Do You have the Lifestyle to be a Successful Trader?
Discipline, Patience, Perserverence and Confidence
In a week where the trade war intensified with Google ending business with Huawei, Brexit politics claimed another British Prime Minister, and the FOMC minutes maintained the same trends, there is a strong sense of déjà vu.
Stocks are relatively weak but not falling. Indeed they have fallen perfectly in line with the Sell in May historical average into our projected May 24th bottom.
This, and the analogy with March’s NDX price was one reason why we bought not just NDX but also SPX and DJIA into the Nasdaq’s spiked new low on Thursday May 23rd even though we closed our DJIA position before the long Memorial Day weekend. Indeed the similarity between the Fed holiday template and Sell in May is instructive.
Even if, for now, we are happy to use the Memorial Day template itself for our guide in an erratic two way market.
The Dollar also remains strong despite a new 18-month low for US yields that continues to follow the 2014 template of a gradual whipsaw decline into an ideal 2.083 10-year yield target.The Dollar also remains strong despite a new 18-month low for US yields that continues to follow the 2014 template of a gradual whipsaw decline into an ideal 2.083 10-year yield target.
And the British Pound stayed weak, following Theresa May’s resignation, more political uncertainty but a buying opportunity.
For the complete template and that for UK FTSE, subscribers can check out our evidence pages.
Yet again, it's been an emotional week particularly for Theresa May. However, she will have time to reflect how she never had the political foundation to succeed. This week we do the same not just about markets but how we, as traders, can seek to create or maintain the right conditions, foundation and lifestyle to be successful.
In the last section in our series on trading emotion, we explain how we can improve our emotional intelligence to help us become more successful traders. How we better perceive, understand, manage, and use our ability to control our emotions involves building and maintaining processes to increase our emotional quotient, the level of our emotional intelligence. Unlike normal intelligence it can be taught and learnt.
Our perception of our ability to control our emotions (fear, nervousness, conviction, excitement, greed and overconfidence) is an important factor in our skill in removing negative tendencies and bolstering positive influences. That awareness depends, and therefore can be improved, by self reflection, experience, analysis and comparison to an ideal standard, other successful traders.
It should not take much self-reflection to know, as traders, we have an emotional make up—a propensity to act in a certain way when confronted by certain market or other ‘life’ conditions. I am sure reading this will prompt many memories of trading experiences where emotions took over, and typically we remember the negative ones. But actually writing down negative emotions to avoid and positive ones to increase is a useful form of self-reinforcement. Even legendary traders like Paul Tudor Jones put posters on the wall.
Knowing oneself as a trader is important.
Awareness of our general strengths and weaknesses but also our tendencies in particular circumstances helps us stay reliant on evidence based analysis rather than vulnerable to the emotions associated with any trade. Jesse Livermore did not just study markets but also his trades and identified mistakes made through emotion rather than analysis. Remembering, or much better, keeping a journal and assessing one’s performance and the impact of emotion is a good way of raising awareness. Rethinking and reliving the set ups, market conditions and emotions of ourselves and others at the times can be seen as a short cut to experience.
One of the reasons why legendary traders have been so successful is because of their experience not just of markets but themselves—the reasons for their mistakes and the qualities that have led to success. It is therefore worthwhile summarising some of the characteristics many better traders believe comprise superior emotional trading intelligence so we are aware, can compare and seek to emulate.
One of the earliest pioneers of superior trading qualities and inadvertently emotional intelligence was Dickson G Watts, back in even in 1880:
But since then discipline has come to been a prerequisite to trading success. This is the ability to follow a plan without being distracted largely by emotion. You cannot really have emotional trading intelligence and therefore trading success without discipline.
Discipline enables the trader to keep to trade plans based on rigorous analysis—the evidence that provides higher probability risk return trades—by reducing the effect of emotion. It allows the trader to focus more on analysis and assess market information to confirm/deny or reduce/increase the probability of success and therefore maintain or adjust plans. Emotional intelligence or discipline facilitates better analysis.
For example, our passion for markets, doing a weekly newsletter each weekend!
If we know we are sometimes prone to be shaken out of a position because of unexpected volatility and fear of losing then it is useful not to switch off the P&L of the trade on our platform and write off the trade financially and emotionally at the outset.
A pre-set stop loss will help neutralise this tendency.
After all, even if we are stopped we can always get back into the trade later.
But it goes beyond this: how we see ourselves as a trader.
Discipline or even emotional intelligence is shown by will power but it stems from confidence.
A positive confident outlook is essential to filtering in higher probability risk return (Matrix) trades that are more likely to succeed rather than a negative P&L driven perspective where we may act impetuously and fail. But never be over confident as that risks complacency or a tendency to over leverage at the wrong time.
Creating sustainable (that is not overly) positive rather than negative feedback loops breeds success.
It also helps build patience, one of the unsung virtues of trading success.
Conversely losing patience because we are emotionally unbalanced is more likely to increase harmful emotions such as fear panic and impetuosity. In a week that saw PM Modi win a landslide in India’s general election it is worthwhile citing the legend of Mahatma Gandhi.
We tend to think of patience with respect to the success of a single trade. But patience with a series of trades or a trading period is perhaps better known as perseverance.
We are not only as good as our last trade and possibly not the next (as the creates emotional pressure on the current position) but the trades after that.
Confidence comes from success but also comes from adequate capitlisation so P&L swings are not great enough to generate over fear or greed or prevent further trades. Perhaps Gary Biefeldt summarised it best.
A strong desire to win is an important trading quality but it must be accompanied by confidence and self belief. That does come with success and the right attitudes when we are in the market. But it is also enhanced by a strong mental and physical disposition.
Next week and the final part of our series on emotional trading we will describe why and how mental and physical processes can improve emotional intelligence and consequenty tradin success. And that, simply put requires preparation and hard work. As Warren Buffet's right hand man said:
Here’s to making the very best.
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