Five Key Steps

In a week that saw the US pull back from Mexican sanctions do little to move a flat market after last week’s rally, an oil tanker attack do little to help oil prices, and a lacklustre US inflation print do little to stop the dollar advancing again, there is perhaps little to say that will add anything to our dominant three market themes: current two-way volatility that will evolve into 1. a 1929 and 1987 stock market blowout whose timing continues to follow our 2014 Russell template 2. a slow Dollar turn predicated on US falling yields and therefore 3. A significant disconnect between stocks yields and the Dollar that will create greater rotation and divergence across all markets.

 

Indeed, besides falling forex volatility that our EURUSD volatility model says will soon end, there is a noticeable and unusual divergence between stock and bond volatility (as highlighted by Credit Suisse London)

 

Of course, the reason is simple and typical of this phase of the cycle. Deteriorating fundamentals lead yields lower. However, rather than drag down stocks, falling yields support sentiment driven stock indices. Respective implied volatilities in both cases are just as much a function of direction as actual volatility.

 

With such disconnection, it is perhaps difficult to preserve confidence in a view of one instrument or asset class when other trading vehicles are traditionally saying something else. But that is our market—one that is therefore subject to more doubt and emotion. And yet as traders we need to stay confident to maintain focus derived from evidence-based analysis and not subject to emotion—the overriding theme of our articles on trading emotion.

 

This newsletter is the last in our series on emotional trading series. Last week we highlighted the five main ways we can improve our confidence, emotional intelligence and mental wellbeing in order to withstand/exploit trading emotions. This week we focus on the physical well-being that can support but also derail mental well being and leave us, as traders more vulnerable to the emotions that confront us every day. It is much easier to cope with the demands of a trading life unless we are both mentally and physically strong enough and that strength can be built over time by routines.

 

Mental and physical well being are inextricably linked and are essential to the confidence and focus we need as traders in both the short and long term.

 

Clearly a trader who is seriously ill will find it difficult to manage the mental pressures of trading.

 

And clearly a mental or nervous break down through trading (or indeed anything else) will impact a trader’s health and their trading performance. But maintaining confidence and focus through mental and physical strength is not just a question of avoiding extremes. George Soros provides an interesting but probably not common example.

 

Physical well being can improve the quality of our thinking and our speed of reaction (or not) and therefore our trading performance. Wendy Suzuki, a neuroscientist from New York University, has focused on how physical well being can improve mental performance. As she says

 

“What if I told you there was something that you can do right now that would have an immediate positive benefit for your brain including your mood and your focus. And what if I told you that same thing could actually last a long time and protect your brain. I am talking about the powerful effects of physical activity."

There are five areas where we can improve our physical activity and well-being.

 

These five steps do not necessarily lead directly to improved trading but, without them, our physical, mental and therefore trading performance can come under pressure.

 

1. Sleep
Sufficient and regular sleeps are important to maintaining physical and mental well being and peak trading performance. But trading can also interfere with sleep and have a knock on if not downward spiral effect. It is commonly believed that people generally need 8 hours to stay healthy and alert. However, one can train the body to cope with less provided it is regular. I typically have 6 hours sleep without any noticeable short or long term detrimental effect.

 

However, a regular sleep pattern is most important. While staying up till 3am and sleeping in till noon might contain enough hours of sleep, it will leave your body unprepared to go to bed at 10pm the next night and wake up ready for markets at 6am. Your body craves a regular routine especially when it comes to sleep. If your sleep cycle is constantly being disrupted, many negative symptoms can erupt such as extreme fatigue, sluggishness, memory issues, emotional instability and even an increase in sickness. There are many reasons why people do not get adequate or regular sleep. Anxiety from trading risk can be a major cause for some traders. It is essential then to minimize the effect risk can have on sleep by ensuring that risk is not too great.

 

It is not just an issue of risk but perception or over-concentration of the risk before sleeping. It is possibly helpful not to check markets immediately before sleeping. I find a good book is a good substitute.

 

2. Diet

Diet clearly contributes to overall health. A healthy diet can provide a trader with a strong physical foundation. Like sleep, your body likes consistency when it comes to what and when you eat. Regularly eating healthy foods such as vegetables, fruits, lean meats and whole grains will give you the nutrients that not only support your body’s vital functions but can balance your mental well being as well.

 

Kaiser Permanente, America’s largest health care provider, encourages their physicians to recommend a plant-based diet to all patients. They say that healthy eating may be best achieved with a plant-based diet, defined as a regimen that encourages whole, plant-based foods and discourages meats, dairy products, and eggs as well as all refined and processed foods.  Many not just traders will find this difficult to accept.

 

The most important thing in a diet for anyone is balance. Eating too much when you aren’t hungry or making yourself skip meals can have metabolic consequences that can upset your physical and mental health. Drinking plenty of water goes hand in hand with eating right. Drinking too much coffee or alcohol can not only affect current but also longer term performance.

 

But like all aspects of physical and therefore well-being, a better diet will not necessarily change a trader’s performance. Just like markets it is best to have an open mind, do evidenced based research, and come to your own conclusions on diet.

 

3. Physical Activity

Exercise is a very useful but not essential activity for traders physical and, as Wendy Suzuki explained, mental well-being in four different respects.

 

Firstly, it helps us maintain emotional balance. There is plenty of evidence to show exercise can be as effective in combating depression and anxiety as medication. I don’t box but I used to find rugby helped remove some of the built up stress from a trading day. But any physical exercise will help do this.

 

Secondly, it allows us to leave a possibly stressful environment. Going for a jog or a swim or to the gym or playing tennis (I do all four) provides a welcome relief and perhaps overthinking without perspective. When I worked in banks I found going for a walk was just as useful and even picking up the kids serves the same purpose.

 

Thirdly, physical exercise helps us gain provide perspective and become sharper. There are not many instances other than (solitary exercise) where you can think uninterrupted and therefore with greater perspective. Physical exercise has also been found to produce immediate improved mental performance and facilitate speed of reaction.

 

Fourthly, it helps us become more efficient providing us with greater physical and therefore mental stamina. This isn’t just important to handle challenging market events but also a series of events or difficult markets.  It also helps us sleep better which can be particularly useful in trying times.

 

4. Relaxation

Relaxation comes in two forms: mental and physical but the two are necessarily intertwined. Relaxation is commonly thought of as only a mental exercise with only mental benefits. That is simply not true. There are many forms of meditation that can have positive physical effects. Tension from trading can also build up in muscles causing headaches or back pain and stress hormones can cause a variety of nasty symptoms such as adrenal fatigue.

 

Whether it is getting a massage, staying home with a good book or physical exercise, some “me time” does everyone good. It is good sometimes just to rest the brain the body and the emotions. It also allows time to reflect about markets and oneself and helps provide balance and avoid over trading.

 

But relaxation doesn’t have to be alone. As we have pointed out trading can be solitary. Good traders are often social animals (literally) and require relaxation with company.

 

5. Organisation or Routine
A much under-estimated aspect of trading or indeed mental or physical well-being is self-organisation. Many successful traders do many processes as a matter of routine. It is their foundation to their trading day. That doesn’t just apply to catching up with news, step by step analysis of individual markets or groups of related markets but also one’s physical routine.

One of my most striking routines, according to the Bloomberg journalist who spent some time with me, was how I start the day by pouring buckets of ice cold water over myself. The most effective way to make yourself alert and fresh and great way of avoiding or reducing harmful alternatives such as cigarettes or cups of coffee. If you do exercise daily or pick up the kids, stop for lunch, meditate, that helps build a routine. And routine is useful in two respects. Firstly, it helps helps us stay organised and do the things we should as traders at the right time. But secondly it also releases energy and time to do the stuff we cannot necessarily schedule such as analysis or trades on unexpected news or even major project work on certain aspects of trading.

 

Routine reduces the number of variables in a complex and dynamic trading world. It makes trading easier and less subject to stress.

 

I do not know of any other activity that appears so easy, particularly in hindsight, and is yet so difficult particularly to do it well. In our series on emotional trading we have identified the harmful emotions and how to combat or exploit. We have emphasised why emotional balance is so important to doing just that. We have explained how we can improve the necessary emotional intelligence by learning not just about ourselves but also improving our mental and physical well-being. Some of this has indeed been provided through self-reflection in good and challenging times. Some of it is arguably innovative and original. But one thing is clear. Trading requires hard work.

 

Hopefully this series has helped provide some short cuts or some ideas to think about. The rest is up to you! Here’s to making the very best.

Good Luck

 

 

 

Ed Matts
Founder
Matrix Trade

 

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