Tag: Psychology

I’ve been listening to a lot of Allan Watts lately.   He is largely accredited for bringing eastern philosophy into to western society in a highly digestible way.  What I want to focus on is knowing without knowing.

As a trader we spend hours scanning charts, searching for the setups we know best, that we know have a high probability of reward.  Though if it was that simple we would just automate what we do and sit at the beach all day.  There is something more I believe.

There is a feeling that occurs, a knowing.  You look at the chart and you know what it will do.  As if you have some sort of pre-cognition.  What is this? As if the stars have aligned and you somehow intuitively know.  When your brain kicks in you may second guess yourself, change your mind, look for evidence to verify this feeling but you know what you know.

The mind, however wants to make up a story about why you feel this way.  It is pointless.  Just as fire does not burn itself, nor does a knife cut itself.  You will not know what you know by logic, thought, or evidence.  You just know…

How often do you feel this as a trader?  What do you do when you have this feeling?  Do you journal it? Do you always take the trade?  Keeping track of these moments is critical in my success because there is a high order knowing I believe that I do not have access too directly.  Perhaps over time with enough sample, I can begin to understand what I do know or at least plug it into a deep learning model 🙂

This post will be a deviation from my series on Charlie Munger’s Cognitive Biases & Integral Theory in Finance.

As Americans we consume.  We consume as if our life depends on it.  When I say consume I’m sure you’re thinking, buying things on amazon.com or dining out.  This isn’t what I’m talking about.  I’m talking all consumption. Listening to music, podcasts, buy materials, education, learning, and anything where you are getting new input.

SHUT ALL THAT SHIT OFF and just sit in silence for 5 mins.  Watch how fast those thoughts speed through your mind.  See if you can shut it off. I doubt you can.  Why? Because you consume and you can’t stop.

The dialect of my generation is consumption with purpose.  “Spend money on experiences. Spend money on things that will save you time. Spend money on education & learning, or just download free podcasts.” CONSUME!

Stop consuming. Let the mind relax. Let your mind f&^king dream again. Explore your thoughts without hearing Entrepreneur on Fire in the background. Shut off the F&^king podcast.  Start Dreaming again.

 

Keeping a trading journal is a critical aspect of becoming a good trader.  You’ll never know what you did wrong unless you can objectively witness the prior trades you took; good or bad.  Then the next question becomes well once I’ve witnessed my profitable trade or error how I avoid it again?  We’ll chat about that in another blog called “How to practice trading.”

There are so many ways, tools, and programs that will help you keep a journal but if you are like me none of them really stuck or worked well for my day trading style.  After all, who has time to spill all their emotions, intuitions, and thoughts while trading?! Not to mention market conditions, entry & exit prices and who else knows what information may be relevant to your style.  To me text is dead in this case. It’s too slow and you have more important things going on than talking about your stupid feelings. 🙂

We are going to draw on integral theory’s quadrants to establish a methodology that will allow us to focus on all aspects of the trade.  You can do this with pictures, text or video.

How to create a trading journal.

Upper left Quadrant: What were the intra-day fundamentals. Essentially why were you looking at this stock? Did you get an alert? Did you see if pop up because of a signal from trade idea? Did your algo say, “buy here.”  Did they release earnings? Did they get an upgrade?   These are some examples of the interior aspect of a trade.  Think “why am I trading this stock.”

Upper Right Quadrant:  Essentially we are talking about Technical analysis.  Did it come into a supply zone? Did it make a head & shoulders top? Did it have a candle stick pattern you liked? Objectively, what was this stock doing? Chopping? Trending? etc

Lower Left Quadrant: This is where it can get tricky this quadrant is about shared meaning/value. An example of this is language.  I interpret this now as the sentiment of the stock.  What do WE, as a collective, believe about this stock? What do WE as a bull (or bear) believe about this stock?

Lower Right Quadrant:  Intersubjective.  Economic systems fall into this category, so would a mechanical failure on the stock exchange.  It can also be interpreted as: What was the market doing? How did the SPY or Oil or whatever market gauge you like to use, perform with your stock? What artifacts were left behind? Do you see a stream of red candles of green?

This would Look like the following:  You can either download a program like Greenshot to capture pictures from your screen and edit them (this is a free version of snagit) or write in a journal when you want. Displaying the picture will give you the best idea of how to review your trades using integral theory and create the trading journal that will hopefully make you a better trader.

Remember you want a journal that will cover all aspects of why you did what you did without taking up loads of your time.  You need the best information and I believe integral theory helps focus us to pull only relavent information.

As I continue my study of Integral theory by Ken Wilber my understanding of it changes.    This is, according to my understanding, is the first attempt to understand finance in an integral frame work.  This is Integral applications In finance.

This is one of my favorites. When you hear a trader say, “I love this stock.” You know they are preparing themselves for distorted facts, ignoring reality and misinterpretation of the facts merely because of their affection towards the stock.

Yes, I said affection.  My belief is that similar to relationships we become married, infatuated, angered and involved emotionally with stocks.  The relationship can last for a couple hours (a fling) or for months, even years (marriage).  As you develop this relationship, regardless of time, you develop feelings.  You’ll hear this in traders talk. “I love this stock.” “I understand how it moves.” “I just get it with this one.”  Sound familiar?

It’s great you found your love and if it’s healthy, you’ll be profitable.  However, there are biases you will experience because you have developed feelings.

• Not believing the pattern:  Your significant other always buys you ice cream after the market closes.  Last Friday they didn’t show up with ice cream.  You may dismiss this as an anomaly but the truth is your significant other meet someone else and will no longer be bringing you ice cream, you just have no idea.  Monday you wait, Tuesday… you get the idea. Mean while you’re pissing away money waiting for the same pattern to develop that is now gone.  Guess what. Time to move on.
• Distorting Reality:  2 weeks go by and you are still trying to catch that same pattern.  It finally happens and you say, “omg yes finally, she’s back.” but it turns out they just had a fight and you’re still shit outta luck.  This also reinforces the operant conditioning that has been happening.  Your perception of reality is no longer accurate, you make allowances that you would not normally make because you have feelings.

Feelings aren’t all bad in the market but the right ones are key.  When “the stars align,” you just know.  It’s a gut feeling.  When you like/love someone or something your reality with it will change. It was an adaptation that was passed down.  It works evolutionarily that if someone in your party fucked you over but you like/loved them and needed their cooperation in the future… It makes sense that you should distort reality for the greater good that is your survival and continue to work with them.  However,   The superfluous feelings you develop for a stock that once made you money though deserves there rightful place in the bowels of memory.

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.

Today’s Daily Trading Goal focuses on how to choose your thoughts.  Thoughts effect your biology and your biology greatly effects your ability to trade through hormones.   Which thoughts you choose to pay attention to is critical.  Listen & choose to think good thoughts.

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.

Today’s daily trading goal is to stop getting caught up in your thinking.  In psychology,  one aspect of this is the confirmation bias.  Where view almost all information as confirming our original thoughts.  Stop this by wearing aware it exists.  Be mindful of your thoughts.

Today’s trading goal is to Control Negative thinking.  It can be very easy for the snowball effect to take hold after 1 bad trade.  Monitor your thoughts & feelings, being aware of them is more than half the battle.