Category: Market Psychology

What type of trader are you? Long-term, multiday swing, intra-day, or ultra short term scalping?  There are many types of traders out there.  A more common frame of typing would be astrology.  Are you a cancer, libra, capicorn, etc.  These don’t necessarily tell you specifics about who or what you do but in society, but we generally enjoy typing ourselves.

How does typing yourself effect your trading?  When we categorize ourselves into boxes such as, “I’m a scalper,” or “I’m a swing trader.”  These conceptions put the focus on an ideology and not on your setups.  Let’s illustrate with an example.  Marvin always buys the 3 bar pull back on the 5 minute chart he watches daily.  However, the next day he see’s the exact same setup on a larger time frame but refuses to take this trade because he is a “day trader.”  It’s these ideologies that can make a trader focus on the wrong aspect of trading.

It’s not who you are (day trader, swing trader, fundamental trader) it’s what you do.  Why do you take these setups, what candle patterns, fundamentals are you looking for and how do you repeat them.  When you begin typing yourself; being a “day trader” filters trades rather than letting you setups dictate the filters.

Integral theory believes we enter different states of awareness, of consciousness, etc throughout any given day.   Have you ever been unable to break an angry mood? Your state was angry.  Have you ever been highly irrational for a long time? Your state was irrational.  Have you ever fell in love & were unable to fall out of it for a long time? Your state was in love.

States greatly effect the way we trade ever single day.  Author Denise Shull’s book Market Mind Games is essentially a book about emotional / psychology states.  Her book can be summarized as follows.  Be aware of your emotional context (state) it will greatly effect your trading decisions.  She’s correct.

This is a very basic overview of how states can effect you during trading.  Denise suggests writing down your emotional state as your are trading such as “I”m afraid to take this trade” or “If I lose on this trade I’m going to be very angry with myself.”  I added to this methodology by taking it a step further and after the bell has rung to go back and ask. What makes me afraid? or IfIi become angry with myself what would happen?

 

To again, continue my series on how I use integral theory to trade the stock market we now move onto levels of development on each of the lines I discussed.

This is the piece of Ken Wilber’s theory that he “borrowed” a lot from other traditions.  Personally, I think this is one of the coolest aspects of his theories.  The book Integral Psychology does a great job mapping out how all these different theories of development are talking about the same thing just at difference stages in life.  I highly recommend the book.

How do development lines work?  If you ever heard of Freud’s psychosexual stages of development that is a developmental line.  Another example is Piaget’s stages of cognitive development.  The most popular set of development stages within the integral framework tends to be spiral dynamics.  This is metaset, in my opinion, of development that can be applied to any line.  I’ll illustrate an example below.

The Line of development will be pattern recognition.  The development stages of pattern recognition could be interpreted as follows.

Beige – Instinctive / survivalist: Reading books on technical analyse & finding patterns that match exactly what you have read.

Purple – Magical / Animistic: Believing you see the patterns in everything.  The street lights form a double top and every time frame you look at hold exceptionally strong cup & handles, for example.  You find a “holy grail” of patterns

Red – Impulsive / Egocentric:   The patterns no longer work and you are angry. You find failing example after failing example.  The belief in the “holy grail” has died.

Blue – Purposeful / Authoritarian: You seek more education believing someone must have the “holy grail.”  You take this person or educational doctrine word for word.  You start to relive the “holy grail” experience that you originally had but it is now done with a stronger authority figure.

Orange – Achievist / strategic : Acting in your own self-interest.  “This guy doesn’t know what he’s talking about but I do.”  This is where you may begin to turn heavily towards statistics to validate your patterns and see how often they do work.  You will turn to more scientific methods.  [Side note: this orange phased is theorized to have only begun 300 years ago]

Green – Communitarian / Egalitarian:  Seek peace with self & others.  You now realize you know what you don’t know and don’t know that which you don’t know.  You have accepted the idea patterns work and patterns fail. That there is no holy grail.  You may even begin to share your knowledge with others.

A picture below should help bring these ideas together.  Remember moving on to the next level does NOT mean you are no longer part of the lower levels.  As you transcend the previous level you include you! You never disregard the previous levels.  Even though you may recognize patterns at a “Green” level of development, it doesn’t mean that “beige” is no longer a part of you.

To continue my series of how I use integral theory to trade the markets we now move onto lines.

Lines define what skills we develop.  For instance, there is a mathematical line of development, there is a pattern recognition line of development.  These skills have varying levels from the novice to the expert, but we will get to that in a future post.

There are a couple core lines I believe are truly necessary for the development of all traders.

• Mathematics
  • Why: The ability to analyze your own trading data, calculate company fundamentals, understanding the greeks of options and many others.
• Pattern Cognition
  • Why:  Being able to spot patterns is critical for being a successful trader.  This extend far beyond technical analysis but also into the motifs that society indulges in to create Bull & Bear markets.
• Patients / Emotional intelligence
  • Why: The market is unforgiving it will require you to keep your biology from overthrowing your mind with the chemical cocktail it will throw at you on a daily basis.

These are what I believe to be the core line of development that are needed to be a good trader. In future posts, I will write about how to develop them.

Integral theory is a beast.  You can read Ken Wilber‘s works over a lifetime only to come back to read them again and realize how much you missed.  My friends who introduced me to the theory always found great ways to answer my practical application questions from this theoretical model.  This and other posts will be my attempt to do the same for stock market trading.

As I discussed in a previous post.  Quadrants a great way to know your current perspective on things.  But how do we use the other 4 tenants?

Quadrants: Great for perspective.  Figuring out where your thoughts are and most importantly where other people’s thoughts may be as well.  This is simply a matter of perspective taking methodically.

States:  Are you angry? Stressed? Joyful? Irrationally exuberant?  In Flow?  This is the current state of your being. What’s coloring your trading ideas.  Maybe even confirmation bias.

Lines:  These are the skills people obtain throughout life. Relevant to trading I see pattern recognition, math, probability and high social IQ as skills worth developing for this business.

Levels:  Each of these skills will have levels that will build on the next.  There is no stagnation unless you choose.

Types: Gemini or Capricorn? OCD or free spirited?  How do you type yourself as a trader? Do you believe the hype that you can put in 2 hours of work a day and walk away a millionaire? Do you believe it takes hard work and practice?  This is typing yourself.  It is also called priming in the field of psychology.

I will write about each of these in more detail in future posts.

Ken Wilber is the famous, possibly infamous, creator of integral theory.  The theory in brief (I can’t stress that enough) posits 5 major tenants:  Lines, Levels, Types, States, and Quadrants.  We’ll be looking at quadrants in this post.

Each quadrant represents an internal (psychological) or external (behavioral) on an individual or collective (societal) level.  As I trader I use these quadrants as a tool to check my perspective.

Upper Left: What am I thinking feeling, expecting from this stock?

Bottom Left: What are other people thinking, feeling, expecting from this stock?

Upper Right: How is the stock moving? What are the patterns and trend?

Bottom Right: What is the sector doing, the collective?

As complicated as integral theory can get. One can typically break it down for practical everyday use.  Metatheories are often good for that. 🙂

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?  :

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

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

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?

 

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.

1. Find your best trades from the week or month or year.
2. Print them out
3. 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.

 

Doing the right thing isn’t always easy.  As I take the time to prepare a salad, shaving and chopping beets. Then cutting the carrots and washing the lettuce.  A canned Amy’s organic soup stares me in the face. In 5 minutes I could be eating, but I have another 10 minutes of prep to go…

When we trade the market, we are always in preparation, searching, no hunting for that one good trade.  When we find it, we eat and are ideally rewarded.  The last week, however, there has been a famine. With the market eagerly anticipating the fed announcement on Wednesday markets went sideways an extremely difficult market to trade for those who use the trend to trade.  What is the right thing to do?

For me, sit & prepare.  My coach John over at John Fitzpatrick Coach summarized a passage from the famous Bhagavad-Gita, “That within inaction is action.”

Within Inaction is Action.

Every trader is different and trades differently. This week for me was a lesson is patience discipline and knowing when to focus energy elsewhere when the fruit is too high to pick.