Trading Psychology

Podcast | Dr Brett Steenbarger | Three Powerful Techniques for Changing Your Trading Psychology

Those of you who follow the blog would know that I am a big follower and fan of Dr. Steenbarger and his Traderfeed blog.

A few days back I came across this Podcast which highlights several things one needs to understand and be reminded of when developing one's trading skills. Do listen to the the full episode, he answers several relevant questions.

I particularly agree with the idea of "Pattern Recognition" and "Analytical Ability" that he stresses upon. Something that I have shared in the blog here and here.


Note to Self - Learning from Losses

There are three things I learned from loosing, ie. taking losses, sometimes large losses. 

1. Personality Fit - I realized what kind of trading style fits my personality, to what extent am I comfortable taking losses. That is when I became damn sure, that it has to be scalping/Intraday trading for me. I cannot think of overnight positions and managing those positions first thing in the morning. I also realized I do not like taking losses once the trade moves in my favor.

2. High Probability Set-ups - Now this one, is learnt better when losses happen consistently in certain set ups, for me it was Mean Reversion Trades + Scaling-in which used to cause disasters.  I thought about it and found quite a few solutions to the problem. Usually if a set up is consistently failing, the reverse of that should be profitable, and that worked for me. I also realized the potential risks of averaging down, and the context in which it works. 

3. Money/Profits are fungible - This one becomes relevant when you make up the losses that you made. The whole process of loosing and then making it up, gives you a sense of confidence, it also helps you compare and contrast your own approach to trading then and now. Lastly, It makes you more open to taking defined risks.

So here's my thank you to 'Losses' that I made. I am glad you came.

Meditations on Screen-time - Part 1

Recently, I gave an assignment to a novice trader to observe certain parameters and trade locations, on live NIFTY charts, as the market develops. So, at the end of the week, we had a catch up session to exchange notes. I was eager to know what he had observed. 

I asked the question "So what did you observe in the past 5 days every time when NIFTY crosses the VWAP?" - He said, "NIFTY either goes above VWAP or below it, and that keeps happening, I don't know what else you wanted me to watch, (he also added) I actually watched it for a couple of days and then stopped, as it didn't make much sense to me"

I was not really surprised, as this was not the first time such a thing was happening. So over the long weekend I thought of reflecting on what is it that I really expect them to do while watching the charts, so here is a two part series on Screen-time, in the first part we will focus on the idea of "Observation" and the next would focus on "Making Inferences"

When I started trading, I actually didn't know what "Observing" was all about, I used to see the charts. It was only a year into trading, and much reflection later that I realized what I was doing. So first things first.

Seeing vs. Observing 

Read this instance from Sherlock Homes's "Scandal in Bohemia"

In the context of trading, here is how I would translate what Sherlock is trying to say.

Observation includes the following

1) Capturing Statistical Data - When observing, are you looking at data elements like, time taken for the price to move from point A to B. A being a reference point, how many times does the price B get revisited, and things like this. While you are doing this the next point should also happen in the background.

2) Creating a Mental Baseline - After observing the charts for a few days, across the same reference points, you should be able to create mental baseline, for instance, If the price moves beyond this point, it does go up by X points on an average. This baseline would get refined over time, but this "program" has to be running in the background of you mind all the time.

Now that we hopefully have some idea of what does it mean to "Observe" lets looks at some ways to enhance the process of observation.

How to get better at Observing?

1. Focus - Imagine you had two tasks to choose from - a) To look at every passing vehicle on the road to see if it,s registration number starts with odd or even b) To look at every passing two wheeler and see if its registration number starts with odd or even?. In all probability your performance on the task (b) would be better. Same logic here. If you look at too many things, too many indexes or stocks, its difficult to observe something specific. The other side of focus is also distractions - It could be in the form of other people in the immediate environment, browsing something else, phone calls etc. That too needs to be controlled.

2. Perspective - Taking the same example as above imagine you are given two more choices now -  a) To look at every passing two wheeler and see if its registration number starts with odd or even?. b) Sit in a control room and look for all the passing two wheelers, both from back and front - again in all probability your performance on the task (b) would be better. This is akin to watching both the CE and PE option strikes of an instrument. You can also build perspective by looking at the same instrument in different time frames, same instrument with different types of charts, for instance you can juxtapose both a foot-print chart a candlestick chart. Or may be a PnF chart and a Candlestick chart. The idea is to get multiple perspectives of the same instrument.

3. Technology -  Well, here technology means, more screen real-estate. One of the reason a multi monitor set-up helps is it, helps you simultaneously view the price action,  which is very different from flipping across tabs. It does not (at least to me) give the same visual perspective. Take at look at my set up below.

On the top are footprint charts of NIFTY and BANKNIFTY along with PnF charts + The bottom two monitors are dedicated to slightly ITM CE and PE

In a way on a single side/pane (without having to turn my head) I get to see multiple views/perspectives of the same instrument. Personally I would say, this has been one of the best investments that I have made in my trading business, and it has enhanced my understanding of NIFTY quite a lot.

4. Documentation - Note Taking, also plays a very vital role, I have seldom seen a high performing trader without a note book on his/her trading desk. How to make notes perhaps could be a post by itself. But at the moment we will keep it simple - so do jot down, things you may want to refer, back test, or explore further later. Essentially what note taking does is, it eases the job of your memory for more important tasks and there by improving your cognitive capacity. 

All the above steps should help you increase your ability to capture "cognitively"
speaking much more than what you otherwise would.

In the next part we will explore, what is it that we can do with this observation. The logical next step would be to "Make Inferences".

Also you may want to look at this old post on visual perception, which obviously is related to Screen time. - Learning to see data - NYT Article Summary & More

Learning to see data - NYT Article Summary & More

Article Link -

I came across this article sometime back when I was researching on "Perceptual Learning". Perceptual learning basically is about how we learn and create patterns in our brain using all of our senses.

Here's an excerpt from the article which explains it further 


In the context of markets, it is closely linked to the idea of "Fractals" and concept of "Thin Slicing" from psychology.

When we are looking at charts and trading, esp. seasoned traders get an intuitive feeling of what may happen next. I have seen this with several traders. They see a pattern emerging and they know how its going to develop further. Obviously its not fool proof, but even if it's better than a coin toss probability, its good enough, in reality I have seen people who have a probability of getting it right more often. But then, it may not just be their refined visual perceptual abilities, there could be other variables that they may be tacitly processing, perhaps some moving averages or some other data. Its only when their brains kind of processes all these elements together that they get their predictions right.   

Also, since price movements are fractal in nature, traders are further able to apply the same sense to different time frames, and perhaps benefit from larger swings as well.  

But then how do we develop this intuition, unfortunately there are no shortcuts. Sufficient "Screen Time", "Focus" and "Reflection" seem to be the only ways get there.

BTW, if you are more interested in the subject of forecasting there is this awesome book by Philip E. Tetlock and Dan Gardner called "Superforecasting: The Art and Science of Prediction", here is a nice summary.