Trading Success

Journaling | Are you fooling yourself or is there a better way to do it?

There is no dearth of resources on journaling and its benefits As with most of the things which are hailed as revolutionary and life altering, as I put my skeptic’s hat on, I see some major issues.

First things first, what is Journaling, essentially Journaling in any context, trading or otherwise is a Reflective practice, where you think about the past, a set of past events, the context in which that event happened, and your behavior in that context, and then jot it down. You may also jot down what you want to continue doing and what you want to change about your behavior if such a context occurs in future. Fair enough.

Now what could an issue with such a process?

Ever heard of this thing called “Hindsight Bias” - Here is the wikipedia definition of it.

Hindsight bias, also known as the knew-it-all-along phenomenon or creeping determinism,refers to the common tendency for people to perceive events that have already occurred as having been more predictable than they actually were before the events took place.As a result, people often believe, after an event has occurred, that they would have predicted, or perhaps even would have known with a high degree of certainty, what the outcome of the event would have been, before the event occurred. Hindsight bias may cause distortions of our memories of what we knew and/or believed before an event occurred, and is a significant source of overconfidence regarding our ability to predict the outcomes of future events.

What if your recollection of the past itself was a bit coloured? What if you jot down something as, if A and B happen - I will do C - and then when A and B happen you could not recognize it as it’s not possible to be sure its A and B and hence you could not follow your self made rule of following C.

Specifically talking in the context of Trading, this is the biggest issue of Journaling along of eyeballing charts is, it’s so damn easy to spot that cross-over, that divergence when it’s in hindsight, and hence equally easy to create rules based on what you see on static charts. Only to not know when to follow the rules that you created for yourself, as you cannot recognize the context which you could easily do in hindsight.

Does this sound familiar?

So what’s the way out?

The answer my friend is blowin in the wind. Sorry for that one, the song was playing in the background and I went with it.

So yes, after much thinking I realised, there is no other way to it than to put in in numbers, in other words, you need to define what A means and what B means, and then look for conditional probabilities of the event, based on which you can decide if the bets are worth taking and set a limit to the losses.

Going back to the old example - Once you spot A and B (Not in an arbitrary way, but more in a measurable way) , you should now know the probability of C happening - And create a set of rules to both the situations, ie if C happens I will do X and C does not happen I will do Y. You can further dig into the stats to optimize these numbers and modify the rules as you go on.

A meaningful way of journaling would be, to write your observations based on the historical probabilities as references.

And as far as behavioral factors go - Ask yourself, what was the context - right before you took that so called “Bad” decision

  1. Why was that decision Bad? Just because you lost? What if you take that bad decision everyday, would it statistically work in your favour? If yes then it’s not a bad decision.

  2. Was it bad because you broke a rule? A rule which would statistically keep you safe? In that case - ask yourself about the context in which you “gave in” - Was there some other external influence on you at that time? In other words go one level deeper in terms of what made you do what you did. Write that down in the journal.

  3. Always create your rules which followed in any given context would keep you on the right side of your books? It’s almost impossible as humans to have too many if-then-else loops running in our minds.

  4. Think of “triggers” which lead to a “rule breaking” behaviour. For instance, in my case it was for a long time, a variant of revenge trading, I may have made money in the morning, lost it in mid day, and would like to end my day green again. So in my case losing my morning gains was the trigger.

And yes, even after doing all this Hindsight Bias may still creep in, its almost a part of our DNA, so long as you are conscious you are good, and if you do break a rule, forgive yourself, there is always another day and another trade to take - trading after all is one of the most difficult ways of making easy money.


Putting Losses in Perspective - Do you have an Edge?

One of the fundamental reasons for losses in trading can be traced to lack of an “Edge”. But then you would ask me what is an Edge?

To me a trading edge is -

An ability to isolate a condition or a set of conditions among a market variable or a set of market variables - that has a non random way to evolve over a specific period of time.

I remember reading somewhere, but I cannot place it where - it said - “If you can’t explain your trading edge, you don’t have one” - Let me take it to the next level

If you do not know the statistical a) probability of the set of (prerequisite) condition/s that need to occur b) the probability distribution of the outcomes once the conditions (a) occur.

If you cannot articulate both then in my world you do not have an edge.

It’s quite possible that you are a veteran and even though you cannot articulate your edge, you have internalized it over a long period of time. But that according to me is a long winded route and I would personally prefer to be in the know of my edge.

So coming back to losses, the reason we need to be able to articulate our edge is - in the event of a loss, we need to know if its a part of our larger probabilistic framework or is it something which is beyond that. We need some objective reference. For example if you have a loss streak of 5 days, you need to know its statistically “normal” in your trading system or is it an anomaly.

In other words, your understanding of the variables of your edge helps you put your trading outcomes in a measurable context.

In the same breadth, it also helps us understand if the market regime itself is changing, and helps us adapt better.

So the next time you make a loss you know who to catch first?

The Dark Side of Being a Full-time Retail Trader

Most aspiring traders that I have met, seem to have a few things in common

  • They want to be independent i.e not to work for someone
  • They also want independence in terms of their time, they perhaps want to spend time doing several things and not just trading
  • They want to make some reasonably good amount of money by investing around a year or two worth of time

These are the sort of expectations that aspiring traders usually have. And as they say, reality is usually quite different from what we expect it to be. So let’s look at the other side, the reality, the darker side i.e.

  • The other side of Independence is responsibility – responsibility to succeed at something by oneself, all by oneself – the impact of this on one’s self-worth can be massive, much more than one can even imagine – Especially if you’ve had considerable success or acceptance in your previous career, the impact could be even more.
  • The other side of freedom to use one’s time could be either indifference or obsession, both the extremes won’t help usually, obsession is a shade better than indifference though
  • Long streaks of losses can psychologically break the strongest of the people, which can have further ramifications, from depression to suicide, yes I am serious.

While all that I described above could be two extremes and the reality would be somewhere in the middle, but I guess what matters is

a) Getting a better sense of reality before diving into this business, yes I call this a business because, like any business, this too requires you to risk your time and money.

b) Developing a plan which includes the possibility of a fairly long learning curve 

c) Viewing this as one of the ventures in your entrepreneurial journey

d) Viewing trading as a performance sport – which would mean hours and years of practice and focused effort and an understanding that you need to be at the top of your game and like anything which is performance oriented very few can be.

e) Viewing the effort towards the goal not just in a linear sense, but also in another sense, be open to the idea of landing on something else altogether, in a serendipitous sense, which could alter the course, perhaps all for your good.

f) Finding like minded people to work with, not falling into the lonewolf trap, there are limits to what one can do by oneself

So with all this said, you can imagine how your everyday life as a trader is going to be. In all probability, you may end up being unhappy, and fairly stressed more number of days than you ever imagined. Depending on your general constitution, it may also affect your health. Depending on the quality of your relationships and life context that too may suffer. All this happens not just in trading, this is the truth for any entrepreneurial venture.

Even after being aware of all this, it’s still different when it really hits you. Because in the beginning, you tend to think “maybe it may work out differently for me” and then it doesn't, you may delude yourself for some time but then, sooner or later it does it hit you. And when it does, you end up asking yourself questions like – Till when do I be in this venture? Should I just quit and take up something else?

Valid questions with no simple answers.

As clichéd as it may sound – as they say - Nothing great ever was that easy.  


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.


Why 95% of traders fail? | Perspectives on that statistic

A few weeks back I had answered a question on Quora?

Incidentally came across another article on the same theme here -

Good to see someone else endorsing the same ideas. I will leave you with a few excerpts.  

Something I said in the answer. In fact good traders have a very high demand in the industry, more so in India. I personally know people willing to hire mature/responsible traders with a proven track record.

Something I said in the answer. In fact good traders have a very high demand in the industry, more so in India. I personally know people willing to hire mature/responsible traders with a proven track record.

One thing that people need to understand is, growth in any business including trading can be exponential, which a 9 to 5 job can never provide. But getting to the point of inflection, could take time. That is the test, perhaps. Can you hold on till that point, or would you quit before that. Choice is always yours. 

One thing that people need to understand is, growth in any business including trading can be exponential, which a 9 to 5 job can never provide. But getting to the point of inflection, could take time. That is the test, perhaps. Can you hold on till that point, or would you quit before that. Choice is always yours.