April 2017 - Integral Market Psychology

Lesson of the Week – Perseverance

Nothing says failure like giving up. This week, while optimizing and running walk-forward tests on upwards of 12 stocks with 5 tests each, I was confronted with this FAILED almost every morning I woke up.

To wake up every morning seeing the word FAILED in bold capital letters plastered across the screen can weaken your resolve that it’s even possible to make money in the market using automated strategies. After a few days, I saw PASSED! I was ecstatic!

I could feel the rush of dopamine flood my brain like a well trained rat pushing that level for a fix. Of course, the moment was fleeting and further degraded as the next FAILED came up again and again.

I was soon reminded of Carel Dweck’s groundbreaking research in Mind Set. Focus on the process, the growth, what you learned NOT the outcome. I supposed that’s a beautiful element of being human: how quickly we can be overtaken by our ancestral brains. I’m not a zen monk and I won’t pretend that seeing FAILED doesn’t bother me but refocusing on the process made the work less emotionally draining.

Focus on the process, not the outcome.

What was my process? :

Find stocks that “look” like they trend
Run optimizations with at least 10k bars in each & 1 year worth of data
Run walk forward analysis
Log it
Live paper money test for PASSED

The process is productive, thinking about FAILED is not. Keep persevering, focus on the process.

Why You Suck at Trading – Opportunity Cost

When you first start trading & open your new trading platform it should remind of a bit like vegas. It’s designed like that on purpose. Not only are there color lights flashing but a plethora of indicators, time frames, and types of bars to try to use. There are thousands of combinations.

For example, Tradestation has well over 100 indicators but let’s say they only have 100. You would have 161,700 combinations to choose from if you only wanted to pick 3 at at time. That’s a lot of choices!.

In the TED talk below choices create an ideal opportunity cost. If I had used a MACD instead of a stochastic indicator this trade could have worked!… DARN! This most likely isn’t true but we can’t help our ancient brains.

All the potential combinations of indicators, time frames, and chart styles create endless choices which create more opportunity cost, implying that you could have done better.

My question to you: Are you changing your strategy because the market is demanding adaptation from you? OR are you changing your strategy haphazardly based on the potential opportunity you perceive you could had?

Cognitive exercise: Changing Your Emotions

When we have a series of bad trades, bad days or worse a bad week we can mentally start to believe all sorts of fiction. “I’m not a good trader.” “I don’t have how to do this anymore.” I have been experimenting with a cognitive exercise that works well for me.

Remind yourself of better times to change your emotional state.

There are a number of exercises around the self-help community that focus on bringing in love, light, and gratitude if you believe in that stuff… My favorite version of this was created by Phil Stutz & Barry Michael in their book titled The Tools. This is a great book in which the authors describe real life cases in which these short cognitive exercises can be used to achieve remarkable results.

I have shortened their Grateful Flow into a trading exercise. I have created three steps to help get your mind believing you can trade again.

Find your best trades from the week or month or year.
Print them out
Cognitively review each bar of each trade as you mentally run the trade in your head.

Without going into the depths of endocrinology the dopamine circuits in our brain are rewarded for risk taking, even if that risk fails. There are other steroids & endorphins that will condition you if that behavior failed. They are two different things.

How does this exercise help? Cognitively it allows you to create a different mental emotional frame. It reminds your brain that you can trade and helps stop the intrusion of negative thoughts. Emotionally, this may help alleviate the negative stress hormones floating around in your bloodstream by creating a mentally more soothing environment.