and combines it with practiced trading insights. This book offers the
path to "trading like a scientist" while maintaining the calm and focus of the "Zen Master." ---- Steve
"SLIM" Miller, Analyst, Hedge Fund Manager, Speaker, Host of his own show on the TastyTrade
Network
"The most important mental skills associated with successful trading can be grouped in two arenas intuiting markets and differentiating risks. Both of these are ironically a qualitative subjective task and
therefore rely heavily on self-awareness. It follows then that anything that increases one's self-awareness
can also make one a better trader. Yvan's book is a welcome contribution to this growing realization that
quantitative understandings alone are insufficient for market success." ---- Denise Shull,
Neuroeconomist, Author, Founder and President of The Rethink Group
"I have to admit this book blew me away for the remarkable manner in which it so completely, succinctly,
and efficiently covers the topic of trading psychology. Yvan Byeajee takes a complex subject and distills it
down to its essence in a way that makes its highly accessible to his readers, and then for good measure
he lays out a concrete and practical action-plan that readers can follow to address and correct their
own psychological deficiencies. This is a must-read for all traders and investors." ---- Gil Morales, BestSelling Author, co-Managing Director and Chief Portfolio Manager of MoKa Investors, co-author and
publisher of Virtueofselfishinvesting.com and The Gilmo Report
"This book has the necessary ingredients for what makes a successful trader in trading or in life. The last
chapter of our bestselling book "How We Made 18,000% in the Stock Market" is entitled "Trading is
Life; Life is Trading" which was a favorite as it was our blueprint at that point for how to live life.
"Paradigm Shift" expands that last chapter of ours into a step-by-step guide for achieving self-mastery. I
couldn't recommend a better book on the parallels between successful trading and knowing oneself." ---Dr. Chris Kacher, Best-Selling Author, co-Managing Director and Chief Portfolio Manager of MoKa
Investors, co-author and publisher of Virtueofselfishinvesting.com
INTRODUCTION
Equanimity is an important aspect of trading and it plays a fundamental role in
trading success. Consequently, one cannot expect to extract money out of the
markets on a consistent basis if it is missing. Given the role psychology plays in
high performance endeavors, there are volumes of books out there that explain
in great detail principles and concepts that can be quite often daunting to
comprehend. The goal of this book is to sift through the noise and present to you
something that is relatable, simple to understand and easy to implement. My
attempt is to convey to you enough information to create inspiration, stimulate
curiosity/ reflection, and provoke realization that greatness is already present
within you waiting to emerge.
On another note, I want to take this time to thank you for purchasing the book. I
want to let you know that my motivation as a writer isn’t monetary. I am a
trader; I make my living off of trading whenever the markets accommodate me,
and this is more than enough for me. I am not affiliated to any company or
entity. My goal of writing this book is the fulfillment of a dream of mine. What
life has taught me is that, one of the secrets to living a happy and fulfilling life
is sharing. If one follows his dreams then he should have something worth
sharing with others in the form of hope, inspiration and a meaning to life. That
to me is a great contribution regardless of monetary outcomes. I have been
debating whether to release this book for a mere dollar, but after much thought I
finally decided that I wanted the perception of its price to reflect the quality of
its content. Therefore, a price adjustment to reflect something that is of quality
but also affordable was due. However, I want to insist upon the fact that most of
the proceeds from the sales of this book will directly go to a charity of my
choice on a yearly basis. One symbolic dollar per book sold (on both e-book and
paperback versions) is the only amount I will be keeping to myself to justify the
time and the amount of work I have put into writing this. In essence, I am
viewing this project as my small and modest contribution to this world.
In conclusion, here are my words to you: you can do whatever you set your mind
to. You can do anything your mind envisions. Just set up a process, follow your
dreams and work on your contribution to this world. In my experience, that is
the most significant and fulfilling endeavor out there.
Yvan Byeajee
FOREWORD
It is a well-known fact that trading is an “inside job”, however it is a rather less
well-known fact that the linear mind needs to be told the same thing at least 50
times before it even begins registering in the brain.
Even those of us who have traded for a very long time need to be reminded of
the basic tenets that create good habits and lasting trading results. The tenets of
good trading consistency are predominantly mental and only secondarily
habitual.
Yvan Byeajee, like many before him, including myself; has learnt from his
trading challenges which led him to go deeper into self-exploration and the
exploration of the nature of lasting success. What’s more, he walks his path as I
know from my conversations with him and that alone makes this book special.
There are many out there who know the theory. Turning the theory from an
intellectual understanding into reality in your daily trading life is quite
something else.
The wisdom traditions teach that there is nothing new in the world, and indeed
there is not, if only because the concept of time as we experience it as human
beings does not exist. Rather it is all about where we focus our attention in the
field of infinite possibilities which already exist as un-manifest potential.
Understanding the importance of expanding one’s conscious awareness is a
feature of this book. Trading is a business, like any other, all said and done: The
success of your trading business success depends on your ability to grow and
expand.
Learning to focus on the right things in a constructive and positive manner is
vital for trading.
Trading is rather unforgiving of our mental frailties. The markets have no
degree in psychology; rather they reflect your psychology and that of the rest of
the sum total of traders in the market. If you think the market owes you
something, because you believe life owes you something you will be taught a
harsh lesson, as the results are immediate. Your report card is presented to you
after every trade and at the end of every trading day.
You have to divorce your emotions from this fact and also your actions, while
learning two seemingly contradicting things: Namely that each trade has no
bearing on the next one and your emotions are a valid feedback mechanism.
Your ability to learn from your mistakes, instead of viewing them with critical
judgement, is also elementary. All the above make trading, I re-quote from one
of Yvan’s quotes: “Trading one of the hardest easy money you will ever make.”
Yvan Byeajee provides the reader with a blueprint for correct thinking which
will have to lead you to correct acting over time. It is all about progressing in
the right order of things. Unless you know what the true cause of your trading
challenges is, you will be wasting much time and energy fixing the effect, while
the cause continues to run, hampering your attempts at success, just like a
wound that is festering underneath the band aid.
The principles explained in “Paradigm Shift” are not unique to trading, but also
apply to life in general.
Yvan provides many examples from different areas of life to help your mind
integrate the material. Once the linear mind has accepted a new concept you will
start embracing it with your entire body. Trading isn’t hard, the hard bit is
getting to the point where you will have created lasting changes in your brain
and that means creating new neural pathways. That is when things begin to
noticeably change.
Yvan gives practical advice on how to hone conscious awareness and reminds us
of some very basic, but often overlooked practices, like getting enough sleep and
regular exercise to help us think with more clarity and focus.
Less is often more. Simplicity resides underneath all complexity if we allow our
egos to take a back seat and start looking at the fabric of universal creation. The
busy conditioned mind and the need to be seen to be doing the “right” things all
the time prevent this from happening, causing much unnecessary pain and
suffering.
Connecting with one’s inner centre is the key that unlocks all kinds of success.
From that place you will be able to observe that the world appears to you how
you are. In other words, it is just a reflection of your inner state. Tes, that is true
for the markets too.
Meditation is one practice which is foundational in my opinion to give you
access to expanded consciousness, greater sensitivity and an overall much richer
(trading) life experience.
This book will give you many easy to follow hints and practices that will help
you to re-connect with your inner core and remain in your centre, if you follow
the advice and keep practicing.
If by reading this book you are motivated to start a daily meditation practice,
that alone will enrich your (trading) life.
Wishing you all well on your journey to lasting trading success and a better life
and may this book assist you on the path to finding equanimity and peace in
yourself and in your relationship to the world at large.
Mercedes Oestermann van Essen
Author, trader, trading coach www.TheBuddhistTrader.com
TABLE OF CONTENTS
Foreword
Table of Contents
Important notes about the book
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Synthesis
Notes and references
About the author
Acknowledgements
IMPORTANT NOTES ABOUT THE BOOK
•
Nowadays, thanks to online self-publishing authors are given the
opportunity to present information with more freedom in terms of contents, size
and format. With no such restrictions, there is no use for unnecessary space fill
–ins, storytelling, out of context information or mere platitudes. My attempt is
to convey simple, concrete, and straight to the point information on what you
need to know to make your learning curve as smooth as possible. That being
said, throughout the book I may tend to repeat main points, not to make the book
appear bigger but simply because some things are important and repetition will
make them stick. I firmly believe that if you apply unequivocally the ideas
presented in this book you will be light-years ahead in your trading journey. This
will give you a better chance at achieving success in an endeavor where most
will fail.
•
My desire to understand the causes of my unsuccessful trading patterns
led me to deeply question myself and my relationship with the markets.
Throughout the book I will tend to use my own experience as example, not in a
solipsistic or self-indulging way but merely for the purpose of better elaborating
on matters which I deem necessary. I think it can create a better relatable
experience for you – the reader.
•
This book was not meant to be read straight through as if reading a
novel. Instead, I suggest reading it slowly while taking time to reflect on it.
Keeping a journal handy and taking notes of your thoughts as you are advancing
will prove to be unarguably beneficial. To help you with this process of action
and reflection, there are questions at the end of each chapter. They provide an
occasion to pause and reflect.
•
Since each chapter highlights different themes in relation to achieving
equanimity in your trading, these can be read individually, but it will be much
more rewarding to read the chapters in succession.
•
In addition to reading this book, I want you to understand and know
that I am encouraging you to make your own research on your side. This is your
personal journey to equanimity, so take the freedom to filter and take whatever
you might deem important out of this book and create the blueprint to your own
success in your trading. Everyone’s journey will be a bit different; hence, it is
essential for you to find what works for you, not what worked for Jesse, Tom or
Paul. Absorb what is useful and reject what is useless for you.
•
This book is the result of my understanding of the root cause of
unsuccessful trading. Therefore, you will get the most out of it if you do not
attempt to compare what you may read in here to others’ work – this can only
cause confusion. The nature of our consciousness and experiences is inextricably
subjective; but, the human mind always wants to compare, categorize and
weight. Don't get attached to anything you might read in here for the
information conveyed are only guidelines that will hopefully help you turn your
attention inwards.
•
In the book, I will refer to the Buddha’s teachings to elaborate on
meditation or other aspects of this whole trading journey. Please understand that
I am not asking you to reconsider your own religious beliefs – if any. This book
is not about religion, it’s about trading. The reason I refer to the Buddha’s
teachings is because through his contemplative practice, this man has
deciphered and diagnosed the human condition about 2,600 years ago. This
diagnosis is still very valid up to this day – I especially see its relevance in the
markets. We don’t have to become Muslims to study algebra, do we? Even
though Muslims invented algebra, it is a secular field in its own right. Similarly,
when we study physics, do we refer to it as Christian physics? No. Even though
Christians invented physics, we merely refer to it as physics. A contemplative
practice like meditation doesn’t require us to get interested in – or espouse –
Buddhism, or any other eastern religions.
•
This book was written with an assumption that you already have a
proven edge in the markets. However, if you don’t have one then you might be
interested in checking my next book called, Around the world: How I travel the
world day-trading the spy for quick cash, due for early 2016.
CHAPTER 1
THE START
“If you wish to know the road, inquire of those who have travelled it” Japanese proverb
The ability to manage emotions
and remain calm under pressure has
a direct link to performance . I wish I was aware of that when I first decided to
become a professional trader. Things would have been much easier. However,
things don’t always happen the way we would have wanted them to. My interest
for the financial markets started when I was in my teenage years. I remember
my older brother showing me a financial website and eagerly saying “people
actually make a living buying and selling stocks on a regular basis, you know”.
Naturally, I was struck with curiosity so I started researching more on the
subject; though, I can’t say that that research was fructuous. Those were the
early days of the internet, and trading-related information wasn’t readily
accessible within the click of a mouse, nor was it as inexpensive or free as it is
nowadays. Yet, I did find enough information to spark my interest even more,
firmly planting the trading/ investing seed inside my head. I remember being so
fascinated, from such a young age, by compound return tables, quotes, and
market related news. At that time, making money in the markets surely seemed
easy – just like a low hanging fruit waiting to be plucked. So I thought!
1
A couple of years later, I had saved a rather significant amount of money from
various jobs I took throughout the years, and I went on to invest it all with a buy
and hold approach. Despite the favorable market conditions during that period,
this approach didn’t fare so well for me. This led me to the conclusion that the
buy and hold approach doesn’t work. Since this strategy never addresses the real
issues for winning in the markets – such as buying how much of what? At what
price? Holding for how long? Do you ever sell? How and when? How do you
make money in a bear market? – by definition, it doesn’t fit into a positive
expectancy mold. Unfortunately, by the time I realized this I had already lost a
good portion of my investment capital. However, I had amassed enough
knowledge in the field to slowly transition to trading on a shorter time frame,
which I thought was better suited to my personality and overall aspirations. This
shift in time frame and underlying methodology has also helped me better
define my edge in the markets, and allowed me to create a significant number of
trade occurrences. More on this later.
I wish I could tell you that the transition happened smoothly but this would be
far from the truth. Before I was able to acquire consistent results in the markets
as a short-term trader I went through significant drawdowns in capital – both
monetary and emotional. From trading with “scared money”, to betting it all on
one trade, to changing methodologies like one changes underwear, I made all the
mistakes you could imagine. Those difficult but highly instructive times
eventually made me realize that success in the markets is 50% psychology, 30%
money management and a mere 20% system. Of course, those numbers are
subjective. Some people like to view these three components as equal. Some like
to give greater importance to risk and money management. But personally I
really think that psychology is the determining factor and deserves top attention.
Without the right psychology even the most robust system is doomed to failure.
Similarly, risk and money management will only assure “death by a thousand
paper cuts”, supposing we can get to the point where we can efficiently manage
risk in the first place. Regardless of the kind of positive expectancy our system
displays, if we are unable to follow our rules and execute our trades properly
with minimal trading errors we will surely find trading to be an exasperating
endeavor.
The right psychology also encompasses the appropriate work ethics. Trading –
or should I say successful trading – requires a lot of work, dedication and
sacrifice. Honestly, I must admit that I am happy that things are that way. If
things were easier everyone – neighbors, uncles, grandmothers – would be
successful traders and make a boatload of money. There would be no challenge,
no fulfillment, and no desire to achieve. In other words, the world would be a
very boring place to live in. Conquering difficulty has the potential to give us an
immense feeling of satisfaction. When something is difficult, overcoming it
feels like a real triumph and this creates an amazing experience. A positive
feedback loop when activated generally begets more success. This is because
though the challenges may seem impossible at first glance, with repetition we
will begin to see patterns arise in the chaos, and we will find that things aren't so
difficult after all if we take the time to analyze the problem at hand. So what is
left to do in terms of an attitude to adopt is to adapt. All the successful traders
and great achievers out there have done it at one point. Successful trading can
only happen when you have sorted out the resistances that are preventing you
from making the kind of money you aspire to on a consistent basis.
Paradoxically, when you have sorted out these resistances you become someone
else. If you came in solely for the money at first, you might find out that this
isn’t the unique motivator anymore; the game and the challenges it represents is
what keeps you in. If you reach this point – and I am hopeful that you do –
money will automatically manifest itself to you. Dropping our obsession for
money somehow gives us more of it. I will address this point later on as well.
I don’t have any credentials in psychology; however, just like many others
before me I learned most of what I discuss in this book through repeated
mistakes, painful losses, and failures. We evolve in a world where we are led to
believe that the mental environment is a perplexing and peculiar place that can
only be understood by experts (psychologists). As a result, most people end up
living their lives in a way that lacks any conspicuous understanding as to the
relationship between their mind and the outer physical world. This lack of
understanding ultimately shapes the way they experience their lives. We don’t
need a PhD to understand the nature of our own mind. We just have to make
ourselves available to learning more about the nature of our dissatisfactions –
and few people are truly willing to do that. They would rather attempt to change
the outer physical world in order to fit what is inside of them and quite often this
will turn out to be a futile endeavor, especially in the markets. It was only when
I started to deeply question myself that I began to see dramatic shifts in the way
I perceived the market, but also in the way I perceived myself and life in
general. This is so because questions asked the right way usually point to their
own answers. If one does not ask the right questions, he cannot expect to get the
right answers. Markets don’t hurt us. It is our own set of beliefs that conditions
us to suffer whenever the markets don’t oblige us by fulfilling our needs. It is
our beliefs that cause us to overthink when a trade has to be entered or exited.
They also cause us to doubt ourselves and our ability to trade successfully. Eager
to deepen my understanding of myself and how I essentially created my own
pain and suffering in trading (but also in my personal life), I began spending a
lot of time meditating. I also attended numerous meditation retreats where I had
some humble encounters with my own mind. A spiritual practice like meditation
can teach us a lot of things about the nature of the being, and the transiency and
ever-changing nature of everything that exists – markets included. It can help us
understand and accept change as an intrinsic part of our lives; and that is
precisely what it did for me. With a better understanding of the self, came a
better understanding of the markets. It all began to make sense. I was
desperately trying to force the markets to conform to whatever beliefs I had, in
terms of what I thought I deserved, what I believed I was entitled to, whatever
special trading talent I thought I had, and so on. Once I targeted those problem
thoughts and beliefs – and once I worked on them – trading took a whole new
direction for me. My results finally came in line with my new expectations.
Developing equanimity was a long and tedious process for me; however, once I
acquired it the repercussions went far beyond the boundaries of the markets. My
whole life was changed. It’s as if my vision of life went from a boring 8 bit
video game to a sophisticated new generation 3D game; and there is a reason for
that. Markets are not different from life itself. Comparing the two, we can see
that:
• Markets and life are both uncertain. We cannot know for sure what will happen
on a period to period basis.
• They both provide us with opportunities. We can decide to be bold and bet the
farm on every occasion, or we can be methodical and make calculated moves.
Either way, if you don’t bet – if you don’t take risks – you can’t play.
• If we are unprepared we can feel pain and suffering as a result of not being
able to flow with them or accept their reality.
• At every corner, they can teach us a lesson if we are open to it.
The comparisons can go on and on; therefore, it is not difficult to see how the
skills, habits, or even delusions you acquire in one can and will often impact
how you behave in the other. That is why developing equanimity becomes
primordial because if you can effectively transform the way you behave when
faced with difficult situations in the markets, I believe you can definitely affect
the way you behave when you’re equally faced with difficult life conditions.
Equanimity is not a word that is commonly used. Its signification for me is
beyond mental calmness or composure. It is the radical non-interference with
the natural flow of sensory experiences. For example, if you are feeling
emotional about something you see or hear in the markets, you are not trying to
hold onto those emotions nor are you trying to push them down. Instead, you
take an observer stance and you watch them flow; and because of their transient
and impermanent nature you watch them slowly fade away. This allows you to
get a sense of detachment or as the French say “sang froid”, so that you have no
problem taking the right action in regards to circumstances and conditions that
are happening. It is the end of the ego. Lots of different people view the end of
the ego in different ways. Others don’t find any sense in such a statement. The
way I see it is that the end of the ego is just equanimity. It is the end of craving
and the end of attachment. As the Buddhists say, “Clinging on to things, ideas,
opinions, objects, people, even life itself is what creates suffering”. In trading,
clinging on to an idea of what the markets should make available for us, clinging
to a loss, or even craving for a certain amount of monetary gain is what creates
suffering. This “clinging” or “attachment” springs up when we are ignorant of
the fact that everything is transient, temporary, impermanent, changing.
Therefore, freedom comes to us when we have snuffed out craving and
attachment by eliminating ignorance.
We all have experienced at some point a gap between what we realize as being
possible from our trading and what our current bottom line is. This happens
because we can’t seem to restrict ourselves from doing things that aren’t in our
best interest. Most of us are stuck at this stage and unable to figure out how to
change things. Trading with equanimity is achievable by anyone, but it requires
a genuine and sincere willingness to learn how to do it. This encompasses
paying attention to ourselves and beholding the environment we evolve in for
what it truly is. Throughout the book, I will refer to my experience as a Zen
practitioner in order to shed light on the various aspects of unsuccessful trading
and what I think is its antidote. My intention is not to fill this book with mumbo
jumbo new age religious ideologies – though, good trading does require that you
reconnect with your inner-self, and this is often attained through a spiritual
practice of some sort. Spirituality needs not to have religious connotations.
“Spirit” comes from the Latin word “to breathe”, and it typically involves a
search for meaning in life. When you breathe mindfully and observe your body
for what it truly is and when you grasp the intricacy, beauty and subtlety of life,
then that soaring feeling, that sense of elation and humility combined, is surely
spiritual. I only aspire to help you realize your potential, not only as a trader but
also as an individual. I will give you a very detailed and comprehensive blueprint on how to develop equanimity. I will show you how to bring more
consistency into your trading and into your life. While I cannot promise you that
you will make money, I guarantee you that you will become a better trader and
overall a better “you” if you understand and follow the principles I discuss
about.
UNCONSCIOUS INCOMPETENCE
“The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.” Daniel J. Boorstin
Anyone who starts down the road to becoming a trader wants to reach
consistency in their results as fast as possible but few eventually make it there.
In fact, several studies2 suggest that most retail traders are worse off financially
after the first couple of years in the financial markets than before they started
trading – i.e., if they make it through those early years without going broke in
the first place. This is a staggering truth and one that is echoed around most of
the financial markets of the world. Naturally, this begs the question: why do so
many people fail in the markets?
Retail traders are by the very definition self-employed. To succeed as a selfemployed trader you need two very distinct skill-sets: first as a self-employed
business owner, and second as a professional trader. Both skills work in unison,
one cannot be without the other. Therefore, there is no question that for some,
trading might not be a good fit at all because it requires a lot of work. Trading is
a real business, though few actually treat it as such. As a matter of fact, any
activity engaged on a regular basis with the intent of making money is a
business. Approaching our trading operations from a business standpoint means
that:
1. We have to develop a concept or an idea which aims to satisfy a market
inefficiency, diversify risk and make money work for us.
2. We have to test that idea and see how it performs over time.
3. We have to hold an inventory. This is our current positions. We have to buy
them for less than what we intend to sell them for.
4. We have to manage our employees. Our current positions can also be seen as
our employees. We have to keep the ones that are working well, and fire the ones
that aren’t.
5. We have to take insurance. Our business must have insurance to manage risk
because losses will occur. It is not a matter of “if”; it is a matter of “when”.
Therefore, stop-losses, hedges and position sizing are our insurance against big
losses in our trading business.
6. We have to use a strategic deployment of capital. We attempt to buy things at
a lower price than what we intend to sell them at. We also try to diversify what
we buy so that our risks are uncorrelated and dispersed.
7. We have to conduct our business where there are ample buyers and sellers so
that we don’t get stuck with positions (inventories) that no one wants.
8. We have to actively preserve our capital. If we lose that we are out of
business. Therefore, we have to make sure that we do not go “all in” on any
perceived opportunity.
9. We have to work towards the expansion of our business. This can only happen
after it becomes profitable. For a trading business, this translates into trading
more vehicles, perhaps trying a new strategy, and/ or adding more trading capital
to our accounts so that we can increase the size of our trades.
All these steps have to be figured out on paper prior to starting to trade through
a process called trading plan development. Engaging with the markets with an
abstract idea or vague concept of what we should be doing doesn’t work;
therefore, it is essential that we develop a trading plan. We all want security, a
reliable source of income and wealth generation, but how can one expect
consistent results from any business that never got properly organized in the
first place? This is the primary reason why venture capitalists will not even
listen to the best of business ideas if the person presenting them doesn’t have a
well-defined business plan. The underlying assumption is that if you can’t build
it on paper, how do you expect to build it in the real world? For this same reason
the trading plan is an absolute must for any aspiring trader. Besides serving you
as a support to describe the inner workings of your business, the trading plan is
another way of acknowledging the fact that you can’t predict the future.
Correspondingly, it is there to help you take a structured approach to the
markets’ uncertainty. Your trading process is not an abstract idea anymore – it
becomes well structured. Your rules and processes are clear on paper, all you
have to do is execute.
Setting up a business is one thing, and it can be considered as the easy part. But
being mentally prepared to make the business consistently profitable is another
thing. While this might be a shocker for a lot of people it is without a doubt the
most challenging aspect of this whole endeavor. For example, a novice trader
may have devised a trading plan and figured out her trading methodology;
however, there might still be a negative correlation between what she ends up
with and what she could have had. In other words, she isn’t using her
methodology to its full potential. Just as buying a car won’t give us the ability to
actually drive it, novice traders erroneously believe that with the buying or the
creation of their own methodology comes the intrinsic skills to actually trade it
flawlessly. They do not think that just like with anything they need a particular
set of skills in order to exploit their methodology to its full potential. We cannot
take for granted that because we recognize an opportunity to enrich ourselves in
some way or another that we will have the skills to be able to take advantage of
that opportunity appropriately. But that is exactly what most of us assume at
first when we start out. We want to be able to produce an income or a return
from our trading that we can rely on, but this is not such an easy task as one
might be inclined to think. Consistent returns in trading are a result of the
consistency in our behavior.
The general public is attracted to the markets because it seems like an easy way
to make a lot of money. This leads us to the following paradox: Suppose a
layperson decides to become a surgeon. He goes into a bookstore, heads straight
to the medical book section, and finds a book entitled “How to perform heart
surgery.” After spending a couple of days studying it do you think he would be
ready to perform heart surgery? The bare thought of him doing this is
preposterous, right? Now, suppose that same person decides to go in the finance
book section of the store instead, and buys a book called “How to beat the
market in 7 days.” After spending a week-end reading it suppose he opens up a
brokerage account the following week, and starts trading with the belief that he
can beat the markets on a consistent basis. Do you still think this is utterly
ridiculous? It takes years to build a successful trading career; still most people
won’t see anything odd about that second option. Trading is probably the world’s
only profession where a complete amateur – a person who knows absolutely
nothing – has a 50 percent chance of being right in the beginning. I haven’t seen
this phenomenon in any other profession. In trading there are only two things we
can do, either we buy or we sell. Naturally, some people are just going to get it
right by pure luck at least a few times in the beginning. This deceives them into
believing that they possess the appropriate skills to trade efficiently. It makes
them believe that they have some kind of special talent to predict market
directions, or that trading is a lot easier than what it seems. However, the reality
is that winning in the markets requires absolutely no skills at all. Additionally,
we don’t have to have a good reason – or any reason at all – to put our cursor on
the buy or sell button; but, doing so, we could immediately find ourselves in a
huge winning trade. Therefore, the natural tendency is to think that if it is this
easy to win, it can’t be that much harder to make a steady income. The truth is
that winning and being a consistent winner are two completely different things,
and this can be a really hard mental barrier to break for most.
What novice traders don’t understand is that good trading requires a particular
set of mental skills that need to be developed. Since those skills are counterintuitive in nature and tend to go against normal human tendencies, they will
have to be developed and built over years of practice and engagement in the
markets. What may be expected from such refinement of mental skills if
practiced, developed, often repeated, and well-perfected is mastery over the self
and its various conditions – i.e., anxiety, fear, greed, craving, and so on. You are
not overcome by these states but you subdue them as they arise. Therefore, when
we first start out we should keep in mind the possibilities online trading has to
offer, not only in terms of monetary gains but also in terms of personal
development. New traders focus too much on the potential monetary rewards
and this is what messes up their results because their expectations are not in line
with the way markets are. We shouldn’t expect to instantly make a comfortable
living at home, in our pajamas. We shouldn’t expect to be millionaires by the
end of the year. While these scenarios are definitely a possibility, they are highly
unlikely to happen right from the get-go. Yet, we can improve our chances of
those happening at some later point throughout our trading career by taking the
time to prepare now. ‘Skills over money’ should be the beginner’s motto. If you
keep an open mind filled with childlike curiosity, and if you cultivate an
eagerness to learn and build your skills instead of putting your attention right
away on the monetary rewards, you will be far ahead of the crowd.
People often fail to acknowledge or realize the financial, emotional and time
commitments that are required to build a successful trading career. As we start
out in this journey, our goal should be focused on adopting a business approach
so that we can bring a little more formality and structure to our entire trading
operation. We should also acknowledge our current lack of skills to trade the
markets effectively. By acknowledging this, we open ourselves to accept new
pertinent information to help us grow. Lastly, when we first start we should
focus on building mental skills conducive to good trading instead of thinking
about the money. When our roles and goals, as traders and business owners, are
clearly defined we can focus on the pure execution of our trading model.
However, if we don’t clearly define our roles and goals, then we will have a
tendency to act in a way that lacks any kind of structure. This lack of structure is
the reason why most retail traders set themselves up for failure right from the
start.
CONSCIOUS INCOMPETENCE
“Trading is the hardest easy money you’ll ever make” Common Wall Street adage
When one starts to develop awareness about his incompetence (usually through
significant losses) and realizes that there is more work involved in trading than
what he originally envisioned, he usually starts to work on finding some kind of
Holy Grail trading system. This stage can linger for years, but sooner or later
there comes a point where the individual realizes (if he hasn’t given up yet) that
there isn’t such a thing as an infallible and ever-winning trading system. The
true key to success is a profound understanding of market structure and how his
psychology relates to this whole process.When this shift of perception – or
paradigm – happens, it creates an avalanche of conflicting feelings for the
trader. He knows the potential is there to enrich himself beyond his wildest
dreams; the markets provide us that opportunity at every moment. The trader
can clearly see his success right before his eyes; however, something within him
seems to disrupt his ability to grab it.
The market represents a challenge and for many traders the challenge or battle is
also occurring within as thoughts and beliefs combine with unacknowledged and
unmanaged emotions that drive behavior. This results in traders not being able to
act in their own best interest. As “conscious incompetents”, they realize that
they are not as “expert” as perhaps they thought they were when they first start
out. The transition to this state from being unconsciously incompetent can be
shocking, especially if it happens abruptly through severe and significant losses.
Such sudden realization – for example when you meet others who are clearly
more competent than you, or when someone holds up a metaphorical mirror to
your real ability – can be painful. This is a very difficult stage to be in because it
is where the most judgments and doubts against the self are formed. This is also
where most people give up. They assume that trading simply requires a special
talent that they were unfortunately not born with. However, it is the stage where
real learning and change begin for those who are persistent.
There is nothing esoteric or even illusory about trading success. Of course, those
who have staying power are the ones who get to experience it, but there is
nothing extraordinary about this. It is achievable by anyone. To my knowledge,
no one is born with any special trading talent or an uncanny ability to predict the
markets. There might be a predisposition for better self-control and better
adaptability, but that is it. This is nothing that us others can’t improve upon.
When we think of it, good trading is a function of three things:
-- How much engagement you have in the markets
-- How adaptable you are
-- How much self-control you display
Those three points work together and they are all sine qua non. You have to be
able to be (and stay) engaged in the markets so that you can acquire the
appropriate knowledge and skills to help you navigate them. Also, you have to
be highly adaptable. This means that you have to accept changes in the markets,
learn from the mistakes that you will undoubtedly make, and embrace the
failures that you will certainly experience. You have to exert control over your
impulses so that you don’t get into low probability trades; bet the farm on any
single trade; or let small losers grow into something so massive that they
endanger your whole account. The degree to which you fail to develop or work
on these three points is the degree to which your progress will stagnate. You will
experience self-sabotage which is almost always the consequence of your beliefs
whether you are aware of it or not.
I know there are some complex books out there that have been written on the
subject of trading psychology – in multiple volumes sometimes – however it
doesn’t have to be that complicated. It is not rocket science that is required here.
You don’t even have to go deep into your past and decipher every single belief
you acquired since your childhood causing you to shoot yourself in the foot
every time you trade. You could, but you don’t have to. All that is required is a
clear understanding of what you need to change, how you need to proceed to
facilitate those changes, and then fabricate the proper plan to help you get there.
Subsequently, you have to apply the plan diligently until trading consistency
becomes an intricate part of who you are. This is the hardest part and one which
very few are able to do. It is not easy to face our demons and put a stop to some
deeply ingrained behaviors. However, I wrote this book with the assumption that
you desire your trading success strong enough that you are willing to “erase” all
conflicting beliefs that stands between you and your goal.
When you break it down to the most fundamental level, changing your trading
results, your behavior, your life is the only logical result of desire. If you truly
desire something, you’ll find ways to make and facilitate the change, whatever
that might be. One thing I want to point out though is that desire is not to be
confused with craving. I strongly believe there is a clear distinction between the
two. Desire is an expression of longing. The pursuit of that which we desire
gives meaning to our lives. Craving is an expression of neediness. When we are
on autopilot – and thus incognizant – , we tend to crave things. When we remain
centered in our awareness and consciousness, we can desire things and align our
actions with our intentions so that both are in harmony. Awareness allows us to
identify what is truly important to us. Desire leads us forward. Craving, on the
other hand, is the attachment to desire and it is a poison that will consume you.
It will cause you to pin your happiness to the very thing you desire such that,
you will melt into grief if you don’t get what you want. Furthermore, it will
impede on your ability to take rational decisions. For example, in trading, it will
cause you to take decisions based on your beliefs about being wrong, money,
your self-worth and myriads of other beliefs. To adapt to the constant changes
that is intrinsic to the markets implies that we are changing ourselves as we
make ourselves available to learn more about it. Therefore, to eliminate craving
you have to eliminate ignorance. If you want to acquire consistent results this
should be an obvious step to take. Keep the flame of curiosity and wonderment
alive. That is the well from which we traders draw our nourishment and energy.
It doesn’t matter if you own a clothing store, a fast-food outlet or even an online
marketing business, if you want consistent results you have to be consistent in
what you do. This is even more essential in a trading business because of the
obvious need for quick actions in the midst of real-time moving markets and the
emotional ramifications that ensues. With no structure to the way you approach
the markets you will have a tendency to act impulsively. If you can make it a
priority to stay methodical and systematic you won’t be subject to such wild
emotional swings that will detract your trading results.
QUESTIONS
Think of a challenge that you successfully took on. What did you learn, and in
what ways? Did you grow from the experience?
What makes you think you have what it takes to succeed in trading?
Are there particular areas in your life where you tend to think you know it all? In
other words, are there areas in which you are closed to change?
CHAPTER 2
THE NATURE OF TRADING
“When you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no
longer have the same significance. As a result, your expectations will be in harmony with the possibilities.” Mark Douglas
At its most basic level , short-term trading involves the frequent buying
and selling of stock, commodities, currency pairs or other instruments, with the
goal of generating returns that outperform buy-and-hold investing. Since the
timeframe is short – positions can be held from a few minutes to a few weeks –
an approach using strictly fundamental analysis would prove useless and
unprofitable. Fundamental analysis involves analyzing the financial statements
and health of a company, its management and competitive advantages, its
competitors and markets. When used on a short-term basis it creates a disparity
between “what should happen” and “what is happening.” This disparity makes it
extremely difficult to make anything but very long-term predictions that can be
hard to exploit, even if they are correct. Technical and quantitative approaches
on the other hand are more adequate for trading because they can identify
frequent high probability opportunities based on statistical studies of price
action, volume, option pricing, and so on. However, using such approaches
successfully in the markets require that you embrace the following:
1. You must adopt probabilistic thinking
2. You must develop the emotional fortitude to stick to your system (assuming
you have a system that has been back-tested and proven to make money in the
first place)
3. You must keep a constant level of engagement in the markets.
Before I expand on those three concepts, keep in mind that I am referring to a
technical methodology that is systematic in nature. Technical analysis is, for the
most part, an art; therefore, subjective and discretionary. However, some aspects
of it can be turned into a fully quantified and statistically backed system. A
quantitative methodology on the other hand is not necessarily technical in
nature. Some fully quantitative methodologies could care less about what the
charts are saying and be completely based on the statistical studies of Implied
Volatility. As you acquire knowledge and insight about the inner-working of
both quantified technical and quantitative approaches – as you expand your
perception of information available – you will gain a deeper level of
understanding of the cause-and-effect of your trading results. The deeper the
level of your understanding and insight, the more effectively you can interact
with the markets to fulfill your desire and achieve your goals.
Adopting probabilistic thinking
A trading edge merely puts on your side the odds of one thing happening over
another based on what price did in the past when similar conditions occurred.
That is what technical or quantitative trading systems were ever designed to do.
Chart 1 represents a quantified technical trading strategy based on price action
of the Russell 2000 Ishares ETF (Ticker Symbol: IWM). It uses a combination
of the 50 and the 100 Exponential Moving Average to identify price trending
conditions. Please keep in mind that this system is rudimentary and is only used
to illustrate a point. It is a buy only system where an entry signal occurs when
price action comes in between the 50 and the 100 Exponential Moving Average
and when we get a close above the previous day’s high. A stop-loss would then
be placed right under the 100 Exponential Moving Average. As can be seen,
trading using this system would have resulted in 5 wins and 1 loss from midApril 2014 to mid-February 2015. This is because, even though there was an
edge – and the edge in this system identified pullbacks within a larger uptrend-,
outcomes generated by any technical or quantitative method are random on a
trade by trade basis. Put in a different way, there is no way to know in advance
what the outcome to any particular signal will be, or what the sequence of wins
and losses will be on any particular trades. In this example, even if everything
was aligned perfectly at F – price being between the 50 and 100 Exponential
Moving Average, plus we got a close above the previous day’s high – the trade
still ended up being a loser. What is not shown on the chart is that the uptrend
resumed itself rightafter that deeper pullback – price went to new highs. So
when putting on the trades, we didn’t know which one would end up being
winners or losers. The only thing we knew of is that we had a higher chance of
things working in our favor.
I know it is somewhat of a paradox to think that events that have random
outcomes can produce consistent results. This might even seem as an odd
concept for a lot of people, but this is the principle that has been used by casinos
for hundreds of years. Technical and quantitative methods will give the
individual trader the same kind of advantage the casino has over the individual
player if the trader can think about it from a proper perspective. Trading errors
are the results of us believing in some way or another that our technical methods
are telling us what the markets are going to do next on a trade-by-trade basis.
The truth is that technical and quantitative methods aren’t designed to do that.
They are there to put the odds of success in our favor over a series of trades
based on what happened in the past when similar conditions occurred. There is
no certainty. It may not seem like it on the surface but there are some very deep
psychological implications attached to this randomness principle. Once a trader
understands that the markets can hand him a string of losing trades without
necessarily negating the efficiency of his edge, he will be one step closer to
consistency. On the other hand if the trader hasn’t learned to accept each
outcome as being random, he will indubitably find that trading can be one of the
most frustrating if not exasperating endeavor he's ever chosen to undertake. The
reason is that he will always be expecting the kind of certainty from his
methodology or from the markets that none of them will ever be able to offer.
Technical and quantitative methods are supposed to define and identify a
statistical edge in the markets. The edge can repeat itself over and over again
with some definite degrees of consistency; however, the hidden problem or
disadvantage in this apparently ideal situation is that the outcome doesn’t
always correspond with the edge on a trade-by-trade basis. Our mind can’t
understand that until we train it to do so.
Intrinsically, our mind has this natural tendency to make associations all the
time. It just naturally thinks that if we have an edge or a pattern that is
consistent, then we should have an outcome that is consistent with that
occurrence. The truth is that there doesn’t have to be a relationship between the
outcome and the occurrence. For example, if our last trade was a winner, there is
no guarantee that the next one is going to be a winner as well, even if the pattern
or technical signal is exactly the same. Conversely, the previous trade could
have been a loser but this doesn’t mean that the next trade is going to be a loser
as well. This is a difficult, yet, very important concept to grasp. Even though the
same specific criterion is used to identify a price pattern, the outcomes to each
signal have no relationship to one another. In other words, there’s a random
distribution between wins and losses over any sequence of trades you might look
at, and depending on the kind of positive expectancy your model enjoys, losers
and winners can come in strings. The traders who have grasped this reality and
have learned to think in probabilities are the ones who don’t experience the
same kind of emotional traumas that the typical novice traders experience,
because they have stopped expecting from the markets what they simply cannot
offer.
We have to shift our paradigm and understand that we are essentially running
our own little casino. When we do so, we will then be able to take full advantage
of whatever opportunity we may perceive in the markets without vacillating or
overthinking. We will understand that there's no reason to do that. If you find
yourself overthinking, stressing, or praying, what is implied is that you are
having trouble accepting the fact that you have no control over the market's
behavior. Embrace the uncertainty and you will experience a completely
different state of mind.
Developing emotional fortitude
First and foremost, we don’t want to get into trading with a possibility of being
disappointed. When that potential exists it has the effect of altering the way we
perceive market information. As an example, imagine that I have a directional
assumption for a trade. I did my due diligence prior to entering that trade and I
got into it thinking that I was going to be right. As the markets are moving
against me, I am going to have a tendency to focus on information that is telling
me that I am right. I will have a tendency to ignore the information that is
telling me that the markets are actually trending against me. In other words, if
the markets are moving against me, every green bars or red bars (depending on
if I am long or short) will have the effect of causing me to feel good and
optimistic even if those bars are just small retracements in a larger trend. By
focusing on information that is telling me that I am right, I am being oblivious
to the fact that the markets are trending against me. Therefore, I will not be able
to take advantage of whatever opportunity the markets are giving me in that
moment - that is, in the direction of that larger trend. I will only be able to
identify the trend in hindsight, way after the facts, all because I am putting an
extraordinary amount of significance on the information that is telling me that I
am right, and ignoring the information that is telling me that I am wrong.
Conversely, if I were to be in a winning position, the same process is going to
happen. I will have the tendency to focus on any market information that is
telling me that I am wrong; therefore, I will cut my winners short because any
minor retracement will scare me out.
If a trader doesn’t develop the emotional fortitude to stick to his convictions he
will always be susceptible to being disappointed. If he doesn’t align his
expectations with the reality of the markets, he is going to have this tendency to
distort market information. This will cause him to hang on to his losers, or exit
his winners prematurely. However, if he changes his perspective and thinks of
trading outcomes as being random in nature, he will be able to change his
expectations in regards to any individual trades he places. Do we have the same
kind of emotional response when we are predicting the flip of a coin? No,
because we are operating out of a completely different belief. The belief is that
the outcome of a coin toss is random, therefore, all we are doing is guessing. In
trading, because we do analysis and our intellect is involved in this process, we
have associated trading to an endeavor where we have to be right. Take trading
out of a right or wrong context, put it in a random category in terms of outcome
and you will get the same emotional responses you get with the flip of a coin:
you won’t care! Change your expectations and your state of mind will change.
Another interesting comparison is that of the scratch card. Buying a scratch card
is a way of saying that we have accepted the risk of losing the money we have
invested in it. We can’t scratch anything until we have accepted the risk. If we
didn’t accept the risk we wouldn’t have been able to take money out of our
pocket and buy the card. Acceptance is being at peace with – or being in
complete harmony with – the fact that we may lose. In essence, it’s the money
we are willing to lose to know if we are going to win a prize or not. Once the
card is bought, we have no other choice but to scratch to see if the pattern shows
up before taking any other actions. If the pattern on the card is a jackpot, great!
If not, then we might buy another one to find out if it is.
When trading both technical and quantitative methodologies, that pattern shows
up first, after which we have to put an amount of money we have decided to risk
to find out if it is going to work or not. Naturally the problem here is that after
the pattern has presented itself we also have the ability to retract ourselves.
Furthermore, the average trader will often overthink and build a case for that
pattern being right. Then, he will seemingly define a risk level – which of course
he hasn’t accepted, and he will enter the trade. When he is proven wrong, he will
end up removing his stop-loss instead of sticking to his original plan. In doing
so, he will let what could have been a small losing trade turn into a big losing
trade. This ability to change things right in the middle of a trade is what messes
up with our expectations. In this particular instance, the trader hasn’t truly
accepted the risk to begin with. Placing the trade and removing the stop-loss
later on was clearly an expression of agreement that was not supported by real
conviction. He didn’t accept the risk, more so he didn’t want to be wrong. But as
we saw earlier trading a technical or quantitative methodology has nothing to do
with being right or wrong, it’s just an odds game. It’s only when we embrace this
truth and when we manage our expectations that we will be able to utilize our
methodology to its fullest.
The only expectation we can have when entering a trade is to think that the
market will do something. What? Nobody knows. We don’t have to know. The
only thing we need to know is this:
1. Do we have an edge?
2. How much our maximum potential risk is?
3. How are we going to take our profits?
At any given time, if any one of these parameters is missing, then the trade is
not worth entering. We have to free our mind from any attachment or
expectations if we want to utilize our respective methodologies to their full
potential. This will allow us to extract the maximum amount of profits that they
– our methodologies – can make available to us based on the kind of patterns
they identify and their frequency. Trading errors result from believing that when
a pattern is present it is going to give us a winning trade on this current trade.
We cannot allow ourselves to think that way because that is the way the typical
losing traders think. They think that they are not going to put on a trade unless
they know it is going to be a winner; otherwise, why would they put that trade
on? That kind of backward thinking obviously messes up their expectations for
the trade.
The markets don’t generate happy or painful information. From their
perspective all of this is simply information. The markets are not right or wrong,
nor are they out to get us and our money. It may seem as if they are causing us to
feel the way we do at certain times, but that is not the case. It is our own mental
framework that determines how we perceive the information, how we feel, and
as a result whether or not we are in the most conducive state of mind to take
advantage of whatever the markets are offering in the moment. If we have a poor
understanding of market structure, probabilities and more so of ourselves,
trading can prove to be a real conundrum. We will always internalize market
action and reject the responsibility of our losses on the markets, not to mention
on others. Trading a technical and a quantitative methodology is just a function
of spotting your edge. It is a function of entering and exiting trades according to
your rules, and assessing the results over a series of trades. This is no different
than a coin flip exercise (refer to the next segment). Keeping this in mind should
alleviate some of the pressure you might feel whenever the markets are moving
against you. However, if you feel you still can’t seem to cultivate the kind of
composure that is required to excel in this business, then you have to do some
work on yourself. Chapter 3 and 4 will dig deeper into that.
Keeping a constant level of engagement
In probability theory, the law of large numbers is a theorem that describes the
result of performing the same experiment over a large number of times.
According to the law, the average of the results obtained from a large number of
trials should be close to the expected value, and will tend to become closer as
more trials are performed. A perfect way to illustrate this law of large numbers
is by taking the example of a coin flip. Suppose I give you a coin which is
weighted in a way that it’s going to come up heads 70% of the time. Now, I
assume you would agree that just because we know mathematically and
statistically that heads has a 70% chance of showing up over the course of
several flips, we still don’t know the actual sequence of heads and tails. What
we do know is that I am going to flip the coin a hundred times and 70% of the
time it is going to come up heads. First flip might be head, second and third flips
as well; but the fourth and fifth ones might come up tails. In other words, we can
have streaks of heads and tails, and the point that I’m hopefully making clear is
that there’s no way to know the actual sequence. However, we do know that we
have 70% chance if we keep the number of flips statistically significant. The
more we flip, the more likely we are to reach 70% heads as expected value.
Put into a trading context, this obligates us to stick to our methodology and trade
it effectively if we want to be able to extract consistent returns out of the
markets. This implies keeping a constant level of engagement in the markets.
We have to take every signal our system gives us and exit where it says we
should, as often as it requires us to do so. Simple, right? The reality is that most
people aren’t able to embrace that simplicity. They get caught up in ‘what-if ’
scenarios. They want to wait for the perfect moment, the perfect opportunity, the
perfect time. It’s a terrible thing to wait until we are ready. We might never feel
ready. I believe there is almost no such thing as being ready. There is only now.
Why not do it now? If our system is indicating an opportunity, now is as good a
time as any. Life is about taking risks. It’s ok if we lose on this trade. We will
learn from it. There is no real losing in life; there are only opportunities for
growth. Adopting a ‘just do it’ approach to trading could ultimately provide us
with the possibilities of enjoying an equity curve similar to the one represented
in Figure 1. As you can see when a profitable trading system is followed to the
letter and trading errors are minimized, our results become in line with the
capabilities of the system. However, the degree to which the system is not
followed and trading errors are constantly occurring, is the degree to which we
will be skewing the numbers in a way that is not favoring a positive outcome
regardless of the capabilities of our system. This will cause our equity curve to
experience deep, irregular and un-harmonic troughs as can be seen in figure 2.
Several studies of FCM (Futures Commission Merchant) accounts have shown
that the most successful traders are those with the highest activity levels. Even
the best intermediate term investors who use trend following systems constantly
massage and adjust their positions. All the people I know who are able to
support themselves by trading tend to be very active. The basis reason behind
this is that:
1.
As said previously, the average of the results obtained from a large
number of trials should be close to the expected value, and will tend to become
closer as more trials are performed. In other words, the more we trade, the better
should our chances be to make money
2.
One cannot expect to develop mastery with merely theoretical
knowledge and no (or minimal) ‘skin in the game’. As we keep trading –and
practicing – we should acquire skills and develop domain expertise faster than
others who aren’t very active
3.
of them
Taking lots of trades prevents us from getting too attached to any one
4.
Taking lots of trades helps in minimizing the impacts of a single
potential bigger loss
There is a lot of talk about over-trading and most trading books out there will
argue against trading a lot. I have no clue as to how this conventional wisdom
started out in the first place, but one thing I do know for sure is that this is a
fallacy. In a quest to understand the concept of trading a lot, we come to a point
where we have to ask the question: why does everybody tell us that this is the
wrong thing to do? If our statistical chance of reaching our expected results is a
function of the number of times something happens, then why do we want to do
it less? Please, help me understand the logic behind this – if there is any! I
firmly believe that over-trading can only exist for people who trade models that
either don’t work, that they don’t fully understand or that they haven’t
thoroughly researched. However, once they understand and trade a tested
methodology, they'll realize that they are severely under-trading.
There is an important caveat to this ‘trading a lot’ concept. For it to be relevant,
you have to trade small! In his interview with Jack Schwager3 Larry Benedict
states the importance of grinding it out:
“Since I started in the business, I have seen a number of traders who ended up committing suicide or
being homeless. The one trait they all shared was that they had a gambler's mentality. When they were
losing, they were always looking for that one trade that would make it all back. I learned early on that
you can't do that. This is a business where you have to work. That's what I do. Every day I make
hundreds of transactions. I grind out the returns. If you look at my daily returns, you will see there are
very few big up days.”
The message is clear; we should never take on enough risk to make losing our
account a feasible outcome. If we go to a casino, they would rather have us place
100 bets for a million dollar each than 1 bet for 100 million dollars. That is why
there are table limits. Even though they have a clear edge over the individual
player, the casino would rather we take more bets because they understand that
probabilities only work when the number of occurrences are high enough to
make them statistically significant. So by accepting 100 bets for 1 million dollar
each, they are making sure that enough occurrences happen. Eventually, over a
certain number of bets, the house will swallow the entire 100 million dollars.
Put in a trading context, if winning and losing trades were evenly distributed,
trade size would not be a big issue. The problem is that winning and losing
trades will often run in streaks. No trader knows how bad their worst streak will
be until it happens. Therefore, large position sizes can definitely hurt our
account balance during those streaks. Trading small enough sizes allow us to
have enough occurrences to make the probabilities work in our favor.
The purpose of learning is very important. We learn things so that we can adapt
to our environment, which is the whole purpose of our existence. It is the whole
purpose of life itself, and while other animals may find other ways to adapt, the
typical way us humans do it is through the acquirement of knowledge. However,
it is not easy to open ourselves to learning new things. Quite often, what we
already know will act as a blocking mechanism to prevent us from corrupting
what we have already learned so far. The extent to which we achieve success in
the markets is a function of knowing the most appropriate set of steps to take in
relationship to the current conditions. But knowing, however noble, is not
enough. We have to be able to act on what we know. The more we allow
ourselves to learn, the better we are able at making assessments about the
opportunities the markets can present to us at any given moment. The more we
open ourselves, the more we understand how to take advantage of those
opportunities. The more we practice, the more we make trading success a reality
for us.
TRADE LIKE A SCIENTIST
“I've missed more than 9000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game
winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed.” Michael Jordan
In order to prove the viability of an edge, we must measure its capabilities
before and after improvements are implemented through an exercise called
sample size determination. Essentially, we commit ourselves to placing a certain
number of trades according to what our system indicates. We do so
systematically without tweaking any of the parameters for the trades until we
are completely done with the set number of trades. Many traders and authors in
the trading literature have suggested that 30 data points is enough to properly
test the significance of a set of data – the significance of an edge. 30 data points
(trades) seem a little bit meager, especially if you are testing a quantified
technical and/or quantitative methodology; therefore, it should be viewed as the
strict minimum. In general, the bigger a sample size, the more believable a
study's conclusions are.
As said at the beginning of the book, I am holding the assumption that you
already have a tested and proven methodology; therefore, what we are more
concerned with here is that you acquire the ability to execute your edge
systematically. The sample size determination exercise can also help you with
that. It can teach you patience and self-control, because in the end our results are
a function of whether or not we are able to execute properly without making
trading errors. If we are able to execute properly, then our results should be in
line with the capabilities of our system. Hence, this exercise forces you to stick
to your system so that you can only assess the results after a set number of
trades. A good thing to do when your edge appears in the markets is to say to
yourself, “I am committed to take the next x number of trades”. In essence, what
you are stating is that you are committed to flawlessly execute those trades until
the end of the exercise. And if need be, any modifications to your methodology,
risk, or trade frequency should be made after the exercise. You should not tweak
or change anything during the exercise or else you will be skewing the results. If
you think about it that is exactly how a scientist proceeds when she runs a
science experiment. During that science experiment there are all sorts of results
that could come up. Some results might be positive while others might be
negative. However, all of them are data points. Each result is a piece of data that
can ultimately lead to an answer. That is how most vaccines were created; they
were the results of trial and error. Therefore, a good scientist doesn’t concern
herself with failures, anomalies, or mistakes. She treats them as mere data
points that will eventually lead to an answer. Imagine if she took every mistake,
failure, or erroneous data within the experiment as a representation of how bad a
scientist she is, it would be kind of unfruitful, wouldn’t it?
When we first start out in our trading journey our primary goal has to be the
building of new habits and the learning of new skills conducive to successful
trading. Therefore, just like the scientist we are simply experimenting. If we run
enough experiments we are going to get negative results, even a few in a row
sometimes. However, if we focus on the process of trading correctly, then
mistakes and failures are merely experiences that point the way. Every trade,
regardless of them being winners or losers, has to be treated with the same
degree of importance. Each result is a piece of data that will eventually put us on
the right path. Doing this sample size exercise appropriately and long enough is
essentially an exercise of de-energizing our beliefs that are not conducive to
successful trading. It is also an exercise of acquiring confidence in our
methodology. The reason behind this is that you might be faced with results like
the following: win, loss, win, win, loss, loss, win, loss, loss, loss. On this 3rd
consecutive loss your rational mind might be screaming “I know what is going
to happen here, I know the next trade will be a loser.” What is expected of you is
that you still put on the next trade. If it turns out to be a winner this will
consolidate in you the belief that winners and losers are randomly distributed;
therefore, we can’t possibly know the outcome to any given trade. So when we
are able to go ahead and do what we need to do, we are building a positive credit
until there are more positives than what was conflicting.
The sample-size exercise is an essential step in learning how to trade
successfully; however it will not be as impactful as it could be if you don’t keep
proper records. When it comes to climbing the learning curve of trading, few
tools have proven as helpful to traders as journals. Given the complexity of the
market, it is impossible for most of us to recall simply from memory how we
have acted in certain situations and more importantly what we have learned.
Trading successfully, unfortunately, is not a skill that we can acquire by being
passive learners: therefore, a journal is by default an indispensable tool in
learning how to use and take advantage of our past experiences and
observations. A good journal should help us monitor our thoughts and emotions.
It can be as simple or as complex as we might wish to make it, but a good rule of
thumb is that the more detailed it is the greater the opportunity to learn. From
Benjamin Franklin to Richard Branson, many of the greatest minds of this world
think (or have thought) on paper. Einstein, for example, would always carry a
notebook with him and record his thoughts. The idea is to use the journal to keep
a real-time record of anything that goes through our mind – anything that might
be of interest at an ulterior time, or anything that can help us in our quest for
growth and knowledge. In trading, what we are thinking and feeling prior, during
and after a trade is so important. If we can get ourselves to record what is
happening in our mind at those precise moments, it can provide us with
incredible insights into the cause of our negative behavioral patterns that affects
the way we experience the markets. The reason for this is because when you
have a pen and a piece of paper, and you are putting your thoughts down, it
allows you to articulate clearly the thoughts in your mind and the feelings in
your body that might just be hazy. When you have it on paper, it is not abstract
anymore, and you have something to work with. The intention is to become
better self-observers. Along with mindfulness and meditation, the journal allows
you to identify problem thought patterns as they are occurring so that you can
interrupt them and prevent them from swaying trading decisions, thus,
redefining your present experience.
In conclusion, trading like a scientist will allow us to make trading as systematic
and mechanical as possible. Along with journaling and the sample size exercise,
there are several other key actions you can take to get you there:
1.
It is important that you take the time to research and plan your trading
business; these are essential steps in your overall success as a trader. This is not
a profession at which you will become skilled overnight. Traders who start
trading too soon or without a well-researched trading plan often find themselves
back at the beginning with a lot less trading capital. Traders who have realistic
expectations and who treat trading as a business – and not as a hobby or a getrich-quick scheme – are more likely to beat the odds and become part of the
group of traders who succeed.
2.
Focus on what you can afford to lose, rather than what you might
gain. The critical point of little bets is that they are little, therefore, if they don’t
work, you won’t lose too much and you can live to fight other battles. So many
new traders start working on getting rich before they even work on just being
consistently profitable. This is a big mistake.
3.
Focus on de-energizing beliefs that don’t serve you. You do this by
doing what you know you should do instead of letting your impulses get the best
of you. This takes time and effort, so don’t expect immediate results. It might
take some people one or two sample sizes of trades in order to consolidate inside
their mind new beliefs conducive to successful trading. Other people might
require more sample sizes of trades. I know I started to see real changes in my
trading after a good 3000 trades. I am a slow learner. Everyone is different and
we all learn at different paces. So be patient and remember that Rome wasn’t
built in a day.
4.
Trade your methodology without deviating from it. Even though we
talk about "trading the markets", in the strictest sense we cannot trade the
market, we can only trade our rules. Our goal is not to catch every big move; in
fact, we won’t, and no one does. Our only objective is to take the money the
market will make available for us each day, week or month according to our
rules. In the end the longer you trade, the more you will learn – engagement will
make you a better trader.
5.
Prepare your action plan outside of market hours. This is one lesson
that took me far too long to learn. You cannot come every day in the markets,
with no action plan on what you are going to trade and how you are going to
trade. Every single time you enter a position, you need to decide beforehand
exactly when you will exit that position. You need to know in advance your
maximum risk allowance per trade, the number of days you ought to stay in the
trade and other contingencies. Since you already know your levels – your profit
target and/ or stop loss parameters – all you need to do at this point is “click”. It
is imperative that we make these decisions before we enter any trade so as to
minimize our emotional implication during market hours. Many people come
into this business with no forethought, only big hopes and aspirations; however,
as the saying goes: “If you fail to plan, you plan to fail.”
QUESTIONS
Do you have a methodology that has been proven to make money in the
markets? Is it discretionary (qualitative and subjective) or systematic
(quantitative and objective) in nature?
What are the factors that prevents you from being mechanical in your trading?
Do you honestly think these factors can be overcome? How?
Before closing this chapter, I thought I should elaborate a little bit on the nature
of markets so as to provide you with further insights into their complexity. Much
effort has gone into the study of financial markets and how prices vary with
time. Essentially, there are two mainstream theories that have been the subject
of heated debates for decades. In one corner you have the proponents of the
random walk theory who suggest that markets are governed by some kind of
Brownian motion (erratic and random motion), thus making them inherently
unpredictable4. These traders typically use derivatives such as options (when
implied volatility is high enough) to try to profit from the markets. In the other
corner, there are other market participants who explicitly subscribe to the
cyclical – and somewhat predictive – nature of price movement that affects the
markets5. These traders expect to profit from ‘black swan events6 which
according to them happen more often than a normally distributed bell-curve
would suggest.
The debate on who is right or wrong in their assumptions or assessment of how
markets intrinsically function is out of the scope of this book. I’m sure you can
find some great books out there that do a great job at providing the statistical
evidence in favor of the random or the non-random nature of markets. There are
as many books on the non-random walk as there are on the random walk
hypothesis. Therefore, this can only lead to one conclusion: statistics are just
numbers; they can be biased and can be subject to personal interpretation. On
their own, statistics don’t prove or disprove anything. Alfred Sauvy, a French
economist once said: “numbers are fragile beings, if you torture them enough
they’ll end up telling you whatever you want to hear.” Therefore, regardless of
anyone’s underlying assumptions about the nature of the markets, I think we can
all agree on three things:
1.
Human psychology is the driving force behind price variations. Large
amounts of volatility often indicate the presence of strong emotional factors
playing into the price. Fear can cause excessive drops in price and greed can
create bubbles
2.
There is a random distribution between winners and losers. In other
words, each outcome to any trade in of itself is random
3.
There are clearly people from both camps who do make money on a
consistent basis.
The message I want to convey here is that regardless of methodology, beliefs,
and assumptions you can make money in the markets if you follow a disciplined
approach and if you don’t act like you know for sure where price is headed. The
fundamental truth that both groups will agree upon is that markets are
unquestionably uncertain. Nobody knows for sure what can happen next and you
should be extremely skeptical of someone telling you otherwise. Regardless of
your underlying assumptions on the nature of markets, if you have an approach
that has been quantified and proven to work in the past, I think it is fair to
assume that it has an equally good chance of working in the future – assuming
there is any value in analyzing the past. Having such a structured approach to
the markets that you can follow methodically, is the closest thing to the Holy
Grail you will ever find.
CHAPTER 3
CONSISTENCY: A REAL CHALLENGE
“Make sure your worst enemy doesn’t live between your own two ears” Laird Hamilton
Now that we have seen how the markets function
and how at
the most basic level, trading is just a game of flipping weighted coins, many
people will still agree that acquiring consistency – in terms of execution and
results – is not that easy. But why is it so? At the most fundamental level, what
makes consistency so challenging is that it requires learning the type of mental
skills that few people are used to learning. The skills I am referring to is selfregulation and self-control. Those terms are often used inter-changeably but
they are different7. Self-regulation can be defined as the ability to stay calmly
focused and alert, which often involves – but cannot be reduced to – self-control.
The better a trader can stay calmly focused and alert, the more objectively he
can analyze the diverse information coming in from the markets; he can
assimilate them, and sequence his thoughts and actions to act in harmony with
what he is seeing. For someone who thinks that self-regulation is really just a
matter of someone getting in control of his negative emotions, there is indeed
little difference between self-regulation and self-control; they are two sides of
the same coin. However, self-control has more to do with the goals you set for
yourself. For example, if you say to yourself, “I will follow my plan or my
trading strategy diligently until the end of the week and I will assess the results
then”, your memory has to keep your intentions intact until the end of the week.
That is not too hard, but not simple either; anyone who has ever said to himself,
“This weekend I will go jogging,” knows how hard it can be to keep that
intention afloat. Self-control is what helps you achieve that goal. On the other
hand, self-regulation is the ability to stay in the present and to focus on what is
occurring right now in your body. It nurtures the ability to cope with inner
challenges that are happening as a result of sensory inputs; be it, the market
moving against you, or someone screaming at you for whatever reason.
Without developing those mental skills to do (or not do) things that are (or
aren’t) in our best interest, it’s highly unlikely that we’ll be able to do what our
methodology or trading plan is indicating without making a number of trading
errors. Good trading is an approach that consists of little to no trading errors.
The process is so eloquent and fine-tuned through years of practice that those
errors just cannot happen anymore – at least not as frequently as before. It is the
epitome of a well-oiled machine. A good analogy, typically on the basis of
process and structure, is the example of the Casino. Casinos base their entire
enterprise on the idea of expectancy. In simple terms, it is the act of focusing on
the long-term results of a system, as opposed to the short term fluctuations. The
idea of expectancy is similar to self-control which is the ability to do what you
intimately know you should do for a long-term and more durable success,
instead of getting side-tracked by short-term emotional gains. For example:
Cutting your losses and not holding on to a position hoping it is going to come
back; liberating yourself from the collective actions of all the other market
participants and thinking for yourself; taking every trade your system signals
you to take even if this means trading in the face of a losing streak or buying
when there is blood on the streets (and inversely selling when everything seems
too rosy) are – among others – abilities that pertain to self-control. In his
excellent book called, Trade like a Casino8, author and trader Richard Weissman
takes the similarities between a casino’s process and a trader’s process even
further. He takes the example of an extremely wealthy individual who enters a
casino with a billion dollars. She automatically finds the cashier happy to
change her money into chips no questions asked. With that amount of money
they unroll the red carpet under her feet, greet her warmly with free drinks,
snacks and various other freebies. However, suppose that same woman walks
over to the roulette wheel with her ridiculous amount of chips and tells the
croupier to put it all on the red, she will be politely informed that there is a
maximum table limit bet size of 10,000 dollars per spin of the roulette.
Why do casinos need table limits when the probability is skewed in their favor?
They simply know that despite the odds being in their favor, on any particular
spin of the wheel it could come up red and if it did, our friend here could
potentially endanger the whole establishment. Although each and every spin of
roulette is random by nature, the house remains unconcerned because they know
that the probability is skewed in their favor over a series of spin. By using table
limits, the house forces the players to limit their bet size, thereby ensuring that
they keep playing. Eventually, the casino’s positive expectancy model will
swallow up the entire billion dollars. In trading, if we can just get ourselves to
execute our trades consistently without any errors; apply our proven edge
(positive expectancy model) flawlessly and be rigid when it comes to risk
management (maximum table limit) then can we, as traders, take the role of the
casino. No matter how good a technical methodology is, turning our trading
profits into a consistent income just like the casino requires the ability to restrict
ourselves from doing some things that our methodology itself can’t help us with.
For example, our methodology can’t force us to predefine the risk of getting into
a trade. If we do predefine the risk, our methodology can’t stop us from not
taking a predefined small loss that ends up turning into a bigger loss. Our
methodology can’t force us to move a stop closer to our entry point where we
get stopped out and the market then trades back in our favor. It can’t prevent us
from hesitating and getting in too late. It can’t stop us from jumping the gun and
getting in too soon only to find out that the signal to actually get in never really
develops. It can’t stop us from getting out of a winning trade too soon, thus
leaving money on the table; nor can it prevent us from letting a winning trade
turn into a losing trade without having taken any profits. Our methodology can
give us winning trades, but it cannot give us consistent results if we are
susceptible to making those kinds of trading errors.
If the casino was to drop its strict risk management practices (table limits) just
once, it could run the risk of devastating losses. However, novice traders have no
problem whatsoever doing so. This inability to self-regulate and self-control is
what detracts their end results. Just like an overweight person who has trouble
sticking with a diet and a regular exercise schedule, if traders can’t prevent
themselves from doing the easy – and what seems natural – thing over the hard
one they will surely find themselves being part of those who consistently lose
money in the markets because they are unable to adopt the type of behavior that
promotes positive results. At one point, we have to decide in which camp we
want to find ourselves in because consistency works both ways. There is the
good kind of consistency, which is often hard and painful; and there is the bad
kind of consistency, which is easy and provides quick but temporary pleasure.
We have to make a true decision about what it is that we want. Until we part
ways with some ingrained negative behaviors we will keep re-enforcing the very
type of behaviors that prevents us from experiencing trading success, aka, the
right kind of consistency.
THE KEY IS WITHIN US
“You have power over your mind — not outside events. Realize this, and you will find strength” Marcus Aurelius
We all have psychological occurrences that are deeply ingrained within us. The
psychological occurrences I am alluding to are fear, anxiety, anger, frustration
and so on. They arise when we are faced with impulses that are transmitted to
the brain from our sense organs. Some of these psychological occurrences can
provoke impulsive and instinctual reactions which I’m sure have been
instrumental to our survival when we were still living in caves. Although we
have come a long way since then, these psychological occurrences never left us,
no matter how much our lives have changed, no matter how much the world has
evolved. This has to hint you on the importance of every single one of these
psychological occurrences. However, there are many instances where these
psychological occurrences escalate to the point where their influence on us is
such that they can impede our ability to live our lives in a way that satisfies us.
For example, fear can sidestep rational thinking in favor of a faster and more
gut-feel response. This is great when a bear is chasing you, but not so great when
you are trading the markets. Taking profits too early for fear of losing the profits
at hand, or not pulling the trigger when a high probability set-up is spotted
might cause you to skip over some very lucrative opportunities.
Quite often, what results from these psychological occurrences is an imaginary
rivalry between us and what we perceive as the object of our trouble. It’s us
against something; someone; the markets. Even if we don’t realize it, it happens
in our minds at an unconscious level. In trading, traders will often personify the
market and that makes it easier to shift on it the responsibility for their losses,
or inaction. In other words, it’s easier to play the blame game. If we want to
have a chance at even surviving at trading we have to temper our reaction to
sensory inputs; because behaving otherwise is in strict contradiction with the
way markets were designed to make profits available for us. It automatically
puts us on the side of the masses – those who consistently lose in the markets.
Therefore, how can we free ourselves from those behaviors that don’t serve us?
By the end of the book you will get a clear and complete understanding of what
you need to do but right now the short answer is this: Breathe! Your breath is a
perfect and accurate barometer for your emotions. You can feel for yourself how
stress affects the ease and pace of your breathing. If you become aware of this
strained condition, you can temper your emotions by taking a few conscious
breaths. Also, whenever you engage in any trading activity, contemplate your
thoughts, your state of mind, and your body. How does it feel to be you? What
does it feel like to be in this precise moment? When thoughts rush through your
mind and psychological states invade you to take possession of your body,
observe and notice as if from a distance. Do it as a matter of personal curiosity.
Our body is very eloquent; it exhibits a special set of symptoms for every
psychological state. For example when we are feeling angry, our mouth may go
dry. Our muscles may contract when we are scared. We may have indigestion
when we feel anxious; our breath will also become strained. Scores of symptoms
can reveal themselves. If you simply observe them, notice and enumerate them,
as if you were a scientist running a science experiment, by the time you have
finished, the psychological state will have disappeared. Now, I’m not implying
by any means that we shouldn’t experience psychological states that are
embedded in our nature. I am not implying that we should reject our feelings
and emotions. Being human is accepting the complete range of emotions and
psychological states that are inherent to our human condition. That is what
makes us complete. However, contemplation can free us from slavery to these
inner occurrences. It enables us to deal with them as they arise by not giving all
of our energy to them.
THE IMPORTANCE OF TRADING RULES
“Discipline is doing what needs to be done even when you don’t want to” Zig Ziglar
Rules are sets of explicit or understood regulations or principles governing
conduct within a particular activity or sphere. In other words, they define
acceptable behavior and are to be used in specific environments and conditions.
Rules are important because they help us live and deal together. As an example,
could you imagine if you and I played a game of Monopoly without rules? Of
course it would be a kind of mess. In the financial markets, there exist rules to
protect us from many things. However, few of those rules can protect us from
ourselves because most of those rules stop where personal responsibility comes
in. Therefore, without regard for peripheral details the only rules that could
protect us are the rules we set for ourselves. Not risking more than 2% of our
total account on any single trade; putting a stop-loss and adhering to that stoploss without compromise; not entering a trade unless you see a valid signal on
the chart; refraining from any trading activity when you’re not in the right state
of mind – all of these are examples of rules you could set for yourself to guide
your trading. Yet, a lot of us have a natural aversion to rule-following, and this
brings us back the idea of self-control. However, to get a better understanding of
this inability to follow our own rules, and to understand how we can effectively
change this, we need to search where lays the root of the problem: our impulses.
All of us are born with our own inherent behavioral characteristics. If we were to
put a baby on the floor while closely observing her for a few minutes, we would
see that she would naturally try to explore her environment. Curiosity is one
characteristic that is common to all children, but all of them aren’t naturally
attracted to the same thing. In other words, out of all the things to be attracted to
that are available in the baby’s sight, she will naturally select and crawl to what
she wants to explore in the moment. It might be one particular object, a toy, her
dad’s shoes or even the sleeping cat. In any case, it seems like there is some sort
of force inside of her that naturally selects what she is attracted to in the
environment out of the vast array of things that she can be attracted to. This is
inherent to any single one of us. Some social structures – this might be families,
parents, and later in life workplaces, religions, etc. – support these natural
attractions to some degree, however, others don’t. The problem is that, every
time our natural attractions are not supported – when we are denied the
experience that we want as a result of these natural attractions – we build up
“denied impulses”. It’s like the desire for a certain type of experience creates a
metaphorical hole in our mind and that “hole” has to be filled with the right peg;
that is, experiences that only we – full individuals – desire. When a baby is
holding something in her hands, looking at it, exploring it, then someone comes
and takes it from her. The response is that she automatically and naturally starts
crying because she is not done experiencing. Crying is a natural mechanism to
put her mind back into balance because the lack of that experience she was
wanting did not fill the “hole” in her mind.
Those “denied impulses” are what creates cravings for a lot of people. As stated
earlier in the book, craving is not to be confused with desire. Desire is not
inherently bad. It pushes us to accomplish things, to better our lives. However,
the clinging to desire – which is craving – is more of an insatiable hunger that
can never really be stilled. Cravings can be conscious but they can also be
unconscious. In the 2005 movie adaptation of, Charlie and the chocolate
factory, Tim Burton greatly expands on Willy Wonka's personal back-story. For
example, we learn that he had a troubled past with his father, he was forbidden
from eating candy of any type or quantity and had torture device-like braces
affixed to his teeth. The “denied impulses” he built as a result of such cruel
treatment resulted in him craving the very thing he wasn’t allowed to touch.
This led him to break his father’s rules and taste a chocolate. This is a good
example of conscious cravings; they will translate in the individual experiencing
difficulties with self-control. Unconscious cravings on the other hand, can find
other – more subtle – ways to manifest themselves. For example, suppose a
teenager wants a career path that her parents don’t support; they will deny her
that choice. Later, she will undoubtedly end up as an adult with “denied
impulses” whether she is aware of it or not. She might be set on a great career
path; she might enjoy financial stability just like her parents envisioned for her.
However, will she be happy? Maybe. On the outside. Will she feel complete?
Not necessarily. Remember, that “hole” inside her mind is still there waiting to
get filled. She might have forgotten about it or even suppressed it, but it’s still
there. It will never go away until she finds a way to reconcile that emptiness.
Until then, it will affect her life in ways that are subtle, but detrimental. She
might not know why she cannot find happiness in her current job despite all the
advantages she has in that job. She might not stand people who have the mental
fortitude to do what they want to do. She might even unconsciously deny her
own kids the choice to do what they want to do in life. This happens to us all the
time. We live in societies that often deny us the choice to live and experience
our lives according to what we are naturally attracted to; according to our
desires. Hence, this has consequences on our lives.
For the ones who experience cravings, it is very difficult to exert self-control
and to follow rules – even their own rules. That is one of the many reasons why
it is so difficult to become a successful trader. It requires us to make our own
rules and to strictly adhere to them. If we have some conscious or unconscious
cravings related to money, being right, and so on, it will undoubtedly be an
obstacle-course to exert self-control and follow our rules. In the end, it will have
a negative impact on our results. Generally speaking, we are all filled with
desires brought about by the prospect of having unlimited riches in. I am not
suggesting that we should try to remove ourselves to some place where this
desire does not arise. Adopting an ascetic lifestyle or becoming a hermit isn’t
the point here. Heading to a monastery or convent wouldn’t do as well. We
might seek throughout the whole universe without ever finding such a place. Yet,
such a place exists within ourselves. When we turn our attention inwards and
take notice, it becomes clear that desire isn’t the enemy. However, clinging to
desire – craving – impedes our ability to think properly and to make rational
decisions. Finding the right balance calls for an abandonment of craving because
it is precisely in this that all kinds of suffering lies.
In uncertain environments such as in the markets, we have the potential to cause
an unlimited amount of damage to ourselves. The only way to prevent us from
damaging ourselves is to institute our rules. However, if what we have is a
backlog of “denied impulses” in the form of unacknowledged and unresolved
cravings, this will create this natural inability to follow our rules. Therefore,
when comes a situation where we should be taking a trade according to our
signal, or when we encounter another situation where we should cut our losses,
we experience conflictions. Our behavior becomes erratic and emotional, and
this is clearly the antithesis of good trading. To be successful in trading, we need
to understand the importance of managing our emotions, and adhering to our
own set of proven rules that will guide our behavior so that we don’t end up
hurting ourselves. Those rules can be as basic as not trading during binary
events, and as complex as entering a trade in the direction of the 30 minutes
opening range break out if the daily chart provides an opportunity. Ultimately, it
is up to you to figure out what works for you according to your system, account
size, personal preferences, risk tolerance and so on. Implementing sound trading
rules takes commitment and effort; however, ask yourself the question, "would
you follow your rules if you knew for a fact that there was a million dollars a
year job at the end of it?” Use this thought to fuel your desire to be and stay
consistent; but make sure you do not obsess about this outcome, for this fetter
called craving is precisely what will cause you to shoot yourself in the foot.
We have to be firm and follow our rules to the letter, and we have to be flexible
in our expectations into order to flow with the uncertain nature of the markets.
Doing so will allow us to gain a sense of self-trust that can and will always
protect us in an environment that has few boundaries. As a result, we will be
able to perceive, with the greatest degree of clarity and objectivity, what the
markets are communicating to us from their perspective. Those are our best
defenses against uncertainty.
EMBRACING UNCERTAINTY
“As for the future, your task is not to foresee it but to enable it.” Antoine de Saint-Exupéry
Two very distinct elements in human nature separate us from other animals: our
cognitive abilities (thoughts and conceptions about our existence and the self)
and the ability to consider the future and make plans for it. That is our
evolutionary gift as a specie. The second ability, for instance, makes it possible
for us to prepare ourselves for changes in the future, predictable as well as
unpredictable. Unfortunately, this ability also gives us the potential to over-think
and worry about future events – events in most cases that might never occur. We
end up putting ourselves in psychological states that stresses our organism, and
this impedes our capacity to perform to the best of our abilities. Our worries are
a response to the uncertainty of the markets, or even of life itself. Stress –
resulting from this constant over-thinking – is the body’s way of telling us that
we are trying too hard; we are too attached to a particular outcome, to an idea, to
something, someone, etc. It is telling us that we need to give ourselves a break
from all of this and it is extremely important to listen!
I grew up in a very unstable environment. My parents separated a few months
after my birth, and early in life I was moved around needlessly by a narcissistic
and emotionally dysfunctional mother. At one point I was left to live with my
uncle who perpetrated mental abuse and physical violence on me. Later, I went
to live with my father until I turned 16, after which my mother took me back
again. That wasn’t the end of my misadventure though – since her personality
disorders got worse with time, I was constantly belittled and mentally abused. In
addition to that, I was taught to fear failure and to reject being wrong. I was
taught to be a perfectionist, and to have an excessive love for money and
material possessions. Needless to say that all the emotional traumas and
dysfunctional beliefs I inherited had a detrimental impact on the way I
perceived – and lived – life. Animals, humans included, that have been raised in
an insecure and difficult environment elicit higher stress response to mild
stressors than those raised in stable and secure environments. Defensiveness,
oversensitivity, social phobia, inability to handle criticism and feedback, lack of
focus, insecurities, sleeplessness, chronic fatigue, depression, anxiety, overall
unhappiness – I had it all, and this definitely impacted the way I traded. I had a
difficult time accepting losses. I couldn’t get myself to pull the trigger and take
advantage of the opportunities the markets were presenting to me, because I
craved that sense of certainty and stability that I lacked when growing up. I also
had a fear of making mistakes and of failures. I would internalize every market
action making it a right or wrong game. In other words, if I was wrong, I would
consider it as an attack on my ego and I would revenge-trade. I’m sure a lot of
you can recognize yourselves in this. Regardless of how we acquire our own
dysfunctional and limiting beliefs we have to strive to do a real work on
ourselves, because the markets are a very expensive place to sort out our
problems. Fortunately, as a result of my humbling encounters with my own
mind, I learned to de-energize most of these impeding beliefs that were imposed
upon me, while also releasing the suffering that was passed on to me. It is a
work in progress, but I am now finally living a fulfilling life – both in trading
and my personal life. I know today that I am at peace with myself, more than I
have ever been before because I decided to change my perspective on the way I
experienced things. I left my state of ignorance, of victim – the “oh, everything
is happening to me” mentality – to a place of acceptance, self-understanding and
non-attachment. It is a place of equanimity!
It is not surprising that so many people consistently lose in the markets. It is
because they suffer from the inability to embrace uncertainty, which itself is
inextricably linked to a plethora of other symptoms – as I have cited, the
inability to accept and embrace failure, the absolute need to be right, the
inability to take actions, etc. A lot of what was instilled in us by authoritative
figures (parents, families, teachers, etc.), or by society as a whole, is utterly
dysfunctional and contributes to the creation and perpetuation of those
pathologies. As an example, our society has a phobia of mistakes and failures.
This is a problem that begins early in life, in most elementary schools, where we
learn to learn what we are taught rather than to form our own goals and to figure
out how to achieve them. Society’s definition of intelligence is the ability to
memorize; so, we are fed with facts and we are tested on those facts, and those
who make the fewest mistakes are considered to be the smart ones. Therefore,
we learn that it is embarrassing to not know, to be wrong, to make mistakes, or
to experience failure. We develop a fear of the unknown, and an apprehension of
uncertainty. We develop (and cultivate) a passion for perfection.
Our education system spends virtually no time on teaching us that it is okay to
be wrong. It spends no time teaching us the value of learning from mistakes and
failures; yet this is critical to real learning. Dr. Van Tharp brilliantly puts it in
his book, The definitive guide to position sizing9:
“The educational process in most industrial countries came about not to really educate our children, but
to develop good workers for our factories and other businesses. When most people worked in
agriculture, we didn’t need a great educational system – it was just for the chosen few. But now we need
"educated workers" to help with our businesses. Sure, we want these highly skilled workers to be able to
think and come up with new ideas. But we also want them to be good employees and do what the boss
wants them to do. So how do we do that? We do it through our educational process where children
learn that the teacher is always right. Early you learn that if you got less than 70% at tests, you are a
failure. And you don’t get an excellent mark, an A, unless you get 94% correct or better on your tests.
When you show that same mark to your parents the answer is usually "why didn’t you get 100%?" They
want you to be right as well. As a result we grow up with a passionate need to be right. If you are not
right at least 70% of the time you are ostracized as a failure. But you want to be right 100% of the time
so that your parents won’t criticize you. As a result you even criticize yourself first so that you can
correct the problem before your parents start to criticize you.”
School doesn’t teach us true intelligence, which is the ability to be in touch with
our inner self – that place of inner calmness, beneath the constant thoughts
where creativity resides. It doesn’t teach us from a young age how to understand
what is going on in our mind so that we can create better and more fulfilling
experiences. School doesn’t prepare us for real life, unless of course our lives
are spent passively working for others. For us who decide to embark on a selfdirected journey of trading the financial markets, our initial awareness of the
markets is mostly through financial media which erroneously depicts trading as
a right or wrong venture; where you are rewarded for making predictions and
staying firm to your convictions in any particular markets (or trades). The
presupposition of all this is the emphasis on having to be right in order to
succeed in this field. This, again, re-enforces in our collective mind this already
existing belief of right=good and wrong=bad. That is why we see novice or
unsuccessful traders often being obsessed with market analysis and indicators.
They crave being right, although few would admit it. They crave the sense of
certainty that analysis and the numerous indicators on their charts appear to give
them. They are desperately trying to create certainty where it just doesn’t exist.
In our rushed modern society, we are extremely rational and analytical on a high
intellectual level. We’re able to create a certain degree of certainty in many
areas of our lives. However, the complexity and uncertainty of markets –
especially rapidly changing markets such as you see nowadays – escape all the
models and formulas we implement to gain a sense of certainty. This lack of
control stresses and frustrates us. In a world where picking the right stocks is
emphasized by everyone the average traders armed with a perfectionist bias
come into the markets and think they can control their success by just picking
the right stocks. So, when they lose money, they naturally assume that they
picked the wrong stocks. If they used a technical methodology, they assume that
it doesn’t work. So they change it. Thus, they never learn some of the key
factors that are important for success, namely learning from mistakes and
failures, perseverance, and having a given set of rules to guide their actions.
The markets reserve the right to change direction at any given point, with no
regards whatsoever to our expectations, beliefs, trading models, trades we have
on, and so on. However, if we adopt an attitude of observance instead of
involvement, we can find deliverance from most trading-related woes. “I
observe what is happening in the moment so that I can be open to learning
instead of internalizing the action and feeling hurt, frustrated and angry.” It
might feel counter-intuitive to do that, because we have this tendency to take
everything personally. Therefore, accepting uncertainty and sitting with it can
prove to be a daunting task. Yet, this is precisely what we should do. This is the
key to any durable trading success! If you want a comforting thought, here’s
one: do this and you will instantly separate yourself from the masses and you
will be miles ahead. This will make all the difference because ultimately, good
trading is a function of how calm you can remain in the face of constant
pressure. Liberating yourself from impeding behaviors and mindsets is a choice
– albeit a pretty tough one – but the best traders, and the best performers in any
high performance field have done that at some point. They may or may not have
done it systematically or methodically but they undoubtedly overcame these
mental resistances one way or another. The reality is that markets are neutral. At
the most fundamental level, every uptick or downtick is just information, is it
not? So by definition, everything that happens doesn’t happen to you. It just
happens. It’s merely information. You are the one putting context and meaning
behind that information according to what you perceive is happening; according
to all your beliefs and past experiences. This leads you to approach the markets
from a “protagonist and antagonist” perspective – you being the protagonist and
they being the antagonists. But the markets are not “out to get us.” Quite the
contrary, they provide great opportunities for the prepared ones. I like to view it
as a young coconut. You have to have a sharp knife (trading strategy) to open it.
Also you need some skills to use that knife efficiently or else you might end up
hurting yourself instead. If your ability to open the coconut is aligned with the
quality of your knife (your trading strategy’s performance), there is a very good
chance that you will open that coconut and what will await you is a delectable
nectar and meat.
Impermanence and change are undeniable truths of our existence – not merely of
the markets. The attachment to – or the craving of – an illusory market certainty
is what creates suffering for us traders and it’s only when we release ourselves
from this fetter that we can find true freedom – to do whatever we set ourselves
to do, without any fears, doubts or any other internal conflicts. Reaching such a
stage of equanimity implies that:
1. Regardless of the dysfunctional beliefs you may have acquired throughout
your life, you know where you want to go. You know what needs to be done to
steer your trading in the right direction. Your intention and your goal are both
aligned.
2. You have embraced uncertainty, however uncomfortable it is. You employ
techniques like conscious breathing and meditation to deal with inner conflicts.
Conscious breathing helps you gain more oxygen in your organism. A more
relaxed nervous system helps you become better at managing the pressure and
the uncertainty of the markets. Meditation, on the other hand, helps free you
from uncomfortable psychological states. For example, watching your
frustration from a detached perspective as it arises makes it disappear within a
few instances.
3. You are flexible in how you approach your trading challenges. If you kept
doing what you’ve always done, you would keep getting the results you’ve
always got. However, this is not your reality anymore. You go with the flow. It is
much easier to trade fearlessly when you embrace mistakes and failures as your
teacher.
4. You have stopped the over-thinking. You live completely in each moment. In
other words, you gave life to your current situation. The only time you ever are
is now, and the only place you ever are is here. You are with your opportunity in
the markets, your losing trade, your winning trade, your realized loss, whatever
it is. You are aware of your body and your psychological states as they arise and
as they disappear. You do not merely “remember” later that you sat down,
entered a trade, exited another, etc., you are aware of doing so, at the time it
occurs. This habit of staying here in the moment has been practiced, developed
and well-perfected such that you now assume mastery over fear and greed; right
and wrong; over anxiety. You are not over-come by any of these states and
beliefs, but you subdue them as they arise. This is the essence of equanimity.
This equanimity that I keep alluding to is achievable by anyone; and it is
something you should strive for, not only in trading but in your personal life as
well. Is it easy to achieve? No – but it is possible. We change all the time, just
the way markets ebb, flow, and change structure. It is a fallacy to believe that a
person would remain the same person during his entire life-time. He changes
every moment. Furthermore, if he consciously wants to change an area of
himself, he has the ability to do so. Nothing is constant but change itself!
Change is intrinsic to everything that is – even the universe is in constant
change – and we are not immune to this phenomenon.
Right from the moment we are born into this earth we are exposed to a
continuous flow of information. Our brain acts like a sponge and we take in
everything that comes our way. We don’t discriminate or select what we want as
to what comes in – it comes in anyways. And when it’s in, it never gets out. As
our lives progress – as we grow – new information comes to our attention and
either adds to or retracts from our existing beliefs. For example, if some
unfortunate events happened in your life making it that you now have an
aversion to cats, every time you encounter a cat, you will see it through your
filters – i.e., your beliefs – regardless of whether that cat is friendly or not.
Furthermore, every time you see or hear a cat hissing and growling, this will
contribute to your already existing beliefs that cats are all evil. These kinds of
associations happen all the time; we don’t have to think about it, it is an
automatic process. Similarly, if we have an aversion to failure, or to being
wrong, it will only cause us to see the markets through such sets of filters. We
might think that we are seeing the world objectively as it is, but this is not the
case. We see it through our beliefs, and if our beliefs are dysfunctional in nature,
we might be looking at the world in detrimental ways. That is why if we want to
thrive in the markets it is so important to work on de-energizing the set of
beliefs we have that doesn’t serve us well. We do this by accepting that those
beliefs are present within us in the first place. This is the only method I know of
that works. You accept what is in you to be able to move on. The way I define
acceptance is that you are at peace with something. When you are at peace with
a belief, you are better armed to render it nonfunctional if need be. Then you
challenge yourself by analyzing, contemplating, and putting into practice what
you want as new beliefs. For example, if you think you are fat, there must be
some beliefs you hold about yourself that makes you think that you are fat. If
you don’t like this image you hold about yourself you have to render those
beliefs nonfunctional. First you must accept that those beliefs – whether they are
grounded in reality or not – are a component part of who you are. But then you
have to make a true decision that you don’t want to be fat anymore. So you start
doing things that fat people don’t typically do. You work out. You start a diet.
Over time, this will slowly de-energize your existing beliefs about you being fat
and it will gradually energize your new sets of beliefs about you not being fat.
Good Trading is a function of us believing without a single doubt that anything
can happen in the markets. For the “enlightened trader”, there is no dilemma. To
paraphrase Mark Douglas10, he approaches every individual trade from a
carefree mindset. This trader has no internal conflicts; he just does what he has
to do without judging or praying. He knows that any thoughts of past or future
are irrelevant. They are fragments of his imagination and don’t hold any ground
in reality. The present is the ultimate truth, and the markets are going to do what
they do best in that present moment – i.e., fool the most amount of people. No
amount of rationalization will change that. Therefore, the best way to counter
such unpredictability is to be mechanical – the trader predefines his risk, and
when a trading opportunity presents itself he puts on the trade. The trade could
turn into a profit; obviously he placed the trade because his signal was telling
him that there is a higher chance of it happening, but it can also turn out to be a
loser. Therefore, it is counter-productive for him to overthink, overanalyze or
even judge whether the trade is going to work or not. In other words, he doesn’t
take any of the markets’ actions personally. At the end of the day, he knows his
probabilities and he puts his faith in the numbers.
LETTING GO OF EXPECTATIONS
“A man must know himself thoroughly if he is going to make a good job out of trading in the speculative markets” Jesse
Livermore
The amount of money we accumulate in the markets isn’t solely a function of
how much time we spend exposing ourselves to the opportunities. It is also a
function of our state of mind. If we are in the most conducive state of mind, we
will make – and keep – money whether we trade 10 minutes a day or 10 hours a
week. However, if we are not in the most appropriate state of mind then we
shouldn’t be trading because one way or the other, we will be the authors of our
own misfortune. Early in my trading career, I didn’t think of trading as a
performance-based endeavor where you have to be on top of your form day in,
day out. Like most, I came into this business with my backpack of insecurities,
denied impulses, bad habits, fears, and so on, thinking that I would make it as a
consistently profitable trader without a profound work on myself. Little did I
know that by being mentally unprepared, I was actually preparing to fail. It’s
only when I was faced with mediocre results months after months, year after
year, that I finally got it: something was out of whack with my expectations. I
decided to take a break from trading, and I went to my first meditation retreat.
There, right in the middle of a meditation practice, unable to calm my mind I
thought of all my past mistakes whether they were trading-related or not. I got
angry and frustrated at myself, so much that tears started dripping from my
eyes. Right then, at that very moment, I had a great epiphany: How did these
feelings and mental occurrences assert so much control over me? With great
curiosity, I began watching them swirl in me like a cyclone. A few moments into
this observation I noticed something rather peculiar. I felt detached from those
feelings, as if emancipated from them. I still felt the feelings swirling within
me, but since I was merely observing them they didn’t seem to have any control
over me. A deep peace settled within me, and soon enough the feelings began to
dissipate, just like a cyclone loses its intensity and slowly fades away with time.
All that time, these “fetter feelings” defined who I was because I was
unconsciously letting them have power over me. I was associating myself to
them and in some ways I was attached to them without even knowing it. At that
very instant, something profoundly changed in me. In the face of everything –
i.e., beliefs, life cycles, circumstances, etc. – that may predestine us for a certain
path or behavior in life we still have the element of choice. This is very
powerful and it is intrinsic to our human nature. We can steer our lives in
whichever direction we chose to, and meditation can bring you tremendous
insights into this. It can allow you to see past what you think you are. Sitting
calmly with your eyes closed can allow you to see past the filters through which
you see the world so that you can truly see things for what they are and you for
who you are beneath your thoughts, emotions, and beliefs.
Dealing with uncertainties requires that we understand ourselves in such a way
that we can act in harmony with the way the markets are. This is not as difficult
a task as one might be inclined to think, and believe me you don’t have to “hit
rock bottom”, like it happened for me, to see any transformation in you.
Working on ourselves only requires that we pay attention to ourselves. This is
not hard in and of itself. The only reason I can think of why this would seem
tedious even more so difficult is because we aren't taught how to do it when we
are young. As a matter of fact, we are usually taught exactly the opposite – that
our mind is a mysterious place that can only be understood by experts
(psychologists). We are taught to suppress what we feel in such a way that we
forget that what we are feeling is still there. Since we lose our ability to pay
attention, we never see that the feelings never went away. And they never will
until we acknowledge them, and reconcile with them. We become slaves to our
beliefs – the filters through which we see the world –, and we are chained by our
thoughts and emotions. As a result, most people end up living their lives in a
way that is lacking any obvious understanding as to the relationship between
their mind (inner environment) and the outside physical environment. This lack
of understanding ultimately shapes the way they experience their lives.
You may not know this, but Bruce Lee's martial art could not have been as
successful and complete without the deep philosophical base he gave it. Martial
arts, by nature, are a reflective practice where the practitioner must not only
examine the issues of life or death but the nature of the self. Bruce Lee once
said:
"When you're faced with looking at your own life with awakened eyes, you will have increased a bit in
the knowledge of yourself, and knowledge of anything outside of yourself is only superficial and very
shallow. To put it another way, self-knowledge has a liberating quality."
This statement is particularly important for us traders because it pushes us to
rethink our relationship with the markets. The markets don’t generate good or
bad; happy or painful information. From their perspective, every up tick or down
tick is merely information. It may seem as if they are causing us to feel the way
we feel at any given moment, but this is not the case. It is our own mental
framework that determines how we perceive information. We don’t see things as
they are; we see things as we are. We are the stream of our thinking which is
conditioned by the past. When we liberate ourselves from our thinking, not only
will we find the clarity to witness markets’ actions from a detached, curious and
impartial standpoint, but also we will also be able to pull the trigger on our
trades without any attachment, expectations or fears. Furthermore, with the
above statement, Bruce Lee enlightens us to the true nature of life itself, so that
we can get a better understanding of ourselves – our goals, aspirations,
motivations, etc. As stated before, we live in a world that is constantly changing
to various degrees. The book you are holding is currently changing even if you
don’t see it. The markets are ever-changing. You are also experiencing changes
physically as time passes, but also within. The whole universe is changing and
shifting. There is no constant but change itself! When we acknowledge this, it
forces us to look at ourselves in the mirror, and reconsider what we think we
know about ourselves and the environment that surrounds us. This is important
because, when we understand that everything is impermanent, changing,
transient, we come to realize that there is no point in getting attached to
anything – be it, certainty, a trade outcome, money, being right, and so on. The
degree to which we are attached to – or crave – anything, in any way is the
degree to which we will suffer.
When trading, so much of our negative mental occurrences – frustration,
disappointment, anger, irritation, etc. – come from our expectations. We build
these expectations according to what we think the markets should do, the
amount of profits we think our next trade will give us, where the markets will
cease to move against us, etc. But when reality doesn’t meet our delusions, we
experience stress, in the form of the mental occurrences I just mentioned, and
this brings along physical discomforts as well. If we don’t deal with those
occurrences they end up fueling new habits so that every time we are faced with
some similar situations in the markets or even in the outside world, we
experience the same kind of physical and mental occurrences. A pattern is
formed. But this works both ways. Just like we create negative habits or patterns
by not taking any actions, we can create positive habits or patterns when we do
take actions. Below are three simple steps you can take.
1. Breathe
Most people are not very conscious of how they breathe. In particular, poor
breathing habits are common among traders. There is no scientific research
behind this thesis, but, it should be obvious because of the high level of stress
proper to this trading endeavor. Our breathing is a perfectly accurate and honest
barometer for what is happening inside of us. We can feel for ourselves how
stress affects the ease and pace of our breathing. Cultivating awareness of the
present allows us to become aware of this strained condition, so that we can
“heal” ourselves simply by taking a few conscious breaths – slow, deep and soft.
When we do so; instantly, we find a deep peace settling slowly but surely in our
mind. This is conscious breathing. It is quite elementary but extremely
impactful. Taking soft deep breaths provide us with an immediate sense of how
we can manage the uneasiness in our body and our thoughts, when we are in a
bad position whether it is in the markets or in our every day-to-day life. By
simply controlling our breath, in time, our nervous system becomes conditioned,
which makes our unconscious breathing deeper, calmer and more harmonious.
By consciously taking hold of our breathing, we have a unique opportunity to
change and strengthen both our body and mind to respond more appropriately in
times of stress.
2. Sit
Sitting with your eyes closed, in a calm and quiet space can allow you to
develop awareness of your mental occurrences – as they arise and as they
disappear. When you are aware of this, you gain insight into your true nature:
You are alive; living, breathing, and at one with everything. You realize your
inter-connectedness with everything that is, and you lose the desire to exert any
control over anything. You just are! What may be expected from such meditative
practice of contemplating the body and mind if practiced regularly, developed
and well-perfected is mastery over delight and discontent, over fear and greed,
over right and wrong, over past and future, etc. You are not overcome by these
states or thoughts, but you subdue them as they arise. I talk more about
meditation in Chapter 4.
3. Let go
This is a mental exercise I want you to do. Picture all the expectations you have
for yourself, the markets, your trading results, your spouse, your kids, your
coworkers, your job, the world. Take them from inside you, and toss them into
an ocean. See them float away, carried out by waves. Watch them go. Now
picture your life without them. How is it? How does it feel? A life without
expectations means you accept yourself for who you are, the markets for what
they are, reality for what it is, and people for who they are, without trying to
force anything or anyone into the containers you have for them. You see things
as they are and you let them be. It is a life where you don’t need to be
disappointed or frustrated or angry – or if you are, you accept it, and then you let
it go. That is not to say you that you never act. You can act in a way that is in
accordance with your values, and influence the world, but never have an
expectation of how the world will react to your actions. If you do something
good, you won’t expect praise or appreciation. If you placed a trade, you won’t
expect a winner on this particular trade. Let those expectations of reward and
praise float away with the waves. Do the right thing because you love doing so,
but expect nothing beyond that. Always pay attention to your thoughts. Don’t
beat yourself up if you have expectations. Just see them; acknowledge them, but
then toss them in the ocean.
Each person’s life can be viewed as stories, and within these stories are themes
and patterns that point to underlying, unconscious processes. The degree to
which we are aware of these processes affects our choices about how we take
daily actions, solve problems and behave. We can change our story and in doing
so, change our life; it can really be that simple, but simple is not always easy. To
change our story we must change, by altering our perceptions and by making
conscious decisions. However, with any change of such magnitude, we are
challenged to just start already. This is where most will quit way before they
even started because change for them is hard and frightening. It requires that we
do things that are challenging and uncomfortable; but, the possibility for
improvement is there and freely available for anyone who is willing to take the
step.
LETTING GO OF ATTACHMENT
“Most of our troubles are due to our passionate desire for and attachment to things that we misapprehend as enduring
entities.” Dalai Lama
If there is one thing we all have in common it is that we want to feel happy; and
on the other side of that coin, we want to avoid hurting. Yet we consistently put
ourselves in situations that set us up for pain. We pin our happiness to trade
outcomes, people, circumstances, and things, and we hold onto them for dear
life. We stress about the possibility of losing, and then we melt into grief when
that happens. We cling to feelings, thoughts and beliefs as if they define us, and
ironically, not just positive ones. If you have wallowed in regret or
disappointment for years, it can seem safe and even comforting to suffer. In
trying to hold on to what is familiar, we limit our ability to see and experience
other more satisfying possibilities. When we stop trying to grasp, own, and
control the markets or the world around us, we give them the freedom to fulfill
us without the power to destroy us. It is our struggle with impermanence and
change that causes us to cling onto everything. The change itself isn’t the
problem — it’s fighting the change, apprehending the change, not wanting things
to be different for fear of pain and suffering. Doing so creates the very
experience we are trying to avoid. The failure to understand that we must
eventually let go of everything – those around us, money, possessions, and
ultimately our own being and identity – is the root cause of all grasping,
clinging, sorrow, grief.
The subject of letting go of attachment is very personal to me and I have been
thinking a lot about its implications for a long time since I had been holding on
to resentments against a few people in my life. As said earlier, my childhood
and the earlier part of my adult life have been quite tumultuous, to say the least.
Therefore, in my mind, it seemed fair and justified to hold and cultivate
resentment towards the people whom I thought were the cause of my troubles.
However, little did I know that the mere act of holding and clinging to the
negative mental energy (dysfunctional beliefs, negative thoughts and feelings)
had been affecting my progression in the markets in ways that I didn’t even
think were possible at that time. In order to achieve success as traders we need
to have harmony between what we are doing and how we feel. Our thoughts and
feelings definitely affect our judgment; our judgment affects our behavior, and
our behavior determines where we end up in life. So the dysfunctional beliefs,
and the negative thoughts and feelings I was cultivating were being translated
into self-sabotaging actions, not only in trading but in my every day-to-day life.
And most of the time I wasn’t even aware of it. It’s only when I sincerely
decided to take a step back in order to gain perspective on my life that I truly
found within me the genuine desire to let go of my past and everything it
encompasses – the negative mental occurrences that constantly dwelled in me,
the physiological repercussions, etc. I had this great epiphany that the clinging
wasn’t serving me at all. It was actually preventing me from growing
intellectually and spiritually; therefore, by definition it was holding me back
into a past that was full of suffering. That past was long gone; yet, it was still
there, within the confines of my mind, and I was letting it affect me. As a result
of this realization, I decided to no longer seek self-identification in those painful
experiences. I began working on letting go of anything I caught myself clinging
on to – be it things that brought me happiness or things that brought me pain and
despair. In other words, I shifted my perspective from being someone who held
on to anything, to someone who embraces and appreciates the transient,
ephemeral, ever-changing nature of everything. You can never completely rid
yourself of clinging but you can minimize it to the extent that you are not
engulfed by it, because you are able to catch yourself the moment you are
getting attached to anything. The Practice of non-attachment is a process – it is
something that you must continuously work on. Looking back, I can say that the
quality of my life has greatly improved thanks to this shift in paradigm. I am in
a better place to appreciate every moment-to-moment experience life has to
offer, good or bad, because I do not fear losses and pain anymore. Of course I do
not wish for them, but when they inevitably occur I am able to find beauty and
wisdom in them. The pain I undeniably feel from time to time is released as
soon as it is felt. Conversely, I don’t get too excited when something good
happens to me because ‘this too shall pass11’ and any clinging would
unavoidably result in suffering.
The practice of non-attachment is the essence of living fully in the present.
When you feel compelled to attach yourself physically and mentally to anything
– as if it gives you some sense of control or security – focus and listen to your
breath. Within a few minutes the organic up and down movements of your belly
will make you more grounded. The more you are in touch with yourself in the
midst of those occurrences, the greater changes you can create in your thought
patterns. Slowly with time, you will begin to appreciate things with a sense of
freedom, peace and love as opposed to a sense of ownership, anxiety, and fear.
Of course, this is not easy to do and one shouldn’t expect to be good at it right
from the start. Implied within the word “practice” is the idea of repetition.
Repetition is key! Tomorrow may not look the same as today, no matter how
much you try to control it. A relationship might end and you might have to move
on. You might have to endure a significant loss in the markets as a result of an
unfortunate event that was out of your hands. When those moments come
remember that the pain that comes with them is impermanent and passing.
Breathe! Count your blessings. And the first one in the list should be that you
are thankful to exist in the first place and to experience life as a human, with all
the states and conditions that are inherent to it. Do you know the mathematical
probability of your existence? Dr. Ali Benazir from Harvard attempted to
quantify the probability that you, me or anyone else came about. His
calculations revealed that the odds of us existing are close to zero12. He
illustrates it this way:
“It is the probability of 2 million people getting together each to play a game of dice with trillion-sided
dice. They each roll the dice and they all come up with the exact same number—for example,
550,343,279,001.”
In other words, just the mere fact that we are here – me writing this book and
you sitting comfortably while reading it – is a miracle in and of itself. So as long
as you fail to recognize the true value of human existence, you will just fritter
your life away in futile thoughts, activity and distraction. Then, when life comes
all too soon to its inevitable end, you will not have achieved anything
worthwhile at all. But once you really see the unique opportunity that human life
can bring, you will definitely direct all your energy into reaping its true worth.
Attachment to the past
The ability to remember past experiences is useful and important – it is the
power or process of recalling to mind previously learned facts, experiences,
impressions, skills and habits that allows us to navigate and make sense of the
present. However, when this ability to look backwards is used for unfruitful
purposes such as overthinking and worrying, it impedes on our awareness of the
present moment and actually detracts our capacity to sustain growth. Every time
we carry around thoughts of the past, it takes up so much space in our brain that
it prevents us from living in the present. In other words, we become oblivious to
the present. Minutes, hours, and days pass by as if in a dream. We might
remember what happened at a particular moment, but we weren’t fully present at
that very moment because our mind was elsewhere.
Can you imagine how your life would be if you could totally and immediately
let go of what happened in the past? The choice is yours. Look at it decisively,
feel the emotions that are brought up by the mere thought of that past. Confront
that past but don’t fight it. Did you decimate your account because you couldn’t
take a small loss? Did an unfortunate event occur in your personal life?
Understand that there is nothing you can do anymore. You cannot change the
past. Paradoxically, acknowledging your inability to change the past will
empower you to extract wisdom out of those experiences and to move on.
Acceptance is liberation! Just like with the “letting go of expectation” exercise I
presented earlier, bring the past to seashore and kindly place it into the ocean.
Watch it wash away. Once it is gone, make it an intention to be present and to
focus on the now. And every time the past comes back again in your mind, do
the same thing. Bring it to the shore!
Attachment to money
Money is one of the most common things people become overly attached to
because the idea of not having it (or not having enough of it) automatically
triggers an inherent survival mechanism. The more primitive and instinctual
aspects of our mind-body have been hardwired to stay alive. Anytime that
mechanism is triggered – every time we believe our survival might be in
jeopardy - our natural instincts are to fight or flee. This is often caused by the
mind imagining the worst case scenario when, in actuality, reality might prove
to be completely different. Such attachment – to money – only arises when we
are over-identifying with our ego’s story of survival. As poet and Zen Master
Peter Levitt puts it: “It’s the Me show playing over and over and over again in
our mind.” We need that money to fulfill our needs; to make us psychologically
complete; to give us a sense of belonging; to bring meaning to our existence,
and it is this over-identification with the self that lessens our ability to trade
efficiently, with ease. This is so because where there is attachment, there is
psychological resistance. Attachment is always the culprit hindering everyone’s
ability to take rational and impartial decisions. It prevents us from being in the
present moment, and this is what detracts our capacity to be – and stay –
consistent in our results.
Many people come into trading with grandiose dreams of future prosperity.
From personal experience, craving for such prosperity impedes on our ability to
manifest money in our lives in the present. The feeling of not having enough of;
of always needing more; of always wishing, hoping and praying for more,
impacts our decision-making process in such a way that in some instances we
can be completely striped of rational thinking. This makes trading a losing battle
because we will deviate from our methodology which is supposed to give
structure to our whole trading operations. This is true for many things in life: if
we focus too much on thoughts and feelings and not enough on the present, this
affects our experience of the present and impedes on our performance. For
instance, a friend of mine whom I will name John for privacy purposes came to
me at one time asking for some tips on how to build the foundations for a strong
relationship. After his first and only long-term relationship, he was left heartbroken. Since then, he wasn’t able to build any kind of long-term relation with
his ensuing partners, and because I had been in a relationship for quite a while,
he figured I had some kind of knowledge or understanding of how to. I am
definitely not an expert in relationships, but John’s problem wasn’t hard to
understand. He had a very successful career in one of the most prominent
financial firms in the U.K and had no problem manifesting money for himself.
However, he was never able to crack the code to any meaningful relationship. He
had a mediocre social life to say the least and his partners would almost always
dump him within their first month of dating. Ironically, the answer to his
problem was right in front of him all along. He was able to amass some
significant money in his trading career because he didn’t care about it. He didn’t
overthink and stress himself to paralysis. However, he did the opposite in his
love life. John is a great guy to be around, but constant negative self-talk,
overthinking, or even trying too hard, prevented him from being himself with
women. The wound of his first meaningful relationship was still open and it was
preventing him from being fully in the present moment – it prevented him from
being natural. He thought he had to be and act a certain way for women to
appreciate him. He was trying too hard. Every time a relationship went over 2
weeks, he got overwhelmed with anxiety and ended up saying or doing things
that didn’t serve his best interests. Paradoxically, it never dwelled on him that
his fluency and ease in his trading career could be transposed to his
relationships. Obviously he was doing something right there – he didn’t
overthink or stress. He stayed fully focused on the present and went with the
flow.
As humans, we are more concerned with having than being. When you practice
the fine art of non-attachment; when you are in touch with your inner-self, at
peace with past and future, and non-attached to needing a massive bank account
overflowing with money, you can finally relax into just being. Paradoxically,
through letting go of your attachment to money you allow the markets to fulfill
you. Detachment enables you to be fully open and receptive to the opportunities
the markets hand you on a continuous basis. Each time you are honestly
detached from having your desire manifest, it will materialize for you much
faster and far easier. Even though it seems like we all have to have money to
exist in this world, we should free ourselves from the belief that money will
bring us the happiness we aspire to. Studies13 show that money is definitely a
contributing factor to happiness, however, if your potential for happiness only
relies on the amount of money your bank account holds, then you will merely
experience conditional happiness – which is brief in its nature and unsatisfying.
When we stop relying and obsessing about the prospect of vast riches that the
markets will make available to us in a near future, then we allow it to manifest
in the present. Contentment, joy, and peace felt in the present allow us to see
market action beyond ourselves. In other words, by being completely immersed
in the present, we can see the markets objectively for what they are and we will
be able to manifest prosperity by simply being able to respond appropriately to
the opportunities they make available to us at all times. If you are dissatisfied,
frustrated, or angry about your present circumstances or situation, that still may
motivate you to do what it takes to become rich. But even if you do make
millions in the markets you will still experience the feeling of lack. There may
be exiting experiences that money can buy but they will come and go while
always leaving you with an empty feeling, or a need for further physical or
psychological gratification. This is not happiness, it is slavery! That is one of
the main points in movies such as Wall Street (1987) or The Wolf of Wall Street
(2013), where the main characters are shown indulging in an excessive lifestyle;
yet, unable to find contentment. There is that permanent feeling of needing
more, always and always, at any cost. Deep down there is a perpetual feeling of
un-fulfillment.
Elon Musk who was recently interviewed by Neil deGrasse Tyson talked about a
little known fact about his life. At a young age, while still in college, Musk
famously began thinking about humanity’s greatest challenges. He identified
areas such as renewable energy and space exploration, efforts he now leads at
Tesla, SpaceX and SolarCity. But before all that, Musk looked for proof that he
would be okay if the grand endeavors failed, and he had almost nothing. He
explained:
“In America it’s pretty easy to keep yourself alive,” Musk explained. “So my threshold for existing is
pretty low. I figure I could be in some dingy apartment with my computer and be okay and not starve.”
Musk decided to see if a $30 food budget could get him through a month. He
bought mostly hot dogs and oranges in bulk, and would occasionally switch it up
with some pasta and jarred tomato sauce. He pulled it off. It gave him the
assurance that he didn't need a comfortable salary to survive, allowing him the
freedom to pursue his loftier goals. A trader is above all an entrepreneur. Do you
have what it takes to lead the life of an entrepreneur? If you think you do, try
living off only a dollar a day for a month. This is a great exercise on
contentment and non-attachment. Do the experiment and see for yourself where
it leads you. Most people can’t because they are so attached to their ways and
comforts; however, when we set out to test our limits in such a way, we often
learn to appreciate the true definition of struggle, hard work and the value of a
dollar. There is a widespread idea in the collective mind that traders have it easy.
It’s not always the case – especially on the retail side of the business – and there
are too many traders out there who lack the intellectual honesty to admit it. I
don’t make money every month in the markets, and I don’t know any retail
traders who can say for sure that they are going to make x amount of money
from trading every single month. Since there is a rather strong uncertainty
component intrinsic to this business, I have to live below my means in order to
absorb any potential losing month(s), which is bound to happen at some point.
This has taught me that I didn’t need much in order to live a happy and decent
life. Since my current interest is travelling the world, I only carry a small
luggage. All my material possessions fit in there. I don’t possess a car, a house,
heck I don’t even have a phone – I don’t need to own such things for they are not
essential for my survival. There is something powerful that comes with the
realization that you don’t need much. We were born free, but then we started
accumulating things as if they were essential to our happiness – as if they
defined who we were. Don’t get me wrong, I’m not implying that wealth and
possessions are not important, because they are; but, on their own they cannot
bring long-term and durable happiness. They can only fulfill us if we have
learned to fulfill ourselves unconditionally. In essence, what I am stating is that,
happiness comes as a result of our liberation from attachment.
Our lives should not be resumed to a game of chasing wealth. If that is the sole
purpose of our existence, then suffering can only be the outcome. I strongly
believe that we are all meant to do something greater than that. Spending time
with loved ones; learning how to live with ourselves and others; learning about
the nature of our consciousness and how it relates to the outer world; expending
our mind; getting involved in good causes – those are all far more greater
purposes than the mere act of chasing wealth like a Scrooge. Wealth – bigger
houses, faster cars, trendier clothes, fancier technology – promises happiness,
but never delivers. Instead, it results in a craving for more, and this slowly robs
us of life. It consumes our limited resources. When you catch yourself thinking
or indulging over the thought of money, snap out of it. Feel your breath and
come back to the present. Be, because you enjoy being; trade, because you enjoy
trading; live, because you enjoy living; learn, because you enjoy learning – that
is the secret to true prosperity!
Attachment to fear
I was never really interested in school. Right from a young age, I never felt my
place was in school studying things I had no interest in learning. I was more of a
dreamer and a free spirit than anything. I wanted the freedom to do what I loved
doing, that is, arts and sports; however, everyone around me was telling me that
my future depended on how well I did at school. “If you do well you will have a
wonderful life, if you fail you will be miserable for the rest of your life.” That
was the “doxa”. So early on I started stressing about my future because
obviously I didn’t want my life to be miserable. But at the same time I didn’t
like school. I developed a fear of the future that stuck with me for a good portion
of my adult life. That fear of the future prevented me from stepping outside of
my comfort zone and became deeply engrained in me – so much that when I
finally broke free of it, my whole vision of the world changed. As if, all my life
I had this self-made wall in front of me that prevented me from seeing beyond
it. When this illusory wall finally came down, I was able to see myself as I am; I
was able to see things for what they were, and the world for what it is. I was
liberated!
To explore the nature of fear, it is best for me to tell you a story. There was once
a town where the thing everyone feared the most was getting lost at night in the
"Cave of Fear". No one had ever returned from there, and whenever anyone got
lost and ended up there, the last thing that was heard was a great cry of terror,
followed by a few enormous guffaws. The townsfolk lived in a perpetual
agonizing terror that one day the monster would leave the cave. So they
regularly left gifts and food at the mouth of the cave, and these always soon
disappeared. One day, a young man came to town, and, as he heard about the
situation with the cave, he thought that it was unfair. So he decided to enter the
cave and confront the monster. The young man asked for some help, but
everyone was so afraid that not a single person approached the mouth of the
cave with him. He went inside, finding his way with a torch, and calling out to
the monster, wanting to talk with it and discuss the situation. At first, the
monster had a good long laugh, and the young man followed the sound of the
monster's voice. But then the monster went quiet, and the young man had to
carry on, not knowing in which direction to go. Finally he arrived at a huge
cavern. At the bottom of the cavern he thought he could make out the figure of
the monster, and as he approached it, he felt that something hit him hard on his
back. This pushed him forward towards a hole in the rock. He couldn't avoid it,
and fell through. Believing that he was about to die, he let out one last cry. Then
he heard the great guffaws. "That is it for me," he said, whilst falling. However,
as he fell, he heard music, and voices. They got clearer, and when he made a soft
landing at the bottom, he heard a group of people shout: "Surprise!!" Hardly
believing it, he found himself right in the middle of a big party. The partygoers
were all those people who had never returned to the town. They explained to him
that this place had been the idea of an old mayor of the town. That mayor had
tried to accomplish great things, but was always held back by the fears of the
people around him. So the mayor invented the story of the monster to
demonstrate to people how such an attitude was so limiting. So the young man
stayed there, enjoying the party and the company of all those who had dared to
approach the cave. In the town they still believe that to enter the Cave of Fear is
the worst of all punishments, so they stayed in their ignorance and fear.
As we can see the story described the nature of fear and its antidote. Fear is the
attachment to an unfavorable outcome that could happen in the future. There is
always that possibility; however, there is also the possibility that it doesn’t
happen. Anything could happen in the future; but, when we think of something
negative, we tend to bring about that negative outcome because we make it
happen by overly thinking about it. When you challenge yourself by stepping out
of your comfort zone, you not only free yourself of fear but you also discover its
nature. For instance, when you were learning to ride your bicycle for the first
time, you probably kept falling. You probably never realized why it kept
happening, and it’s only now when you look back at yourself that you realize
that you were holding onto those handle bars with so much fear that your
knuckles went wet. You were so afraid of falling off that your body was a stiff
like a plank. You were holding too tight in such a way that whenever the bike
moved to the right you weren’t able to compensate. Your body was too stiff to
bend and to accommodate, which is why you kept falling off. It’s only later on
when you were able to relax that you found that you were able to stay on that
bicycle with more ease. In fact, when you really relaxed, you didn’t fall off at
all. This shows us that fear is the reason why we keep attracting bad things in
our lives. It is the reason why we never advantage of opportunities. That happens
to us all the time in trading. When we fear an outcome, this brings a negative
state of mind which creates the karma which causes that outcome to actually
come. Furthermore, we are unable to take advantage of the constant
opportunities the markets make available to us on a moment-to-moment basis.
In other words, there is a lack of trust in our methodology. We fear that the
market is going to harm us, so we don’t trust; and because we don’t trust we
cause the very thing that we fear to happen. It is a self-fulfilling prophecy. When
you are afraid that you are going to do something wrong your mind starts
overthinking and you tense up. You just cannot perform well under such
conditions – and you end up doing something wrong. Conversely, when you
relax, you tend to think more about what you are doing in the present – not what
might happen in the future. As a result, things tend to flow quite smoothly.
When we free our mind of the limitations of fear and ignorance, we are able to
relax and maintain equanimity. Being fearless encompasses a deep
understanding that failure does not exist! This is very important because if you
believe deep down inside that there is no such things as failures and mistakes,
you won’t be experiencing the constant swirls of “what ifs” in your mind. Being
fearless also encompasses the understanding that, while pain is inevitable in life,
suffering is optional. All of us have experienced pain and suffering to various
degrees. For some, the pain is such that they think that the only way to protect
themselves from suffering again in the future is to control what is outside of
them. So they become control freaks trying to control the world (the markets,
people, things, circumstances, etc.) so as to make it fit what is inside of them –
their beliefs, thoughts and emotions. This is a losing battle because there are
many things we have no possible control over. Instead, we should strive to act on
things that we do have control over. Change must come from within so that we
can bend with the wind and flow with the way things are – transient, everchanging, uncertain. The craving for control stems from our pain. It is the
clinging to the fear that this pain might happen again in the future, and it is that
specific clinging that creates suffering. Releasing ourselves from any clinging is
the end of duality – right or wrong, good or bad, etc. Every time you decide to
do something you are simply and just in the moment. Nothing else goes through
your mind. At this point, you understand more the role of mindfulness and
meditation. You finally see that it is about letting go of things. It is about not
exerting (or trying to) control. There is no thinking – you are just here perfectly
at peace with everything.
Attachment to pain
All too often, we –traders – allow our mental state to fluctuate with the markets.
We associate what is happening to us in the present to memories of when similar
conditions happened in the past. If those situations made us feel a certain way at
that moment, we automatically enter the same mindset in the present. In the
1987 documentary, The Trader, Paul Tudor Jones is shown screaming, swearing,
biting his nails, shaking his hands, tapping his feet and doing anything you can
imagine a nervous person doing. This shows us that this kind of mental
association happens to anyone regardless of level of expertise. If only we could
flip a switch at the very instant this occurs, and turn off the suffering. Well, that
switch exists. It’s called Letting go! You would probably say, “Well yeah, but
that’s the problem, letting go in the midst of the moment is not easy.” To this I
can only say this: Pain is embedded in the very fabric of our existence – it is
inevitable; however, suffering is a choice. Suffering occurs when our mind is
constantly dragged out of the present to indulge in clinging. The markets are a
metaphorical mirror that reflects to us what is inside of us in terms of thoughts,
beliefs, and emotions, so any negativity that we hold onto will have an impact
on our ability to think and perform properly. This is so because everything that
happens in our mental environment feed on each other. Our thoughts feed on our
beliefs; our emotions feed on our thoughts, and all of this demand physical
expression, thus, translating into actions14. Therefore, I strongly urge you to find
the courage to release yourself of any clinging so that you can free yourself from
suffering. This will not only lead you to a more consistent and pleasurable
trading experience but also to a more happy and satisfying life. Conquering
ourselves, however difficult it is, has the potential to ignite something very
powerful in us. In the ash of pain a phoenix can be born. Equanimity helps us
look deeply into the difficulty and the pain we have so that we can become the
phoenix. Please note that when I say “conquering” I do not mean that you have
to fight with yourself. Fighting ourselves to obtain the results we want does not
work. It is counter-productive to do so and can only lead to results that are
contrary to what is expected. On the other hand, accepting what is inside of us as
thoughts and feelings; watching them arise and fade is the only way to disarm
those mental occurrences. Watching for the mere sake of watching without
evaluating, trying to fix, or push away – this is the essence of equanimity. When
you acquire equanimity as a skill, you learn to be in harmony with every sensory
experience (sight, sound, touch and mental feelings) while not holding on to
them.
Being in harmony with our senses brings us to a place of openness. This
openness allows us to challenge what we think we know about the nature of our
reality. It allows us to better appreciate the complexity of each and every
moment. This openness makes it clear to us that there is no way our mind is
possibly representing the whole spectrum of information that is available for us
to perceive in any given situation or circumstance, at any given moment. For us
to have knowledge of the whole spectrum of information that can be available at
any given time we would have to be omnipresent, omnipotent and omniscient. I
think the best way to communicate this is by analogy. Consider that Joe just had
an argument with a work colleague. As a result he cannot stand her anymore,
and this is affecting his work environment. Now, consider that this colleague has
a range of expressions. Everyone has. All our inherent qualities, characteristics,
memories and experiences can be described in some sort of finite way. Now, do
you think Joe’s representation of that colleague (in his mind) is actually her? In
other words, is it who she really is? No, it can’t be. Because for Joe to know her
as who she really is, in all her wholeness, he would have to know her as her
consciousness. He would literally have to be her and every aspect and
component part of who she is. Therefore, any way that he is representing her is,
in actual fact, less than who she is. Anyone that we can think of is just some
limited version of who they are. Based on those premises, we have no other way
than to assume that Joe’s representation of that colleague is a component part of
his identity.
Think about it for a second – other colleagues definitely have their own mental
representation of that person, don’t they? They may have similarities to Joe’s
but his representation is unique. It exists in no other places in the universe other
than in his mind. The problem that we all have is that, we have this tendency to
think that our representation of another person is actually that person when in
fact the only place where that representation exists is in our mind. Again it is
really part of our identity. It is not that colleague as she is, it is Joe! We can’t
perceive in other people what is not inside of ourselves in the first place. It is
impossible; otherwise, that characteristic or trait that may exist in them would
have been invisible to us. Therefore, it has to be inside of us so that it can exert a
force on our senses in order for us to recognize it and label it. Then, if that
representation is composed of negative mental energy (anger, confusion,
frustration, fear, etc.) then it is having a negative effect on our lives, and we are
the ones who are going to be suffering.
Everyone gets hurt emotionally at certain points in their lives. None of us evolve
in this world pain-free. And the problem is that if we don’t truly settle or resolve
our pain it will turn into suffering. That suffering will then keep affecting our
lives on a conscious level first and foremost, but also in subliminal ways. On a
conscious level, we might find ourselves being constantly on edge, stressed,
pessimistic, and so on. On an unconscious level, we could develop some very
damaging behaviors. We might unconsciously sabotage our trading results, and
we might not even know why this is happening. Furthermore, we will pass this
suffering onto our children. We have no other choice, it is going to happen. As
much as we want to try not to, and be conscious of it, unless we have a way to
address our suffering, it will get passed on. Then our children will pass it on to
their children, and it will keep on getting passed on until somebody decides to
break the cycle. This is not taken out of a science fiction novel. That is how life
cycles are perpetuated sometimes over hundreds of years. Everything is interconnected, and whether we understand it or not, everything has a cause and
effect. We like to think that time heals emotional wounds, because most of the
time after years of holding onto suffering, we inadvertently built a system of
beliefs as an attempt to shield ourselves from those wounds. However, the pain
is still there inside of us. Suffering cannot go away unless we learn to release
ourselves from it.
Personally, I strongly believe that if we weren’t meant to keep on growing
mentally, then we wouldn’t have been gifted with the ability to think, reason,
and create. Implied within our ability to think, reason, and create is the inherent
capability to learn our way out of the painful situations. In other words, we have
the capability to heal our emotional wounds so that we can perceive what is
available from the world beyond our pain and sufferings. The world will always
offer us an opportunity for love, harmony, happiness, and success. It will also
offer us despair, disappointment, anger, hate, and betrayal. What we end up with
from each of these moments has to be a direct reflection of what is inside of us
because the world and everything that it encompasses does not interpret the
information it has to offer in any given moment. That process happens
exclusively in each and every one of us through our filters (i.e., beliefs).
Therefore, consider that the idea of letting go of mental pain is that you are
doing so because any negative energy inside of us has the potential to express
itself in negative ways; not only in the way we see and experience the markets,
the world, our lives, but also the effects it has on our own physiology. This is so
because the fundamental truth about beliefs is that they ask for expression. They
will express themselves however they can. We don’t have to passively let our
trading (and our lives) be affected in detrimental ways because of the negative
energy that lingers in us. By embracing non-attachment, we can also embrace
acceptance, peace, gratitude, prosperity and joy, leading us down the path of
physical, emotional, and spiritual wellbeing.
In conclusion, when we acknowledge and fully embrace our present reality,
where we are, who we are, what we are doing, what we’ve got – when we are
grateful for all that is and grateful for being – it releases us from the mental
blockage that prevents us from experiencing success. When we relax into the
truth of the transiency of everything, we naturally dissociate our self from the
essence of who we are. Since everything is in constant motion, we understand
that the only promise attachment has to offer is that of suffering. Paradoxically,
when we transcend the boundaries of attachment we free our mind from any
limits – and this is when money makes itself available to us.
QUESTIONS
What are the mental occurrences and feelings you experience when you spot an
opportunity in the markets; when you are in the process of entering a trade;
during the time that trade is on; when you exit the trade? Elaborate on each and
every one of them without judging or weighing – just write what comes out of
your mind without censoring anything.
Are your expectations in line with what the markets can realistically make
available to you based on the opportunities your methodology can identify?
What are the things you cling on to? Why are you attached to these things?
I would like to invite you to reflect on a quality (or more) of yours that you
think is a good reflection of what gives you an edge in the markets. I would like
you to also think about that part of you that tends to get you into trouble in the
markets.
What I hopefully made clear so far is that market analysis is just a piece of the
trading equation. If you ignore self-analysis, you are missing the whole picture.
Without self-analysis, we cannot see things objectively. We cannot see the way
they truly are, and at this point trading is just an incessant act of projecting our
own problems onto the markets. At the very core, our resistance to change is the
cause of all of our woes whether they happen in the markets or in the outer
world. Resistance is experienced when there is clinging which is deeply rooted
in ignorance. Everything we have discussed so far has led us to this very
conclusion.
Our attachment to things, ideas, people, events, outcomes, emotions, ourselves,
and our lives brings suffering. This is one of the fundamental truths of living.
The Buddha realized this about 2500 years ago and made it the second of his
Four Noble Truths. The First Noble Truth being that life is suffering. Because
everything that is is impermanent, happiness is by default transient as well.
Therefore, clinging to anything will only provide a temporary and fading sense
of security; after which suffering will arise. However, the discovery and the
acceptance of this truth also lead to its solution which is found in the Third
Noble Truth. The Third Noble Truth states that suffering can be overcome and
true happiness attained. This is perhaps the most important of the Four Noble
Truths because in it the Buddha reassures us that true happiness and
contentment are possible. When we give up useless craving and learn to live
each day at a time, enjoying without restlessly clinging to the experiences that
life offers us, then we become happy. We are released from the narrow limits of
self-interest. We become free! And this leads us to the Fourth Noble Truth which
states that we can end suffering namely by following the eightfold path which
encompasses behaving decently, not acting on impulses, and practicing
mindfulness and meditation.
Siddhārtha Gautama (the Buddha) wasn’t some kind of deity or superhuman,
although a lot of the beliefs attribute to him superpowers or a deistic nature.
What most scholars agree upon is that he was just a human being who went on a
quest to find the meaning of suffering. After trial and error he finally vowed to
sit under a Pippal tree in a complete, extensive, and intense meditative state
until he found that which he went on to seek. In the end, the answers came to him
through enlightment. This ability to find our purpose and to awaken is present
within each and every one of us provided we are ready for it. Awakening is very
important, especially for us traders because it is the self and all its cravings that
prevents us from seeing the markets as they are. It prevents us from getting the
answers we seek. These answers are within us; however, how can we see what is
– and was always – within of us if we constantly have blinders that obstruct our
vision? These blinders are our filters through which we see the markets, and
depending on how closed they are, they can severely affect the way we see not
only the markets but also the world. Finding our answers – to our trading
misfortunes, our unhappiness, and so on - requires an openness to challenge
what we think we already know. If we aren't willing to acknowledge that in any
given situation more information and choices exist than what our beliefs allow
us to perceive, then we will never learn to recognize or anticipate the existence
of these other more satisfying possibilities. By acknowledging the possibility
that other more satisfying realities exist, we open ourselves up to perceive and
learn the steps that can result in greater levels of satisfaction. Refusing to
acknowledge the existence of these possibilities would be the same as claiming
that the earth is flat before it was discovered as not being so. When we
continually argue for the status quo by defending what we already believe we
know, the markets (and life) will seem to be constantly assaulting us.
CHAPTER 4
WHERE EXPERTISE BEGINS
“You will never change your life until you change something you do daily.” Mike Murdock
In this chapter, I will attempt to lay
the foundation for the
cultivation of your equanimity in the midst of the omnipresent uncertainty that
reigns in the marketplace. I will also share my complete set of rituals that helps
me in my quest for optimal performance on a daily basis. You are free to
implement those rituals to help you acquire more consistency in your trading.
However, you should understand that what works for me might not work for you.
We are all different and the goal here isn’t to blindly mimic what I outlined but
to find something that works for you. For example, I state Zazen as the type of
meditation that works for me. You might find that this type of meditation
doesn’t work for you. You might be inclined to doing something else. You can
make your rituals as hard or as easy; as long or as short as you want to, but a
general rule of thumb is to keep everything as simple as possible when you are
in the process of figuring out what works for you as a ritual. This is so because
you don’t want to engage in extensive and time-consuming rituals that require
you to display an enormous amount of self-control. [Note: I am using the word
“self-control” when the term “will-power” would have been more appropriate
here. They both are the same thing but somewhere along the line the word “selfcontrol” became obsolete and we started calling it “willpower”. The term “selfcontrol”, though, shows the connection to the self. That is the key and it is the
reason why I prefer that term]. Our ability to use self-control to our advantage
oscillates from low to high on a continuous basis. It does so because of many
different factors such as hunger, changes in mood, and other external factors.
Hence, thinking that you will be able to stick to strenuous rituals is a fallacy.
This might work for a week of two, but it is not sustainable over the long haul.
It is incredibly easy to get caught up in the desire to make massive changes in
your life and ultimately not being able to stick with them. Therefore, it is
important to remember that lasting change is a product of daily habits. When
you finally decide to start the changes that will bring you the trading results you
desire, one thing I cannot emphasize enough on is to start small. As the great
Bruce Lee once said, “long term consistency trumps short term intensity.” These
few words in and of themselves are full of wisdom. Bruce Lee understood the
importance of sticking to rituals for they are the stepping stones on the path to
success – whatever success means to you. If your rituals are too intensive right
out of the gate, you won’t be able to stick to them. That is why it is so important
to start slow and build the level of intensity gradually over time. A mere act of
brushing our teeth, for example, hardly requires any self-control at all because
the task is so small that we don’t even have to think about it. However, such a
small ritual, done methodically every single day has some very good longer
term benefits. Regardless of what we might want to start as a ritual to help us
reach our long-term trading goals what matters is that we become the type of
person who always sticks to his new ritual. No matter how insignificant that new
ritual may seem, small rituals can have huge impacts. Of course, then if it is that
small and easy, we can definitely build up the level of performance that we want
once the behavior becomes consistent and an intricate part of who we are. When
do we know we have reached that point? Performing the ritual day in and day
out barely requires any self-control. It is easy as breathing. When you get there,
only then can you build the level of performance. Back to the teeth brushing
example, if you have made it a habit to brush your teeth once a day for 1 minute,
building the level of performance would be that you could start by doing it twice
a day for one minute. Then you could move on to doing it for two minutes, twice
a day. After that, who knows, flossing might be the next step in your regiment.
You get the point.
Having attended several meditation retreats throughout the years I have seen
first-hand how a particular set of simple but powerful rituals can impact lives.
Zen monks have rituals for many things they do, from eating to cleaning to
sitting and walking meditation. Ritual gives something a sense of importance —
if it is important enough to have a ritual, it is important enough to be given your
entire attention, and to be done slowly and correctly. Zen monks adhere to their
rituals methodically, with awareness of every moment, such that they are
completely absorbed by what they are currently doing. There is symbolism
involved in each ritual, and a real sense of purpose. You don’t have to learn how
to do everything exactly the Zen monk way. Just make it an intention to be – and
stay – as present as possible whenever you are engaging in a ritual. I remember
one of my teachers once said that the act of repeating a certain number of rituals
over and over again without thinking about what you feel like doing or don’t feel
like doing, what you ate last night or what you’re going to do tomorrow, will
bring a sense of clarity to what you are currently doing right now. In other
words, we are surrendering to the fact that there is a way to find that which we
are looking for. The more we are willing to give ourselves whole-heartedly to
that way, the more we are actually giving ourselves to ourselves. The stakes are
very high. Since rituals are tasks that facilitate the achievement of our goals, if
we are able to actually do the things we ought to do by being completely
immersed body and mind into it, then there is nothing preventing us from
reaching a point where our original goal (or outcome) doesn’t matter anymore.
The rituals (or the process) become the actual goal. Instead of feeling like every
daily activity is something that “just needs to get done,” our rituals become
activities that we feel serve a positive function in our lives, and they become
something we even enjoy doing and look forward to. In other words, we find
liberation, contentment and joy along the way.
When we stop worrying about our goals, everything takes care of itself. We
become the type of person who can achieve the things that we want to achieve
because we intimately know that there is a way to get there. It is not an abstract
thought anymore. We know there is a process to follow, so we give ourselves to
that process. People often set their sights on an unrealistic overnight success or
transformation they want to achieve. This is a big mistake. If we don’t maintain
a level of consistency in what we do, we will never be able to make the progress
and achieve the results we desire. This is why so many successful traders talk
about the importance of consistency in their approach – whether it is in regards
to the application of their trading methodology or in the work they do prior and
after any trades – as that has often made all the difference in their results. One
thing to note, though, is that having big dreams isn't about you sprinting as fast
as you can towards the finish line. It could but please, for your own sake, don’t
make it that way. What is the point of rushing, only to collapse once you have
reached your goal? Instead, make it about the journey. What counts is the mental
fortitude to do a little bit each day until you get to where you want to be, one
step at a time. At first, those small steps might be so small and insignificant that
you might even think that they don't even matter. However, when you add up
these steps over time, day after day, month after month, and year after year, you
create an avalanche of positive outcomes. This pushes you beyond your own
expectations – it pushes you towards achieving the goals you set for yourself in
a more relaxed and healthy way.
THE IMPORTANCE OF RITUALS
”Every time we participate in a ritual, we are expressing our beliefs, either verbally or more implicitly.” Tony Schwartz
One of the greatest obstacles to trading success is our own inconsistencies.
Hence, rituals help us organize our time so that we can efficiently focus on the
process of acquiring the trading skills and domain knowledge we discussed
about in the previous chapters. I use the word “ritual” instead of “routine”
because I believe that even though there is no difference in the action itself,
there is a profound difference in the intention – or the attitude – behind the
action. To many a routine is a mindless chore that is not a meaningful part of our
day, but it needs to be done so we do it. I like to think that rituals are a bit more
than that. I view them as more meaningful practices where we are actually fully
present in the moment and fully engaged. The fundamental value of rituals is
that they ensure total preparation. Therefore, you should set up a set of rituals
that allow you to direct your focus of attention one small step at a time on tasks
which consists of:
•
Learning about the market’s behavior
•
Learning about your own behavior
•
Learning to execute properly without mistakes or trading errors on
every single trade
The ability to sustain and cultivate an optimal state of mind is the very core of
any trading success in the first place, and the goal of a good trader is to build
good habits which ultimately breed consistent results. Consistent results,
whether in your trading results or in any other areas of your life is a function of
a process-based approach which can be broken down into small and manageable
daily tasks.
Below is an example of how my daily schedule is currently organized. The time
allotted per rituals is more or less accurate. I don’t fret over a few minutes lost
here and there, but I do make sure that I get everything done the same day. Great
achievers are successful in what they do because they have established habits
which unsuccessful people are unwilling or unable to develop. Good habits are
the key. They are hard to get and easy to lose. Bad habits are easy to get and hard
to lose.
Since I travel a lot my time zone is always changing, so I am always altering my
schedule to fit the opening and closing of the U.S stock market. For simplicity’s
sake the schedule laid out here is Pacific Standard Time.
Monday to Friday
•
5:30 a.m - 5:50 a.m
I wake up at 5:30 sharp, I stretch, then I take a sip of water. Afterwards I will
read my affirmations
•
5:50 a.m - 6:30 a.m
By that time I’m having breakfast while glancing over market related news
•
6:30 a.m
Market opens. I am watching how price action unfolds
•
8:00 a.m
I’m usually done watching the markets. I am out of any day-trades I took during
the opening hour. I also placed my orders to open any new swing-trades and
placed my orders to close any existing ones (if any)
•
8:00 a.m - 8:15 a.m
I read trading blogs
•
8:45 a.m - 11:30 a.m
I’m usually out during that time period for a run, followed by an hour of yoga
session. If I have the time I will put a 20 minutes meditation in there
•
12:30 a.m - 1:00 p.m
I am back in front of the screens and I am getting ready to watch the market
close. I will often open new positions or close existing ones closer to the market
close
•
1:00 p.m - 2:00 p.m
I update my trading journal and my trading log. I also save the charts of the setups I took or exited for later review
•
2:00 p.m - 3:30 p.m
Research and homework for the next trading day ( I scan through hundreds of
charts noting possible entries, exits, position sizing, and risk management
parameters to minimize decisions during market hours)
•
9:30 p.m - 10:00 p.m
I read a book. The only books I read are trading-related, or self-improvementrelated. I will typically read one chapter per day so this might take more or less
time depending on the length of the chapter
•
10:00 p.m - 10:20 p.m
Sitting meditation (zazen)
Saturday
•
The first thing I do when I wake up is sitting meditation. Then
Saturdays are usually days where I allow some form of creative expression in
the way I approach the rest of my day. I usually spend most of the day with
myself or with loved ones
•
9:30 p.m - 10:00 p.m
Reading - one chapter as usual
Sunday
•
I start the day with sitting meditation
•
1:00 p.m - 2:30 p.m
I will read my journal, logs and saved charts. The goal is to learn something new
about the market’s behavior but also mine – what I did right, what I did wrong
and where I could have done better
•
2:30 p.m – 4:00 p.m
Back-testing and research
In the following sections I will elaborate a little bit more on some of the
individual rituals you see on the schedule – i.e., the self-affirmation technique I
use, the kind of sitting meditation I do, and so on. But for now, as you can see I
have something planned every day of the week, with the exception of Saturday.
This prevents me from having to think about something to do. When we leave
our mind the choice to choose what to do, guess what? It is going to have a
tendency to procrastinate. When the plan is already laid out, there is no place for
decisions, dilemmas, or even thinking for that matter. All you have to do is show
up every day. One thing I want to point out is that my schedule has evolved over
time to fit my needs at the moment. You should expect yours to do the same.
Test, tweak and eventually find something that suits you best, but be strict about
the rituals. Once you have set up a task to do as part of your rituals, try your best
to stick to it and be done with it within the set time frame. In the end, sticking to
rituals is just a function of your desire. How much do you really want that
trading success? Close your eyes and take a deep breath before answering this
question. Seek within yourself. Look beyond your fears – in the deepest part of
your unconscious mind you will find the truth. The unconscious mind never lies!
If you find that the answer is a resounding “A hell of a lot”, then commit to it.
There is no free lunch – you have to do the work. When you make a
commitment to your true self, you have to stick to it. If you do stick to it no
matter how hard it is, you will acknowledge and honor your true self. Doing so,
profoundly changes something in you. The caterpillar finally becomes the
butterfly.
DAILY AFFIRMATIONS
“Change is from inner to outer – We start by dissolving our attitude, not by altering outer conditions” Bruce Lee
Our lives are pretty much self-fulfilling prophecies. When we deeply believe in
something our behavior is usually aligned with that belief. So, every time we tell
ourselves “I can’t”, we are creating a feedback loop that is a reminder of our
limitations – and our behavior generally follows. Similarly, if we tell ourselves
“I can”, our behavior usually goes in line with such a statement. An affirmation,
therefore, is defined as the assertion that something exists or is true. An
emerging set of published studies15 suggest that a brief self-affirmation activity
during the day can boost the physical and emotional wellbeing of a person. It
can also protect against the damaging effects of stress on problem-solving
performance, hence, accelerating one’s ability to achieve his goals. Napoleon
Hill, one of the earliest producers of modern genre personal-success literature,
interviewed many of the most successful people of his time – Thomas Edison,
Henry Ford, and so on – and the one thing that they all seemed to have in
common was that they acted as if what they desired most already existed before
they had it. This was the core philosophy of Hill’s work, and it is a good
representation of the role affirmations plays in long-term success in any field.
By stating affirmations to yourself in a mantra-like fashion and repeatedly over
weeks, months and years your mind becomes trained to think in a different way.
If you don’t think this works think about your fears for a moment. For example,
if you are afraid of spiders, you are literally using affirmations and visualization
to train your mind to produce a state of panic whenever your see one. This also
works in reverse – people who are confident have affirmed, at every opportunity,
to themselves that they are confident in every situation, whether they did it
consciously or not. We all use affirmations in our lives without even knowing
that we do, so why not put affirmations to good use and consciously train your
brain to a better way of thinking. Below is an example of 8 statements for
mental reprogramming that you can implement as part of your daily rituals. You
should read them out loud to yourself every morning, preferably before
engaging in any trading activity. Doing this on a daily basis will contribute to
keeping you positively focused on the process of practicing proper trading
habits.
Statements
1. I objectively define my edge in the market
2. I act upon my edge without hesitation, doubts or fears
3. I pre-define my risk on every trade I place. I completely accept that risk and I
am willing to completely let go of that trade once it’s on
4. I continuously monitor my susceptibility to making errors by keeping detailed
logs for every trade I place
5. I have completely relaxed self-assurance. I am sure of myself in all situations
6. Markets are uncertain and I am at peace with it. I accept the losses it hands
me with gratitude for they are learning experiences. I also accept the wins with
gratitude, however I let go of all of these outcomes.
7. I know when I am prone to making trading errors and I am aware of the
mental occurrences happening within me at that time. I feel them; I breathe into
my lower abdomen and I watch them pass. This allows me to regain objectivity.
8. I am easily able to relax as deeply as I wish at any time. I use this ability to
conserve my energy.
I suggest these 4 steps to get the most out of these affirmations:
1. Write out/ print the affirmations, and keep them on your trading desk so that
they are within sight.
2. Never start your trading day without those affirmations. A positive mindset +
a positive expectancy methodology= success
3. Some days you won’t be in the mood for reading the affirmations. Read them
anyways – that is when you need them the most. The fact that you’re doing what
needs to be done, instead of doing what is easy will assert something within you.
You will be telling to your subconscious, “No, I really want this. I am committed
to making trading success a reality for me.”
4. Once or twice a week, sit down and write out the affirmations that are
specifically hard for you to implement. Writing them down will help consolidate
them inside your mind.
Feel free to retract or change some of those statements so that they can better fit
where you are heading in your trading journey. You can add statements that
cover other areas of your life as well. They all don’t have to be specifically
trading-related. For example, when I feel low on a certain day for x number of
reasons, I take a deep breath and I affirm the following to myself: “I am so
grateful for my life. I am grateful for having been granted the opportunity to
experience life, with its ups and downs. I am grateful for all the range of
emotions I feel, joy, sadness, hope, despair, etc.” This affirmation has such a
powerful effect on me that the mere thought of it, an intense feeling of gratitude,
courage, joy, and hope emerges within me. So play with it and see what
affirmations work for you. One thing to keep in mind, though, is to keep your
new statements positive and in the present tense. Every negative thoughts or
words are considered as negative affirmations and these can be even more
powerful than positive affirmations because for some reasons we often find
them easier to accept. The brain doesn’t seem to automatically process negative
languages. Any statements that include the word “don’t” or prefixes such as
“un” or “non” are initially (subconsciously) processed in the positive. If I tell
you not to think about a pink elephant for example, you automatically think
about it even though I specifically asked you not to. This is why we should avoid
using statements in the negative. Rather than focusing on an outcome that is not
desired, focus on what is desired.
Your subconscious mind is listening to everything that you say to yourself, and
it doesn’t have a filter. It will take in everything that you say, and over time,
unconditionally accept the most consistent messages as reality – whether this is
actually true or not. It doesn’t matter if you are only kidding, or don’t truly
believe the things you say to yourself. Your subconscious doesn’t have a sense
of humor, and it is completely literal, therefore, start making yourself more
aware of your self-talk.
MEDITATION
“All of humanity's problems stem from man's inability to sit quietly in a room alone” Blaise Pascal
One day I was walking down the streets in the suburbs of Seattle. I saw a little
boy with a red plastic bag attached to his neck. The plastic bag was cut in a way
that it resembled a cape. On the little boy’s t-shirt there was a superman symbol
– which I’m assuming he must have drawn himself. He was there playing on his
own, completely immersed in his own world while his dad was cutting the grass.
He was so happy, so full of joy, so full of life. No worries, no cares, no limits, no
nothing. He could fly. We’ve all experienced that when we were kids. We could
be whatever we wanted to be. We could do whatever we wanted to do. In an
instant we could find ourselves in the vast savannas of Africa, or on a space
cruise, without ever leaving the comfort of our room. It’s an amazing feeling.
We come to this world free of worries, boundaries, self-limiting beliefs, and so
on. Everything we envision we have. We are able to make all of our dreams
come true. I remember when I was a kid, I desperately wanted this brand new
slot-car racing toy, but I never got it. I ended up drawing the circuit on a piece of
paper. I used rocks as a substitution for cars and for me that was the real thing. I
had the game I wanted, and I was happy! Literally, we are limitless; however, as
we get older and older we get influenced by the world. We are told what to do
and how to behave. Our urge to conform makes us lose our wings and our
imagination. We give up on our dreams and aspirations so that we can “fit in”
better. As time goes by, we stop listening to our own heart and intuition. We start
giving an enormous amount of attention to the noise outside of ourselves, so
much that it drowns our inner self. We forget about our greatness, we lose our
adaptability and eventually we forget about ourselves. We forget who we really
are, and we start living a life that is not ours. We live a life that has no true
meaning to us and we believe that this is the way things should be.
Many of us experience a profound sense of disconnection – we feel disconnected
from our true essence, our core, our true self. This can come from many sources
—like distracting ourselves with sex/drugs/alcohol, the busy-ness that comes
with actively engaging with the markets, staying in an unsatisfying relationship,
or for some being stuck in a dead-end job. Whatever the source, the outcome is
always the same: we feel lost, out of touch, short on substance. Like a hamster in
a wheel, we go through the daily routines of our lives, while something deep
inside longs for more. We sense that we have a purpose—we can almost touch it
right in front of us—but it remains elusive, just out of reach. I have experienced
this sense of disconnection many times in my life, sometimes on a daily basis.
The good news is that no matter how far we have strayed from our deeper self or
how lost we are, we can always return home.
The habit of meditation is one of the most powerful things I have ever learned.
Once I discovered it, my whole life – my perspective of it – started shifting
right before my eyes. The "point" of meditation isn't to get rid of your mental
clutter — but to get really familiar with it. Then, over time, be able to let go of
concepts of duality, past, future, and other distracting thoughts. The only thing
that remains is the present. Even if only for a short instance – time flies, ego
vanishes, and all aspects of awareness go through the roof. In a sense, the feeling
I get from it is that I am returning home to my true-self16 and I gain a real sense
of appreciation for my whole existence. What boggles my mind is how such a
simple, yet profound exercise can transform us in ways most will never even
think are possible.
In the Buddhist belief system, the Buddha is said to have attained enlightment
under the Bodhi Tree where he had been sitting in a meditative state for weeks.
It is said that soon after his enlightenment he passed a man on the road who was
struck by his extraordinary radiance and peaceful presence. The man stopped
and asked: “You seem very special. What are you? Are you some kind of an
angel?” “No,” the Buddha replied. “Well, are you some kind of god then? You
seem un-human.” “No,” he said. “Well, are you some kind of wizard or
magician?” “No,” he replied. “Well, are you a man?” “No.” “Then what are
you?” At this the Buddha answered, “I am awake.” In those three words – “I am
awake” – he gave the whole of Buddhist teachings. The word “Buddha” means
one who is awake. To be a Buddha is to be one who has awakened to the nature
of life and death, and in essence freeing his mind in the midst of this world. The
practice of meditation does not ask us to become a Buddhist or a religious
person. It invites us to fulfill the capacity we each have as humans to awaken.
Therefore, in that respect, meditation is simply brain exercises. It comes from a
2,500 year old tradition of using an anchor like the breath to stabilize attention
and bring awareness to the present moment. This is achieved by an experience I
call “the disengagement of the self.” The identification of a self as being
separate from everything else is a fallacy in and of itself. It is an illusion that
consists of the belief that there is an "I" that is not part of anything else. On this
basis we think, "I am one and unique. Everything else is not me. It is something
different." From this identification of the self stems our dualistic views on
everything. Since there is an "I," there are also "others." As soon as this split is
made, it creates separation. It creates two opposite ways of reaction: "This is
nice, I want it!"; "This is not nice, I do not want it!" “This is good”; “This is
bad!”
Meditation helps to close our perception of duality – even if it’s only for a short
moment. It helps in restoring our awareness of the present by making it clear to
us that there is no good or bad. What is, just is. We are the ones who put context
behind our experiences through our set of filters. An experience is just an
experience, and we can learn to appreciate it as it is. Meditation also helps us
see that we are not just a consciousness in a body: we are the body. The sense of
being an ego, an “I”, and a passenger of the vehicle of the body is merely an
illusion. That sense of being a subject, a locus of consciousness inside the head
makes no neuro-anatomical sense17. There is no place in the brain where an ego
would be hiding. Everything we experience: our consciousness, our emotions,
thoughts, moods, and the impulses that initiate behavior – all of these things are
delivered by a myriad of different processes in the brain that are spread out over
the whole of the brain. It is possible to lose this feeling or sense of “self” that is
the center of experience. For thousands of years people have claimed that they
were able to do so through meditation. Rather than having the experience of
watching over your shoulder and being separate from your experiences but at the
same time appropriating the experiences, you can just be identical to the
experience. This is classically described as self-transcendence. While this
doesn’t tell us anything about the nature of the universe nor does it make any
religious dogma any more plausible, it does tell us something about the nature
of human consciousness. We are lost in thoughts 99% of the time, and much of
this thinking is what makes us unhappy. Therefore, if we lose our sense of self,
by default our mind calms down and the thinking diminishes – it can even stop
for a few moments. Our experience of the world then becomes more accurate or
more faithful to the way things really are.
In addition to allowing us to experience the world in an undistorted way,
meditation has several other benefits. Jonathan Haidt (researcher, psychologist
and professor at the University of Virginia) is one of the world’s leading thinkers
in positive psychology. In his book called, The happiness Hypothesis18, he
explains the following:
“Suppose you read about a pill that you could take once a day to reduce anxiety and increase your
contentment. Would you take it? Suppose further that the pill has a great variety of side effects, all of
them good: increased self-esteem, empathy, and trust; it even improves memory. Suppose, finally, that
the pill is all natural and costs nothing. Now would you take it? The pill exists. It’s called meditation.”
Ray Dalio, one of the most successful hedge fund managers in the world
attributes his success to a daily meditation regimen. When he was questioned at
a New York Times19 conference in 2013, he said the following:
"I've been doing it for 44 years, twice a day for 20 minutes. It's such a great investment ... more than any
other factor in my success. It opens up the two sides of the brain, brings a creativity and openmindedness. It allows you to clear your head and bring equanimity to everything."
Even Steve Jobs was an adept of meditation. In an interview with Walter
Isaacson20 for his biography, Jobs said:
“If you just sit and observe, you will see how restless your mind is. If you try to calm it, it only makes
things worse, but over time it does calm, and when it does, there’s room to hear more subtle things —
that’s when your intuition starts to blossom and you start to see things more clearly and be in the present
more. Your mind just slows down, and you see a tremendous expanse in the moment. You see so much
more than you could see before. It’s a discipline; you have to practice it.”
Various scientific studies21 confirm that meditation is extraordinarily powerful.
A few of its benefits are that it reduces anxiety, decreases pain (physical and
emotional), decreases depression, and anger. On the other hand it can increase
attention, focus, immune system, will-power and overall wellbeing. It can
strengthen our mind and helps us put our attention where we want and when we
want, thus, decreasing impulsivity. In trading, we all know by now what
impulsivity does to our bottom line; therefore, meditation is the best tool we can
use to help us reach a present awareness that we would otherwise not be able to
reach. This present awareness is essential because the degree to which we are
able to catch ourselves before committing a mindless trading mistake is the
degree to which we’ll succeed in the markets.
If we are to trade successfully, we have to be able to pay attention to what we are
thinking; saying, doing or feeling prior to entering any trades; during the
moments the trades are already on, and finally after the trades have been exited.
In other words, we have to become objective observers to this trading process. It
is so important to do that as traders as it allows us to refocus and redirect our
focus of attention on the object of our goal, thus erasing conflicting and
competing thoughts. Institutional traders have their managers to guide them and
help them stay on course; however, we – individual traders – don’t have the
luxury of having such an objective observer that would prevent us from
deviating from our plan and help us stay focused in a way that is consistent with
our objectives. We have to learn how to do it ourselves, and that is where
meditation proves to be valuable.
There are many ways we can practice meditation. My practice has evolved over
time to fit my needs. The kind of meditation that I do now is called “Shikantaza”
which is a Japanese translation of a Chinese term for Zazen introduced by
Rujing, a monk of the Caodong school of Zen Buddhism. The aim of it is to just
sit, that is, suspending all judgmental thinking and letting words, ideas, images
and thoughts pass by without getting involved in them. The idea is to try to
focus on what is here and now. Regardless of what you think it should be or
shouldn’t be, if it feels good or bad, your attention remains on your breath.
For beginners, here is how you start:
1. Find a quiet spot. It really doesn’t matter where you sit as long as you can sit
without being bothered for at least 15-20 minutes.
2. Sit comfortably facing a wall. The wall represents the difficulties we all face
in life. Sitting facing a wall allows us to face our difficulties. If we can cultivate
equanimity while we are facing that wall, then nothing prevents us from doing
the same thing when we are faced with difficulties in life. Also, how you
position your body has a lot to do with what happens with your mind and your
breath. The most effective positioning of the body for the practice of Zazen is
the stable, symmetrical position of the seated Buddha. Sitting on the floor is
recommended because it is grounded. Use a zafu—a small pillow—to raise your
behind just a little, so that the knees can touch the ground. With your bottom on
the pillow and two knees touching the ground, you form a tripod base that is
natural, grounded and stable.
3. Fold your hands in cosmic mudra. The right hand is held palm up holding the
left hand which is also held palm up, so that the knuckles of both hands overlap.
If you’re right-handed, your right hand is holding the left hand; if you’re lefthanded, your left hand is holding the right hand. The thumbs are lightly
touching, thus the hands form an oval, which can rest two fingers below the
belly button. The cosmic mudra is there to help turn your attention inward.
4. Focus on your breath. As you breathe in, follow your breath in through your
nostrils, then into your throat, then into your lungs and belly. The breath is the
vital force; it is the central activity of our bodies. Mind and breath are one
reality: when your mind is agitated your breath is agitated; when you are
nervous you breathe quickly and shallowly; when your mind is at rest the breath
is deep, easy and effortless.
Again, the object of this meditation exercise is to be able to make a clear
distinction between the moments where one is fully present and his/her
distracting thoughts. Typically, when we find ourselves in a distracting thought
we simply acknowledge the thought, then we go back to focusing on our
breathing. As we continue to do this exercise day in and day out – as we
continue to practice – what we will find is that the amount of time that it takes
for us to recognize and acknowledge a distraction will start to collapse. As it
gets smaller and smaller, there will come a point where the distraction and the
awareness of the distraction will become virtually simultaneous. At this point,
we would have become objective observers to our own stream of thoughts. We
would have trained our mind to be more present. This is particularly beneficial
when trading the markets because the first step towards changing repetitive
patterns of negative behaviors is to recognize them in real time so that we can
act on them, instead of recognizing them in hindsight.
When I first started meditating a few years ago, I remember that I was expecting
something to happen. I expected that I would sit in the lotus position and that
something magical or outstanding would happen. Looking back on this it seems
ridiculous. Of course nothing really happened. I just sat there and eventually I
got bored. I remember hearing birds outside and I thought to myself, “Maybe I
could count how many birds I can hear.” Here are two things I didn’t know back
then:
1. The goal of meditation is to have no goal. Science has confirmed to us the
benefits of having a regular meditation practice, and we should keep this mind.
However, we shouldn’t practice meditation with the expectation of obtaining
something from it because the moment we expect something to happen we are
instantly taken out of the experience of the present moment. But wait a minute,
isn’t the goal of having no goal a goal in and of itself? It is, so let me rephrase:
the goal is to have no goal but the goal of having no goal. I hope I didn’t lose
you. Consider this adage: “You’ll never get anywhere unless you know where
you’re going.” This is common sense but common sense is not always right. To
prove this, conduct a simple experiment: go outside and walk in a random
direction. Feel free to change directions randomly. After 20 minutes, maybe an
hour, you’ll be somewhere. It’s just that you didn’t know you were going to end
up there. And there’s the rub: you have to open your mind to going places you
never expected to go. If you practice without goals, you will explore new
territories. You will learn some unexpected things about yourself and the nature
of your consciousness. You will end up in surprising places. The path – your
practice – becomes the goal.
2. The quality of our meditation practice has a lot to do with what we bring into
it. For example, if you had a bad day in the markets you are going to bring that
state of mind into your meditation practice. However, the only agreement that
you have to make with yourself is that if your mind begins to wander—if you
become aware that what you’re doing is thinking about your losses – you will
look at the thought, acknowledge it, and then deliberately and consciously let it
go and bring your focus back to your breath. Each time you return to the breath
you are empowering yourself with the ability to put your mind where you want
it, when you want it there, for as long as you want it there. If you find this hard
to do at times, especially if you are in a crisis or involved in something
important in your life, don’t worry too much about it. It is still a productive
meditation as long as you followed your intention of returning to your breath
whenever you caught yourself getting lost in distracting thoughts. Don’t treat it
as a failure; treat it as another data point [refer to the previous chapter]. Don’t
use meditation to suppress thoughts or issues that need to come up. Instead use
it to learn to accept and love everything that is inside of you as thoughts and
feelings. Let the recurring thoughts happen; engage them; let them run their full
course. But watch them; be aware of them. Allow them to do what they have to
do; let them exhaust themselves. Then release them; let them go. Come back
again to the breath.
Sitting and paying attention to our breath is a practice of mindfulness. It is a
way to train ourselves to focus our attention on something specific. Out of that
stillness, our whole life arises. If you don’t get in touch with it at some time in
your life, you will never get the opportunity to come to a point of rest. Once you
have practiced the discipline of seated meditation for a while, you will start to
see the repercussions in many aspects of your life. For example:
• When you engage in your everyday rituals, you will find that most of the time
you are 100% there with the tasks.
• If you are compelled to take a careless action in the markets during market
hours, you will take a moment to pay attention to your breath, and think about
what you are about to do. You won’t be judging or weighing; you would just be
an observer. Soon you will notice that the impulse would gradually dissolve like
a spoon of sugar in a cup of tea.
• When you take a walk, instead of thinking about trading, profits, losses, things
you need to do later, etc., you will be more aware of your breath, your body’s
sensations and the things around you.
• When you eat, you will just eat. Your focus of attention will be on the food, on
your feelings as you eat, and on the sensations.
These are just examples. If you don’t get to this point after a few months of
regular practice, don’t give up. It is a very important part of being alive and
staying alive: the ability to awaken. Therefore, stick with it; the more you stick
with it, the more you will be showing to your true self that you are 100%
committed to this. Nothing goes unseen by our unconscious mind.
THE DISREGARDED EDGES
“Every decision you make - every decision - is not a decision about what to do. It's a decision about who you are. When you
see this, when you understand it, everything changes. You begin to see life in a new way. All events, occurrences, and situations turn to
opportunities to do what you came here to do” Neale Donald Walsch
Unwavering consistency is a requirement for achieving excellence; therefore, as
we saw, setting up a strict set of rituals that allows us to manage our time
efficiently is a must. This kind of unfaltering discipline is necessary because it
is important that we get the most out of our days. Now, one of the common
associations that many people make is that traders enjoy lavish nights out on a
regular – if not daily – basis. These kinds of associations are reinforced even
more in the collective mind with movies like The Wolf of Wall street, which
glorifies an excessive lifestyle. Despite the controversy surrounding the movie,
searches for stockbroker jobs on Indeed.com rose to a near 80% in the U.S
around its release22. A quite similar reaction was also observed in the 80s around
the movie Wall-Street where its alluring effect inspired many would-be bankers
and traders. The movie eventually became a staple in popular culture. This has
to tell us one thing: people fantasize about the idea of easy money, easy life,
with little to no efforts. However, reality is a lot different. Trading requires hard
work and dedication. Furthermore, it is a game of inches where every little piece
of an edge that can contribute to providing you with an even greater edge in the
markets shouldn’t be dismissed. It is often what makes the difference between a
winning trader and a losing trader, a profit and a loss, outstanding returns and
average returns. In addition to having a set of rituals to guide your day-to-day
actions, sleep, exercise and nutrition are as well important. These are, what I
call, the disregarded edges because it seems like everybody knows their
importance in theory, but in practice few actually strive to apply what they know.
Sleep
In order for us to gain a greater edge in the markets we have to stack the odds in
our favor and this starts with apparent simple things like having a decent amount
of sleep time. This allows us to function properly during the time that we are
awake. Getting enough quality sleep reduces stress, boosts memory, confidence,
and concentration. On the other hand people who are sleep deficient are less
productive, they take longer to finish tasks, have a slower reaction time and
make more mistakes. It is just impossible to perform at a professional level
without proper sleeping habits and one would assume this to be common sense,
but in actuality how many people do have such habits?
A lack of sleep can be a major drag on happiness. For a long time, I
underestimated its importance. It wasn’t until I learned the following two things
that sleep took on a whole new level of importance for me:
• Your ability to take quick and rational decisions in the markets will drop
considerably if you don’t get enough sleep.
• If you have some destructive habits that are engrained in you and you are
working on implementing a new set of positive habits, a lack of sleep will cause
your brain to go on “autopilot.” Therefore, your brain will revert to these old
negative habits because your motivation to stick to the new positive ones will
drop tremendously.
Sleep is a deep part of the body’s rhythms, and it’s one of the harder habits to
change. I have changed my sleeping patterns a number of times, and know that it
can be difficult. That being said, it is changeable. I love the idea of being like a
cat. In my mind, it means sleeping peacefully, care-free, without the worries that
plague us humans and keep us from getting the amount of rest we need to
function properly [although in reality this might be a conjecture – many cats,
I’m sure, don’t always enjoy restful sleeps]. So how do we become cat-like in
our sleep? I don’t have all the answers, but here are some of the things that have
worked for me:
• Physical activity. A good workout, run or yoga session usually gets me nice
and tired. Even if the activity is early in the day, I often go to bed with a tired
body, and I look forward to the rest. Don’t work out right before bed though, this
will excite your body and mind.
• Getting up early. You can get your body to shift its sleeping schedule by slowly
getting up earlier. Try 15 minutes earlier than normal for a week, then another
15 minutes. If you get up earlier, you’ll be a bit tired during the day, and when it
comes time to go to sleep, you’ll enjoy the rest.
• Establishing a bedtime ritual. It takes time to unwind the body and mind. At
least an hour before bedtime, I start slowing down. I put away things like
phones, tablets, computers, etc. I lie down and read a book (not on my laptop).
This kind of ritual helps establish in my mind that it’s time to sleep, and my
body takes this cue and begins to prepare itself.
• Clearing the mind. Sometimes, we can have something spinning around in our
head. Sometimes it is replaying something that has happened, or things that
someone said, and other times it is worrying about something coming up, or
planning. I usually meditate at night before bed time to clear my mind of my
day.
• No Parties. The most successful traders I know of live a very simplistic
lifestyle. They have a strict schedule that they whole-heartedly adhere to. They
value their sleep time and go to bed at a reasonable time every night because
they know that a good night sleep will positively impact their decision-making
process the next day. Therefore, no time for parties! At least not on a regular
day-to-day basis. If you want to acquire even the slightest chance at competing
in an environment where evolves the smartest minds of the world and some of
the most disciplined people you’ll ever find, you have to prioritize your sleep.
I will admit that I don’t always sleep soundly. However my sleeping problems
usually never last because these steps I just outlined always prepare me for
optimal sleep.
Exercise
It is no secret that exercise brings physical wellbeing that is hard to get from
doing any other activities, however, for the past decade scientists have pondered
on how exercise could boost brain function as well. Regardless of age or fitness
level, studies23 show that making time for exercise provides some serious mental
benefits from the reduction of stress, the improvement in self-confidence, to the
alleviation of anxiety and the sharpening of memory. Paradoxically, those are the
main areas of our mind where we need to work on (or sharpen) if we want to be
become good traders. In the markets, we are constantly bombarded with
information which causes our emotions to fluctuate on a regular basis. I have
found that running for a minimum of 20 minutes every day has a tremendous
effect on my mood and overall mental state. It helps me keep a clear my mind
while also helping me evacuate any tensions I may have accumulated from
trading losses I may have experienced in the morning. Therefore, when I come
back to my trading station, I am in a better state to take the most appropriate
decisions in the moment.
As exercise, I also do Yoga which is an ancient South Asian science. In our
hectic Western world its justification is greater than ever. In general, its purpose
is to provide you with a better life through greater self-insight into your body
and thoughts. Yoga postures in that sense are just moving meditation. It is a
method to connect body, mind and soul so that you reconnect with your inner
being. Since one of the purposes of yoga is to gain complete bodily control –
especially control of the breath – through a strict array of poses, it helps us sit
with uncomfortable sensations, feelings and emotions, and “forces” us to deal
with them. Trading, in the same respect, is an uncomfortable process as it
requires us to take uncomfortable or counter-intuitive decisions at times. An
exercise like yoga could definitely help us develop the kind of mental fortitude
that could have a dramatic impact on our trading results.
Whichever exercise options you choose, don’t rush things; start off slowly and
build up gradually. It’s ok if you missed one day of physical activity. For
example, if someone who is on a strict diet slips and eats a good portion of pie
for Thanksgiving, it is not the end of the world. One day doesn’t make a full
year. If that person keeps her consistent approach regarding her diet then that
single day won’t make any difference to her bottom line. Similarly, someone
who lifts weights and who doesn’t go to the gym for a few days in a row will not
experience an instant decrease in his muscular mass, especially if he gets to his
consistent routine the following week. What counts is that the sum of all your
positive habits is greater than the sum of all your negative ones. But always keep
in mind that a regular exercise will not only have an effect on your physique, but
also your mind – they are one! In turn this will impact your ability to perform
your best while trading.
Nutrition
From a young age we are taught that eating well helps us look and feel our
physical best. What we are not always told is that, just like exercise, good
nutrition significantly affects our mental health as well24. A healthy, wellbalanced diet can help us think clearly and feel more alert while also improving
concentration and attention span. Conversely, an inadequate diet can lead to
fatigue, impaired decision-making, slowed down reaction time, stress and
depression. The food we eat is often regarded as just fuel for the body. Energy is
delivered to the engine (the stomach) and the system (the body) stays running.
However, as you know, the type of fuel you put in a car will greatly affect the
way it functions. Similarly, the type of food we eat and its quality also plays a
crucial role in determining our physical and mental condition. That is why
processed foods are the worst kind of food you can put into your stomach.
It is very important that you listen to your body and pay attention to how you
feel in it every day. A lot of un-comfortableness, illness and general moods can
be cured by simply eating well. You may know that French fries soaked in oil or
soft drinks with sugar are fattening, but you may not consider the fact that they
also reduce your ability to concentrate, make you moody and sluggish. However,
if you eat lots of vegetables, fiber, chicken, fish, and if you drink a lot of water,
you will quickly experience the difference. You will feel more balanced, more
energized, lighter, your skin will glow and your brain will work better.
Remember, every little thing that gives you an edge in the markets shouldn’t be
ignored even if it is as simple as eating or hydrating yourself. All these little
things will stack up together creating an even greater edge. Once you are on top
of your form – once your body and mind are both in sync, only then will you be
able to perform to the best of your abilities in the markets. A positive mind + a
positive expectancy model (proven trading strategy) = success!
QUESTIONS
Are you struggling with negative habits that stand between you and your trading
success? How did you acquire those habits? Do you have any positive habits?
How did you acquire them? How much would you rate your level of intention
and commitment to breaking free of your negative habits?
Have you noticed any negative patterns in your self-talk? Elaborate!
Trading is a game of inches. How do you cultivate your mental edge in the
markets?
Hopefully what struck you the most in my schedule is how much time I don’t
spend trading. I think this is very important. Our ability to respond adequately
to market action shifts constantly throughout the day; therefore, I find it
counter-productive to stay in front of the screen all day watching price action.
As a matter of fact, a research study published by the National Academy of
Sciences25 examined the factors that impact whether or not a judge approves a
criminal for parole. Around 1,112 judicial rulings over a 10-month period were
examined. The natural assumption to have here is that the judges were
influenced by factors like the type of crime committed or the particular laws that
were broken. However, reality is surprisingly different. The choices made by
judges were impacted by all types of things that shouldn’t have an effect in the
courtroom. For example, at the beginning of the day, a judge was more likely to
give a favorable ruling about 65 percent of the time. As the morning wore on and
the judge became more and more drained, the likelihood of a criminal getting a
favorable ruling dropped to zero at a steady rate. After lunch, however, the
judge would return to the courtroom refreshed and the likelihood of a favorable
ruling would immediately jump back up to 65 percent. However, as the hours
moved on, the percentage of favorable rulings would again fall back down to
zero by the end of the day. It didn’t matter what the crime was – rape, theft,
murder – a criminal was much more likely to get a favorable response if their
parole hearing was scheduled in the morning (or immediately after a food
break) than if it was scheduled near the end of a long session.
This has to show us the importance of taking breaks throughout the day. Being a
full-time trader doesn’t mean that you have to stay in front of the screen all day.
If you do so, you will end up shooting yourself in the foot. Trust me on this; I
have done it too many times. Nowadays, trading the markets (placing order and
exiting positions) is only a small fraction of my daily schedule. I prepare my
plan of action outside of market hours. This allows me to use active trading
hours to simply execute my plan. Such planning and time away from screens
prevents me from self-sabotaging myself. But whenever I am trading, I am fully
there. I am 100% committed to the task. My beliefs, state of mind and actions
are aligned so that I am able to execute my plan to the fullest extent of my
abilities. This more balanced approach to trading has definitely changed my
whole trading experience. I approach the markets in a more relaxed way, and my
results are far more consistent.
We don’t have to read a ton of books to understand the role rituals and habits
play in our lives. When we try to change our behavior, we often strategize about
our motivation and judge our future success on the basis of our self-control.
However, what we should be thinking about instead is how to set up good rituals
and habits because they persist in the midst of laziness, tiredness and an overall
lack of energy to exert self-control. They are the stepping stones on the way to
success. Once you have developed a daily set of rituals that fits your own needs,
you will find that you not only get more things done because you now remember
to do them, but you also become more efficient at what you do day after day.
Furthermore, it will lay down the basis for skill development, confidence,
domain knowledge, and equanimity. Keep in mind that you will have set-backs on
your way to success and it is fine. This happens to anyone, even to the most
disciplined individuals out there. However, in the end, what counts is that the
sum of all your positive actions is greater than the sum of all your negative ones.
CHAPTER 5
PEAK PERFORMANCE: A QUESTION OF BELIEFS
"Only he who can see the invisible can do the impossible" Frank Gaines
A glass of wine is a glass of wine , no matter in what angle you
stare at it. However, a good glass of wine is specified by its flavors and taste.
Similarly, a trader is a trader regardless of his level of expertise; of what he
trades; his account size, and so on, but a good trader is defined by the
equanimity he displays. He separates himself from the others by the fluidity that
emanates from each and every of his actions. Whether his methodology is
discretionary or systematic in nature, a good trader is mechanical in his process.
Being mechanical doesn’t necessarily mean engaging mindlessly in a process –
quite the contrary, the good trader is present, mind and body, in each and every
of his actions. He is so immersed in the present that he flows with the markets in
such a beautiful and effortless way that it baffles the mind of the layman. This is
so because he assumes mastery over the typical woes that plague the typical
trader – i.e., action or inaction, enough and not enough, fear and greed, right and
wrong, good or bad. To put it another way, self-knowledge has some pretty
amazing liberating qualities.
I like to draw similarities between good trading and free solo climbing which
also requires a total abandonment of ego, beliefs, and futile thoughts in favor of
a total immersion – body and mind – into the present moment. Alex Honnold is
an American rock climber best known for his free solo ascents of big walls. He
has broken a number of records and is one of the world’s best free soloist. On
CBS’ 60 minutes, he is shown climbing the Sentinel Rock in Yosemite Natural
Park. As he moves sideways across a section of flaky and slippery granite rock
he pauses to dry a sweaty hand in his bag of chalk. There is nothing but him, the
wall and the wind. All he has is a pair of rubber climbing shoes and a bag of
chalk – he climbs without ropes or a safety harness. This is what climbers call
free soloing, and it is so dangerous that less than 1% of climbers attempt it.
When Alex Honnold is asked if he gets adrenaline out of this, he replies:
“There is no adrenaline rush. If I get an adrenaline rush that means that something is going horribly
wrong, you know; because the whole thing should be pretty slow and controlled.”
Without any protection, one mistake could be fatal. Similarly, the process of
trading itself should be easy, fluid and natural. The more effortless it is, the
better the chances for success. Just like in free soloing whenever there is
uneasiness, struggling, or pain, it is wrong. You are out of sync – you are out of
harmony with the markets. The perfect trade is one that requires no mental
strain.
I like to push the similarities a tad further and say that a good trader is like
water. Once again Bruce Lee’s philosophy pertains well here. At the age of
seventeen, martial artist and actor Bruce Lee had been training in kung fu for
four years with Yip Man a martial arts teacher and expert. Bruce Lee, at one
point, reached an impasse in his practice. When engaged in sparring he found
that his body would become tense, his mind perturbed. Such instability worked
against his goal of efficiency in combat. It is said that Yip Man sensed his
trouble and approached him. "Lee," he said, "Relax and calm your mind. Forget
about yourself and follow the opponent's movements. Let your mind, the basic
reality, do the counter-movement without any interfering deliberation. Above all,
learn the art of detachment." At this, Bruce Lee understood that he should relax.
However, this raised a paradox: the effort in trying to relax was inconsistent
with the effortlessness in relaxing. In other words, trying to relax is an effort in
and of itself. So in the end he found himself back in the same situation. Again
Yip Man came to Bruce and said, "Lee, preserve yourself by following the
natural bends of things and don't interfere. Remember never to assert yourself:
never be in frontal opposition to any problem, but control it by swinging with it."
After that, Bruce took a week off and spent many hours in meditation and
practice, with nothing coming of it. Finally, he decided to go sailing in a junk
(boat) where he would have a great epiphany. “On the sea”, he said, “I thought
of all my past training and got mad at myself and punched the water. Right then
at that moment, a thought suddenly struck me. Wasn’t this water the essence of
Kung fu? I struck it, but it did not suffer hurt. I then tried to grasp a handful of it
but it was impossible. This water, the softest substance, could fit into any
container. Although it seemed weak, it could penetrate the hardest substance.
That was it! I wanted to be like the nature of water.” At that precise moment,
Bruce Lee realized that in order to control himself he needed to accept himself.
He lay back in the boat and let it drift of its own accord. He was at peace with
himself and his environment. Bruce had not only discovered the state of nomindedness; he came to see his unity with everything.
The good trader is shapeless and formless just like water. You strike it and it
does not suffer. When you pour water in a cup, it becomes the cup. It flows
unattached, boundless, and adaptable. The good trader shares similar
characteristics. He is also unattached to any trading outcome; his wellbeing does
not cling onto any trades. He is boundless in the sense that he doesn’t put any
limits on what he wants and on what he thinks is achievable. What his mind can
conceive he knows he can get – be it, despair, frustration, happiness, hope,
successes, failures, etc.; therefore, he works towards creating the type of life and
experiences that provide him with the greatest level of satisfaction. Lastly, he is
adaptable. His expectations are in line with what the markets can realistically
make available for him. He is flexible in his assumptions and has evolved to a
point where he doesn’t take any loss personally; he views them the mere cost of
doing business.
If our trading journey doesn’t put us on a path to becoming better versions of
ourselves, then I don’t know what does. The constant uncertainty we are faced
with on a moment-to-moment basis in the markets is conducive to the
exploration of better alternatives to fulfill ourselves. These better alternatives
come through an exploration of our true self. In turn this discovery of who we
are becomes the ultimate prize far beyond any monetary rewards. Getting to this
point requires three particular changes to occur in our mind. I will elaborate on
them.
Embracing failure
I have failed my way to where I stand in life today. My path has been filled with
mistakes, failures, and drawdowns. To a certain degree I still experience those in
my every day-to-day life; yet, I am sitting here today, writing this chapter with a
clear vision in mind. It is to hopefully convey to you the truth about what it
means to lose, to fail and to fall. All these are part of the human experience and
are as – if not, even more – important than successes. This might not be
something you are used to hearing; yet, it is noteworthy. We all evolve in a
society that has a phobia of failure. Early in life we are taught that being wrong
isn’t an option, and that failure is something to be ashamed of. As kids we soak
in what comes our way just like sponges. We naively trust that the people who
play authoritative figures in our lives – teachers, parents, relatives, etc. – know
better. But they don’t always. Sooner or later what is passed on to us (voluntarily
or not) becomes part of our identity, and consequently we start dreading the very
experiences that allows us all to grow as individuals in the first place. We start
taking failure as a sign of weakness and for some this becomes the cause of
numerous sufferings.
The reality is that failure and success are intricately intertwined. Since failure is
a function of trying, one of the best ways to measure your progress at something
is to count the number of setbacks and failures you have had. If you haven’t
failed yet, chances are that you aren’t trying very hard. It is no coincidence that
the most successful people throughout history are also the ones who have failed
the most. Success is rarely the unrealistic straight line you see in Figure 3.
Instead it is a path filled with setbacks, mistakes and failures. It is an erratic and
unregularly spiral. Thomas Edison, who registered 1093 patents – including ones
associated with the light bulb, the phonograph, the telegraph, and cement –
proudly declared that he failed his way to success. When someone pointed out to
him that he had failed ten thousand times while working on one of his
inventions, Edison responded, “I have not failed. I’ve just found ten thousand
ways that won’t work.”
Figure 3. Success is not an unrealistic straight line.
So we have to evolve and free our mind from any stigma associated with
mistakes or failures. We also have to redefine our relationship with risk so that
we can perceive with the greatest degree of objectivity the opportunities it
represents, whether it’s monetary or more in terms of self-growth. The only way
to build the confidence that is required for success is by taking risks. Each risk,
whether it results in a good or bad outcome, will result in a learning experience.
You will learn what works and what doesn’t. Even risks that result in a bad
outcome will build confidence and make future risks easier as your belief in
your own ability to deal with setbacks will be reinforced when you fail over and
over again. You will realize that the beast you had always feared is not as
terrifying as you might have thought it was.
People erroneously see trading success as an event. The truth is that, just like
most significant accomplishments in life, it is the sum of all the risks taken,
mistakes, failures, continuous learning and hard work one had to go through in
order to get there. Success is a process where every win and loss is a data point –
it is not a standalone event. To become the person you know you can be, you
have to be willing to accept failures as learning experiences and be willing to do
more than what you think you can do. Paradoxically, in doing so, you will also
experience the greatest feelings of freedom and satisfaction in your life. So
allow yourself to fail, and to lose. You will immediately see that it wasn’t so bad
after all. Nobody died; you are still there, living and breathing, right? Hopefully,
you have a roof over your head, food to eat, a good bed to sleep on. Tomorrow is
another day and the markets will hand you an equal opportunity. It has no
recollection of what happened the previous day, and the next day it could hand
you the biggest winner of your entire career, as far as I know. We all want to
learn the way to win, but never to accept theway to lose. To accept defeat – to
learn to lose – is to be liberated from it. Once we accept, we become free to flow
and harmonize. Fluidity is the way to a tamed mind.
Focusing on the process
A new study26 made by some researchers at the University of Chicago and the
Korea Business School shows that if we focus too much on our goals, we risk
spoiling our experience of the activities we need to pursue to achieve said goals.
In turn, that makes it far more likely that we’ll drop out early. That is not to say
that setting goals is useless. It is equally important as it fires up our intentions to
engage in the very activities that will help us achieve those goals. However,
once the intention is out there, our focus should revert to the process. When I
was in the process of writing this book, in the last 3 months prior to the release I
had written approximately 40 000 words. Given the fact that I took around 11
months to get to this point, this translates to about 3600 words per month and
909 words per week. It really surprised me because I didn’t measure my
progress in relation to some benchmark. I have never set a word count goal for
any particular day. What I did focus on was writing one paragraph every
Tuesday and Sunday. After sticking to that schedule for 11 months, the result
was this very book you are reading. I knew I wanted to write a book, that was my
goal and I knew that having a process would lead me there. So, I focused on the
process of doing the work, and one small step at a time it grew into something
much bigger. Had I placed my focus on the outcome and the need for immediate
results, it would have put a huge burden on my shoulders. We do this to
ourselves all the time – we place unnecessary stress on ourselves to succeed in
the markets, to lose weight, to do this, to become that. Instead, if we made it an
intention to forget the goal, it would greatly reduce the amount of pressure from
having to achieve something. By focusing on the daily process and trusting that
it will lead us to our desired outcome over time, we can enjoy the present
moment and improve at the same time.
There is no destination in trading; we have to always keep learning and keep
adapting to markets which are ever changing. Therefore, focusing on the process
becomes sine qua non for achieving excellence in such an endeavor. Becoming
the type of person you want to become is about the daily process you follow and
not the ultimate product you achieve because your life today is essentially the
sum of your habits. How good of a trader you are; how physically fit; how
happy; or how cultivated you are – all of those are a result of your habits. So the
more we stretch beyond our comfort zone and make an effort to do what we
know we should do instead of doing what is easy in the moment, the more we
actually strengthen our cognitive ability to control our impulses and make better
choices. The more we strengthen that ability to control our impulses, the more it
becomes part of who we are.
Letting go of obsessive comparisons
One of the biggest reasons we are not content with ourselves and our lives is that
we compare ourselves to other people. We see photos of what our friends are
doing on Facebook and we think that our life isn’t exciting enough. We see
someone else who has a nice job and think that we are not doing that great in our
career. We see someone with a nice physique, and we feel bad about ours. We see
people brag about how they made a killing in the markets, and we think that we
are not going anywhere in our own trading. We read about people who are
traveling the world, learning languages, going to exotic resorts and restaurants,
and wonder why we are not. We spend our time comparing our reality to an
ideal, a fantasy, but it is not a comparison that makes sense. You can’t compare
apples to oranges – but that is what we do to ourselves when we indulge in the
activity of always comparing ourselves to someone else.
Our obsession with comparison stems from our dualistic outlook on life.
However, duality doesn’t exist – it is a self-created illusion. The human brain
isn't divided dualistically. There is no detached observer inside the head who is
observing experience. Experience and the experiencer are a single entity. A cup I
am looking at now is not the same one that I will be looking at in the next
moment. Furthermore, each of you is also looking at it from your own angle,
with your own feelings, and these also are constantly changing. Our acquired
beliefs, and our inherent inclinations and preferences make it that we spare in
comparison, categorization, weighing, judging. In trading we compare our
performance to others, and this is not only damaging to our sense of self-worth
but also to our bottom line results. We don’t all trade the same kind of strategy;
have the same kind of trading capital at our disposal; trade the same underlying
and the same markets. We don’t possess the same level of experience, emotional
makeup, or even the same kind of ability to learn. These things can be worked
on, but the point I’m trying to make is that there are little – to no – points of
resemblance. So there is no valid reason to compare ourselves to others. And
even if every of those things were exactly the same, how would the comparison
be useful? It would be meaningless even then simply because if comparing
yourself to others is the only way you evaluate your worth, you will always be
losing. In trading or in real life, you will never reach a point where you are
better than others in every single way possible. So, why would you want to
engage in such a losing battle? The only person we should compare ourselves to
is ourselves! Enjoy the journey. Learn about yourself as you keep trading. Keep
going, and in doing so, you’ll get better — compared to yourself. If you are
doing better than what you were doing yesterday then you are doing great,
regardless of your results. Instead of trying to be as good as or better than
others, focus your energy on being the very best version of yourself.
Next time you catch yourself using someone else as a benchmark for your own
results – or worth – stop and remind yourself how ineffective this strategy really
is. Instead, compassionately redirect your energy and attention to your own
goals and what is required to achieve them.
Getting in the zone
Unleashing our true potential in the markets requires that we cultivate the ability
to stay fully focused on the present. This is the essence of “flow” or “being in
the zone.” This mental state stems from the liberation from impeding
psychological occurrences. Flow is an optimal state because it involves being
totally focused on what you are doing. When in flow, nothing disturbs or detracts
from this concentrated state. Neither external nor internal distractions take up
mental space. But when the “noise” finally gets to you, you are instantly taken
out of the experience. This present-moment focus – or flow – is congruent with
the way markets were designed to make money available for us because markets
cannot give us prosperity if we cannot execute our model consistently. The
easiest way I can explain this “flow” phenomenon is by taking the example of a
symbiotic relationship that you can observe everywhere in nature. The flawless
execution of our model essentially puts us in a symbiotic relationship with the
markets. It can be described as a relationship of mutual benefit or dependence.
The Egyptian plover-bird, for example, eats food remains off of the crocodile’s
teeth. This benefits both parties as one gets food and the other free dental
cleaning – after a meal the crocodile opens its mouth, and in no time a ploverbird will swing by to clean up the mess. This is not without danger for the
plover-bird. Once in a while one might get trapped between those reptilian
fangs. However, the bird’s ability to get the food out and fly away unharmed is
unshakable, so much that, its actions are easy, controlled and fluid. But, what if
the plover-bird was to overthink and stress about the fact that it might die a
cruel death? It would certainly bring upon itself the very situation it fears.
Furthermore, what if it clinging onto the idea that it has to get fed right now?
This could cause it to overestimate how far it can reach into the crocodile’s
mouth. Within a second or less, the crocodile could close that huge mouth of
his; the bird wouldn’t be able to make it out on time, and our poor friend would
be instantly crushed. In our quest for outstanding trading performance, we can
definitely learn a lot from this. Success is a measure of how much we are
immersed into the process of trading without overthinking. It is a measure of
understanding risk to reward. Lastly, it is a measure of our confidence in our
skills. When we have those three, just like the plover-bird we should be able to
find ourselves in that magical “zone” where attention, aspects of performance
and wellbeing shoot through the roof.
CONSCIOUS COMPETENCE
“Every time we choose safety, we reinforce fear” Cheri Huber
In chapter 1 I laid out two stages of progression – unconscious incompetence
and conscious incompetence – in the ‘conscious competence’ learning theory27.
Progression from the unconscious incompetence stage to the conscious
incompetence stage is often accompanied by a feeling of realization – things
'click' into place and you feel like you have understood a key component of the
trading conundrum – which of course you have. Then comes a point where you
finally enter the stage of conscious competence. You start moving out of a place
of getting things mostly wrong into a place of getting things mostly right. When
you have reached that stage, things start to become more interesting. You are
now able to perform the skills you wanted to acquire in the first place – you are
able to execute your trades without (or with minimal) trading errors, you accept
the risks inherent to any trade you place, you let your trades work without
tweaking them, and you are finally able to see this whole trading endeavor for
what it truly is: a simple act of forgetting the self! While this notion makes
sense to you it is still challenging to act in accordance with it. Being consciously
competent at something means that we are able to perform the act, but we still
need to think about what we are doing; therefore, this is only achieved by care,
thought and effort.
Remember when you first learned to drive a car; at one point you were able to
bring the car from point A to point B, but this definitely required a lot of mental
focus, didn’t it? You had to think about keeping an eye on the rear-view mirror;
you had to think about being very attentive to the traffic and making sure that
you didn’t go too slow, or too fast, all at that same time. You could drive but you
were far from being an expert driver. In the present days, with countless hours of
practice behind you, whenever you drive you don’t even have to think about it. It
just happens without any conscious thoughts from your part. The skills have
become so engrained in you that they are second nature. Similarly, in trading, at
the conscious competence level we still have to restrain ourselves from doing
things that aren’t in our best interest. It is an uncomfortable process. This is not
to say that this is a bad place to be in – quite frankly it can be incredibly
satisfying to be at that level – however, this is where many traders will plateau.
Most will slow down or stop trying once they have reached that level of skill.
That is fine if one’s goal is to merely be good at something. However, if
becoming an expert is the ultimate intention, then it is important to keep
pushing.
Traders often brag on social-medias about the number of years they have been
involved in the markets. Implied within this behavior is the conveyance of the
idea that if you do your time you will become successful. This cannot be any
further from the truth. Time is only one part of the equation. Shaping mastery is
a function of deliberate practice. The difference between simple practice and
deliberate practice lies in the quality of the practice as opposed to merely the
quantity. Consider the activity of two traders practicing on a paper trading
account for one hour every day. Trader A places 2 trades during that hour, and
trader B places 1. Trader B has several tabs opened on his internet browser and
his attention is split between trading, updating his Facebook status, tweeting
about what he had for lunch, watching videos on YouTube and so on. He then
takes several breaks to take calls. Trader A on the other hand is watching how
price action is enrolling. He is taking notes of any pertinent information. His
attention and focus is entirely on his trading and he has specifically asked his
wife and kids not to disturb him during that time. To characterize Trader A and
Trader B’s hour of practice as equal would hardly be accurate. Assuming this is
typical of their practice ritual and they are equally skilled at the start, who do
you think would be the better trader after 6 months? Each trader in the example
could brag about practicing for one hour, but only one of them is practicing
deliberately.
Researchers have noted that top performers in every industry are committed to
deliberate practice26. The best artists, musicians, athletes, CEOs, and
entrepreneurs don’t merely work a lot – they work a lot on developing specific
skills. Just one hour of focus and deliberate practice each day can deliver
incredible results over the long–run instead of simply “putting in your time” and
hoping for the best. The good trader has understood this concept. He is an expert
at practicing. He is an expert at focusing on improving his technique and at
constantly orienting himself to his goals by finding ways to render his process
more efficient. The lesson, then, for expanding our skills is not to let ourselves
lapse into easy, automatic action, but instead to work at the edge of our mastery.
When we are in the process of acquiring and consolidating new skills inside our
mental environment we have to make sure that we are adopting the right
behavior and that we keep pushing, because it is so easy to let ourselves do what
is easy and comfortable over what is hard and necessary. Only when we can
understand the necessity to keep stretching the boundaries of our comfort zone
can we move to the next stage – which is that of the unconscious competence
level.
UNCONSCIOUS COMPETENCE
“We are what we repeatedly do. Excellence, therefore, is not an act but a habit” Aristotle
At this point of your development, you are at one with the markets. What
previously required strong mental focus and determination is now as easy as
breathing. You are able to pull out significant money from the markets on a
consistent basis. You are now a trader with a rapidly growing account. You have
a deep understanding of the dynamics of trading success and you feel a strong
connection to the markets. You equally have a great understanding of yourself –
you are coherent about what you are doing, self-accepting, self-honoring, and
without internal conflicts. You are free from being dependent or reactive in
relation to market action. No need to win, no hurt from losing. Paradoxically,
money starts to take less and less importance in your life. You are not dependent
on trading to fulfill you and this frees your ability to perform at your best in the
markets. You don't get trapped in negative feelings. They don't go round in
circles and get out of control. You don’t experience racing pulse anymore. Being
in such complete harmony is a consequence of your perseverance. Harmony is
self-sustaining. Harmony flows. It's a virtuous circle that runs through all
aspects of your life, body, heart, mind and spirit.
It wasn’t always like that and you still remember your humble beginnings.
When you see newbies in forums or on social-medias shouting “go market, go”
as if they are urging on a horse to win in The Grand National, you see yourself
many years ago. You know what you have been through to get where you are
today and you know that a good percentage of those people won’t be there a
couple of months from now. Most would have lost all their money; most would
have quit; most would probably be scarred for life because of their inability to
do the work necessary to achieve success in such a field. Above all, by quitting
they would never learn the most important lesson that the markets tried to show
them all along: their lack of adaptability caused their own demise. When you
look back at the sacrifices you have made, the list gets extended. You have felt
pain. You have cried. You even lost a couple of friends. Your family probably
tried to discourage you. You lost a boatload of money. You have doubted
yourself and you almost talked yourself out of the adventure countless times.
However, you never gave up. And when you think about it, it was all worth it!
That being said, while I am one of those who believe in hard work and
dedication, I also believe in balance, rejuvenation, and the importance of taking
some time off from time to time while doing activities other than trading.
Personally, I find it important to give myself free time to explore ideas and to
make sure that I continue on excelling in my trading because I love it and not
because it is an obligation. In many areas of life, there is a magical zone of longterm growth: Pushing enough to make progress, but not so much that it becomes
unsustainable over the long term.
Cultivating balance in everything you do is essential in order to continue
growing mentally. Another fundamental aspect of sustaining growth is to
understand what guides you. Life is a whole different experience when you find
purpose in life. If you are in the early part of your trading career, you might be
thinking to yourself that it is trading the markets that makes you tick – that this
is your purpose. Trust me, it is not! I am talking about a deeper purpose, one that
is built within the very nature of our being. From what I have discovered, those
purposes are as follows:
• Every day try to lessen the suffering of others by however amount. Our
purpose should be about giving, not getting. If you drop something in front of a
child for example, and try to reach it but pretend you can't, practically every
child will pick it up for you and give it to you. Helping other people is part of
human nature.
• Try to learn something new every day that you did not know the previous day.
The purpose of learning is very important. We learn new things so that we can
better adapt to our environment. This is the whole purpose of our human
existence, and of life itself, and while other animals may find various original
and inventive ways to adapt, the typical way we, humans, do it is through
knowledge.
• Try to make the world a slightly better place every day. If you have the power
and the influence to act on the world and contribute to making it a better place,
but you don't, what kind of life is that? The tiniest thing counts: smiling in the
most sincere way to a stranger; helping someone in need; giving to charity;
eating and supporting organic and local, etc.
QUESTION
Do you accept mistakes and failures? In other words, are you compassionate
towards yourself and others? Could you be more compassionate?
Are you getting enough recovery time? Do you take enough breaks from
trading?
What have your learned from this book? What are the steps you are going to
implement to change the way you experience your trading?
Paradigm Shift explored the many aspects of what makes a successful behavior
in the markets. If you read the book up to this point, you now have a pretty
accurate sense of what needs to be done in order to acquire equanimity and
consistency in your habits. These two ingredients are the foundation of any
trading success. However, being aware of something doesn’t automatically make
it part of who you are. Awareness is not necessarily a belief. Learning about
something new is not the same as believing it at a level where you can act on it.
Whether you do put into application what you have learned here or not, will
entirely depend on your level of desire.
We are born free – every single one of us! The bondage, restrictions, and limits
that we find in our life are self-created. The edges we perceive have been placed
there by the way we use our mind. There are fundamentally no edges and no
boundaries. When you realize this, you see that you are the author of your own
destiny. Only you can set yourself free. No one can do it for you.
SYNTHESIS
Here you will find the main ideas that I have tried to express throughout the
book, condensed into a list. Until these are anchored in your mind at a functional
level, it might be a good idea to read them on a regular basis. What I would even
suggest you to do is to print/ copy, and keep them close to your trading desk so
that they are within reach whenever it is necessary.
1. Be aware of the present reality of your body. How are you feeling right now,
right at this moment? I spend so little time trading for a reason. I am aware of
my body and my mind’s need for rest. I do lots of different activities throughout
the day that are unrelated to trading. When I come back to my station I am
awake, alive, clear and energized.
2. Be positive. When you pour happiness in whatever you are doing, nothing bad
can happen to you. A smile in times of stress can be very powerful. When you
trade with the intimate knowledge and confidence that nothing bad can happen
to you, you become free!
3. Release yourself of your attachment. Failure to do so can only impede on your
trading performance and your overall wellbeing.
4. Process-based goals with tasks broken down into small, manageable, and
consistent routines will bring you the results you desire. This consistency will
benefit every areas of your life and bring more happiness along the way.
Happiness and success is in the process which you should be fully committed to,
without thinking about short-term emotional gratification.
5. Get out of your head a little bit. What is happening inside your mind isn’t
real. Fear, greed, past, future – all is delusion. What is real is right now! Stay
here, breathe and do what you have to do with the absolute awareness of the
present.
6. Whatever short-term state of mind and emotional fluctuation you may be
experiencing in the present is temporary – everything is.
7. Approach your trading from the idea that all you are doing is building skills.
Just like in a science experiment you are collecting data points and assessing the
results over a minimum of 30 trades.
8. Mistakes and failures are part of your development and self-growth. They are
just experiences that point the way. You should be patient with yourself when
you make mistakes and when you experience failures. You should take full
responsibility for them, embrace them, record them, learn from them, and thrive
for change.
9. Money will automatically be drawn to you as a result of trading well and
consistently. Consequently, your focus should be entirely on the process instead
of the outcome or the money. The chance to compete for something you care
about; the opportunity to work hard, the time and space to make something of
value, those acts and those moments are the real prize, not the result that comes
afterward. The fight is the reward.
10. In any given moment you don’t know which trade is going to work, when,
and in which order so there is no point in overanalyzing, cherry picking, and
overthinking.
11. Understand that you are only testing, pushing your limits, experiencing the
losses. Information is neutral. Our concepts of duality only exist in our mind.
We are the ones interpreting information based on our different filters – beliefs.
12. You become a successful trader when you lose your obsession about being
right. Decide if your motivation to trade is to be right, or to make money. If your
choice is to be right, this is probably not the correct arena. I see far too many
people in this category within the trading world.
13. If you are to get where your strategy can bring you, you have to focus on
creating a number of occurrences instead of focusing on creating positions. Once
you change this term you realize that there is no point in doing anything else
other than entering and exiting where your system tells you to.
14. Even when you start making consistent money, you will always have to keep
learning and adapting to the markets which are ever changing. There is no
destination in trading.
15. Sitting in contemplation of your body and mind helps you focus on the
process of trading correctly. When you are focusing on the outcome or prone to
making trading mistakes, it helps shift you back to the process by developing
your ability to stay focused on the present.
16. You don’t get any smarter during market hours so limit any decision making
during that time. Every decision should be made prior to market open.
17. Every time you choose not to follow your plan, you are feeding the belief
you are trying to de-energize, but if you choose to follow your plan, you are
feeding the new sets of beliefs that you want to adopt. The more you do it the
easier it gets, until it becomes a learned skill.
18. Quit trying to win the lottery with your trading and instead focus on being
the casino trading against the gamblers
19. If you do not succeed in your trading endeavors it would have meant that you
would have failed to truly understand your emotional make up and master
yourself.
20. You can’t guarantee the results, so don’t tie your happiness up in them. To
struggle for something meaningful, that is success — regardless of the result.
21. Don’t fear the markets. They can’t actually hurt you. You can hurt you
though.
22. Trading is all about mastery: the mastery of markets’ complexities and the
myriad challenges of self-mastery. Making money is an affirmation of that
mastery.
23. Most traders can write and create really good trading plans, but only the best
traders actually have the discipline to follow that plan in actual live trading.
24. Be content with what you have. Know that you are exactly where you should
be in life and don’t resent or envy others for their successes. Don’t feel sorry for
yourself; instead take responsibility for your role in life.
25. Appreciate and celebrate other people’s success in trading or in life, and
don’t grow jealous or feel cheated when you get surpassed. Success in life
(whatever that might mean to you) can come with luck or hard work. If it comes
with hard work it is more durable, so be willing to work hard for your own
chance at success.
26. Allow yourself to feel the full range of human emotions. By accepting your
humanity, you will easily feel and show your emotions to yourself and to all
other people. If you are angry, you show it, and thus release it. If you are happy,
you show it. If you are sad, you find it easy to weep and thus dispel the sadness.
The ability to show emotions at appropriate times is valuable, and the mark of a
mature person.
27. Don’t walk around with a feeling of entitlement. Understand that the markets
– and life for that matter – don’t owe you anything.
28. Embrace uncertainty. Understand that bad times also form part of the overall
experience of living. Cherish every single moment, good or bad, this will
ultimately makes you stand apart as an individual.
29. Luck is a double edge sword – it works both ways. Consequently, don’t rely
on it or spend time wishing or hoping for luck to manifest itself. Instead take
risks and venture out of your comfort zone. This will result in you creating your
own luck.
30. It is only when you detach yourself from your thinking that you can find
freedom.
NOTES AND REFERENCES
Chapter 1
1. TalentSmart has conducted research with more than a million people, and we’ve found that 90% of top performers are skilled at
managing their emotions in times of stress in order to remain calm and in control.
2. Barber, Lee, Odean (2010): Do Day Traders Rationally Learn About Their Ability?
Odean (1998): Volume, volatility, price, and profit when all traders are above average
Barber, & Odean (2000): Trading is hazardous to your wealth: The common stock investment performance of individual investors
Kumar: Who Gambles In The Stock Market?
Barber, Odean (2001): Boys will be boys: Gender, overconfidence, and common stock investment
Calvet, L. E., Campbell, J., & Sodini P. (2009). Fight or flight? Portfolio rebalancing by individual investors.
Barber, B. M., Lee, Y., Liu, Y., & Odean, T. (2009). Just how much do individual investors lose by trading?
Gao, X., & Lin, T. (2011). Do individual investors trade stocks as gambling? Evidence from repeated natural experiments
Strahilevitz, M., Odean, T., & Barber, B. (2011). Once burned, twice shy: How naïve learning, counterfactuals, and regret affect the
repurchase of stocks previously sol.
Da, Z., Engelberg, J., & Gao, P. (2011). In search of attention
De, S., Gondhi, N. R. & Pochiraju, B. (2010). Does sign matter more than size? An investigation into the source of investor
overconfidence
Chapter 2
3. Hedge Fund Market Wizzards by Jack D. Schwager – John Wiley and Sons – Larry Benedict chapter
4. Random Walk Theory: The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random
walk and thus cannot be predicted. It is consistent with the efficient-market hypothesis.
http://en.wikipedia.org/wiki/Random_walk_hypothesis
5. Predictive nature of volatility: Mandelbrot’s analysis of historical data indicates that returns have sample distributions that are highly
leptokurtic, meaning they have fat tails that make extreme market moves more likely than would be predicted by the normal distribution.
http://web.williams.edu/Mathematics/sjmiller/public_html/341/handouts/Fama_MandelbroitAndStableParetianHypothesis.pdf
6. P.53. Black Swan event: The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a
surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. Term popularized by
Nassim Taleb, The Black Swan: The Impact of the Highly Improbable - April 17, 2007. Random House
Chapter 3
7. Paper from the scientific American - Self-control helps you meet small challenges, but to change your life significantly you'll need selfregulation instead: http://www.scientificamerican.com/article/taking-the-reins/?page=2
8. Trade like A Casino by Richard Weissman – John Wiley and Sons
9. The definitive guide to position sizing: How to evaluate your system and use position sizing to meet your objectives by Dr. Van K. Tharp
- The International institute of trading mastery
10. Trading in the Zone and The Disciplined Trader by Mark Douglas – New York Institute of Finances
11. “This too shall pass” is an adage indicating that all material conditions, positive or negative, are temporary. The phrase seems to have
originated in the writings of the medieval Persian Sufi poets, and is often attached to a fable of a great king who is humbled by the simple
words. Some versions of the fable, beginning with that of Attar of Nishapur, add the detail that the phrase is inscribed on a ring, which has
the ability to make the happy man sad and the sad man happy. Jewish folklore often describes Solomon as giving or receiving the phrase.
The adage and associated fable were popular in the first half of the 19th century, appearing in a collection of tales by the English poet
Edward Fitzgerald and being employed in a speech by Abraham Lincoln before he became president.
12. What are the chances of your coming into being? by Dr. Ali binazir: http://blogs.law.harvard.edu/abinazir/2011/06/15/what-arechances-you-would-be-born/
13. Can money buy happiness? Research by Stanford Graduate school of business: http://www.gsb.stanford.edu/insights/research-canmoney-buy-happiness
14. When thoughts become actions: An fMRI paradigm to study volitional brain activity in non-communicative brain injured patients:
http://www.ncbi.nlm.nih.gov/pubmed/17509898
Chapter 4
15. 1/ Benefits of self-affirmation: http://www.cmu.edu/homepage/health/2013/summer/benefits-of-self-affirmation.shtml 2/ Carnegie
Mellon Research Shows Self-Affirmation Improves Problem-Solving Under Stress
http://www.cmu.edu/news/stories/archives/2013/may/may3_selfaffirmation.html 3/ The Psychology of Change: Self-Affirmation and
Social Psychological Intervention https://ed.stanford.edu/sites/default/files/annurev-psych-psychology_of_change_final_e2.pdf 4/ SelfAffirmation Improves Problem-Solving under Stress: http://www.plosone.org/article/info:doi/10.1371/journal.pone.0062593
16.True self: True self and false self are concepts introduced into psychoanalysis in 1960 by D. W. Winnicott. Winnicott used "True Self"
to describe a sense of self based on spontaneous authentic experi-ence, and a feeling of being alive, having a "real self." "False Self" by
contrast Winnicott saw as a defensive facade — one which in extreme cases could leave its holders lacking spontaneity and feeling dead
and empty, behind a mere appearance of being real.
17. The cognitive scientist Bruce Hood defines an illusion as an experience of something that is not what it seems. He uses this definition in
his book, The Self Illusion: How The Social Brain Creates Identity (2012), arguing that the self is an illusion – and he admits that everyone
experiences a sense of self – a feeling that we have an identity, and that this identity does our thinking and perceiving – but he says that
beyond the experience, there is nothing we can identify as the self. This is an argument conveyed by Sam Harris as well. Harris is an
American author, philosopher, neuroscientist, and the co-founder and chief executive of Project Reason, a non-profit that promotes science
and secularism. He has discussed a lot about the nature of the self and how spirituality and science can intertwine. This is in line with
Buddhism teachings. In early Buddhist texts the Buddha uses the term anatta, which means ‘not-self’ or the ‘illusion of the self’. Thus
Buddhism contrasts to, for example, Cartesianism, which says that there is a conscious entity behind all of our thoughts. The Buddha
taught his followers that things are perceived by the senses, but not by an ‘I’ or ‘me’. Things such as material wealth cannot belong to me if
there is no ‘me’, therefore we should not cling to them or crave them.
18. The Happiness Hypothesis by Jonathan Haidt published by Basic Books
19. Ray Dalio talks about his meditation practice: http://www.dailyfinance.com/2013/11/12/ray-dalio-hedge-fund-genius-meditation-secretsuccess/
20.Steve Jobs and meditation: http://www.businessinsider.com/steve-jobs-zen-meditation-buddhism-2015-1
21.1/ Using meditation for less stress and better wellbeing:
http://www.racgp.org.au/download/Documents/AFP/2009/June/200906manocha.pdf 2/ Meditation acutely improves psychomotor
vigilance: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2919439/ 3/ Alterations in brain and immune function produced by mindfulness
meditation: http://www.ncbi.nlm.nih.gov/pubmed/12883106 4/ Physiological effects of transcendental meditation:
http://www.sciencemag.org/content/167/3926/1751
22. Job searches for ‘stockbroker’ skyrocket after ‘The Wolf of Wall Street: http://blogs.marketwatch.com/thetell/2014/03/27/job-searchesfor-stockbroker-rocket-after-the-wolf-of-wall-street/
23. 1/ Mental health and physical activity: http://www.sciencedirect.com/science/journal/17552966 2/
http://www.apa.org/monitor/2011/12/exercise.aspx
24. 1/ The role of nutrition in mental health:
http://www.mindingourbodies.ca/about_the_project/literature_reviews/depression_and_nutrition 2/
http://www.sciencedaily.com/releases/2015/01/150129104217.htm 3/
http://www.sciencedirect.com/science/article/pii/S095528631300020X
25. Scientific paper showing how extraneous factors affect judicial decisions: http://www.pnas.org/content/108/17/6889.full.pdf
Chapter 5
26. When thinking about goals undermines goal pursuit – scientific paper by University of Chicago and the Korea Business School:
http://www.sciencedirect.com/science/article/pii/S0749597812000222
27.In psychology, the four stages of competence, or the "conscious competence" learning model, relates to the psychological states
involved in the process of progressing from incompetence to competence in a skill:
Unconscious incompetence
The individual does not understand or know how to do something and does not necessarily recognize the deficit. They may deny the
usefulness of the skill. The individual must recognize their own incompetence, and the value of the new skill, before moving on to the next
stage. The length of time an individual spends in this stage depends on the strength of the stimulus to learn.
Conscious incompetence
Though the individual does not understand or know how to do something, he or she does recognize the deficit, as well as the value of a
new skill in addressing the deficit. The making of mistakes can be integral to the learning process at this stage.
Conscious competence
The individual understands or knows how to do something. However, demonstrating the skill or knowledge requires concentration. It may
be broken down into steps, and there is heavy conscious involvement in executing the new skill.
Unconscious competence
The individual has had so much practice with a skill that it has become "second nature" and can be performed easily. As a result, the skill
can be performed while executing another task. The individual may be able to teach it to others, depending upon how and when it was
learned
Thanks for reading; I hope you enjoyed the book as much as I enjoyed writing it
ABOUT THE AUTHOR
Yvan Byeajee is a full-time trader, writer, mentor, and coach. He spends most of
his time travelling back and forth between North America, Europe and the tiny
island nation called Mauritius where he is originally from. He does this while
trading the U.S stock market and dispensing coaching and mentoring sessions
wherever needed.
Find out more at http://www.amazon.com/Yvanbyeajee
Or visit http://www.tradingcomposure.com
ACKNOWLEDGEMENTS
I would like to thank all the actors who played a contributing role in my life,
from family and friends, to acquaintances or random strangers with whom I
have exchanged thoughts and sometimes a few laughs. All of them taught me
valuable lessons about life and played an immense role in shaping the person I
am today.
Special thanks:
•
Dr. Brett Steenbarger, for his amazing work at Traderfeed.blogspot.ca.
His consistency in releasing weekly blog posts fueled my inspiration, and helped
keep me focused on the process of writing this book when at times I felt like
giving up or delaying the work. Dr. Steenbarger is a renowned Trading
Psychologist, Trading Expert and best-selling Author. He wrote classics such as,
The psychology of trading, The Daily Trading Coach, Enhancing Trader
Performance among others. I am featured in his new book called Trading
Psychology 2.0, where I share a list of my best trading practices.
•
Dr. Alexander Elder, Author of the classic Trading for a living for his
precious feedback on where to steer the book.
•
Laetitia Thanee Chantal Jacquouton, Yoga Instructor, and Jaap
Verbaas, PhD in Geology, for helping with the edition of the book during their
free time. Please, keep in mind that while having done a great job with the
editing, they are not professional editors. They have accepted to do the work free
of charge so that I could pass on the savings to you by making this book more
affordable. So, there still might remain some mild grammatical errors, however,
this doesn’t diminish in any way the quality of the book’s content.
•
Kevin Guy Harry Jacquouton for showing me that forgiveness and
redemption are possible.