Best of Trading Psychology · Part 2

Foreign.

Speculation and risk. This is the Chat With Traders podcast hosted by Aaron Fifield.

Welcome back everybody. Great to have you here for episode 200 which is a nice milestone to hit. So I'd like to say a quick thank you for your continued support of the show. It is very much appreciated. Now, as an extension of the previous episode, I present to you the second installment for the Best of Trading Psychology. This is of course a compilation of snippets on psychology and mindset taken from previous episodes of Chat with Traders and I feel like this is a fairly important topic to highlight given the psychological aspect. Can really make or break many traders with any of the snippets. If you would like to hear the full episode, links will be in the show notes@chatwithtraders.com 200 Otherwise go direct@chatwithtraders.com the episode number which I'll indicate prior to each clip. To get things underway like last time, we'll start with a clip from the very early days. This is Lance beggs from episode 13. A former military pilot who's been trading futures full time since 2010. Lance could be described as a discretionary price action scalper, although it pertains to psychology. Still, this clip is a bit unique in the sense that Lance speaks to how he adapts the mindset of other market participants and how that then drives his decision making. So something he refers to as the metagame.

I'm not really a pattern trader, more of a looking at the internal nature of price, the strength and weakness of how the price swings show on the chart and also metagame aspects. Do you want me to get into that?

Yeah, yeah, go for it.

All right, how do we do this?

The ultimate aim of my approach is to identify, if I want to simplify it, a short term bias for market movement. Okay, so price is it the next two or three price swings going to be bullish or are they going to be bearish? Okay, and then we're looking for a price movement against that bias. So I'm looking at people pushing the price against that bias. Now as I'm looking at that pullback against bias, to try and time my entry, I'm not looking from a pattern perspective. I'm looking from two ultimate perspectives. First is the nature of how price is moving. Is it pulling back? If we take an uptrend, for example, is the be bearish pullback sort of occurring with bearish strength or is it weak? And I'm really looking to fade weakness if it pulls back with strength. That's information I Wasn't expecting. I'm standing aside and waiting. So I'm looking at the internal strength and weakness of the pullbacks, but I'm also looking at a metagame perspective. This is the people perspective. I'm really trying to get in the mindset of the people who are trading that pullback, who's getting trapped, who's in a losing position. When are they feeling fear? When are they praying to the market gods that come on, please, just once, give me a winning trade? I'm trying to feel that fear, and I use that to time my entry. Basically, I'm looking to identify the point where these people know they've got it absolutely wrong and then profit from their exit order flow by entering at or before that point of their failure. So while I'm a price action trader, it's a little different to most. I'm not looking at heads and shoulder patterns and triangles, et cetera, et cetera. It's really looking at the internal way that price is moving and the people aspect, the idea, metagame, metagaming. For people not familiar with that term, it's really, to put it simply, it's just the game hidden behind the game. For me, most people are stuck in the game of price. Just they look at price moving and they're trying to identify when do we buy, when do we sell, based on these chart patterns. And for me, I recognize that that's not actually the real game because the price itself and the price movement comes from order flow, and that order flow comes from traders making trading decisions. So in trying to identify the cause of a price move, you really need to be getting down into sort of analyzing what the traders are thinking who are making these price patterns occur. And so that's the metagame. That's where I operate in timing my trades.

Yeah. And I think that that ties in very well with something I read on your site yesterday, actually, and you mentioned the aim of analysis is to identify where you know others will buy after you and identify where others will sell after you.

Yeah, absolutely correct.

And, you know, that's the metagame approach. Actually, I think the article that comes from was the Rock paper Scissors one. Is that correct?

Quite possibly, yeah.

The rock Paper Scissors is a good analogy for what a metagame is. And there's. There's. There's a Simpsons episode which I mentioned in that article, where Bart and Lisa are. They're disagreeing over something. And so Lisa says, well, Bart, there's only one way we can solve this, and that's rock, paper, scissors. And then they Go to Lisa's thoughts process. And she's thinking, poor, predictable Bart always chooses rock. And Bart is thinking, good old rock. Rock never fails. So he throws rock, Lisa throws paper, Lisa wins. Lisa there was playing the metagame. She's not playing the rules of Rock, Paper, Scissors, which is basically that, hey, it's all random. You've got a one out of you got a 30% chance of winning, 33% chance of losing, 33% chance of draw. She is actually playing the game of.

Thinking, getting inside the thought processes of her opponent and using that to her advantage. And that's what I'm trying to do in the charts. When you break it down to first principles and go back to sort of, what is price? How does price move? What causes price to move? And I think that was a critical part in my development. When I actually stopped to look at cause and effect. I realized that it's all trader decisions. And it doesn't matter what technical patterns or indicators you use for entry. If you buy in the market and no one buys after you, they're not going to drive price further, so you lose. So really the game comes down to sort of identifying the places on the chart where you know people are going to buy that after you, you're getting in before them, or if you're short, people are going to sell after you have already sold. And that is essential for driving price in your direction. It's essential for profit. And so I think if you're not looking at the market from that perspective, you're doing yourself a disservice.

Next. This snippet comes from the series My first year trading full time. It's episode 196, so a recent one with Ryan Trost. Ryan's a junior equities trader at the NYC prop firm SMB Capital.

You've hinted at psychology a couple times during our conversation here, and I know one of the things you've said in the past is that traders shouldn't underestimate the psychological aspect. How come?

Because I think that it's so easy to get caught up in the idea that this is all systematic. It's all patterns, it's all, oh, you buy these breakouts and you sell. When you reach your target, you risk this amount per trade. You only take good setups at work, and none of that is really taking into account that you feel a certain way when you make or lose money. Anyone who denies that, I think, is fooling themselves. I feel a certain way when I have my best day ever. I feel a certain way when I have my worst day ever and those emotions and psychological aspects that come into play aren't never going to go away. It's impossible to be robotic. Even the best traders at this firm, you read their reviews or you talk to them after a good day or a tough day, and it all comes down to, were they in the right frame of mind? Were they putting themselves in the mental state where they could perform at their best? Did they meditate? Are they taking regular breaks to refresh themselves? Are they doing some type of best practice to take their temperature?

That's a saying we have here at the firm. You take your temperature at 1530 minute intervals on the day and say, okay, maybe I just took a loss really early. Why did I take that loss? Was I in this trade because I was chasing the symbol? Or I had a fear of missing out, or it was a boredom trade because there's not really anything else going on today. All of those things are not really a product of your system, but they're a product of your personality and the way that you think about the day. And I think that if you don't really focus on the fact that it's impossible to completely devoid yourself of emotion unless you're a strictly algorithmic trader, it becomes not about fighting your emotions, but learning to use them in a way that is productive and leveraging your own personality and your strengths. You don't have to avoid your demons. Tom is pretty active on Twitter and he'll always talk about how, you know, there's certain things that make all of us tick. There's certain things that get us happy, certain things that get us excited, sad, frustrated, angry, you know, overconfident. All of those things are going to play into the role of a performance based job. And that's what this is. You know, you can only be at your best if you put yourself in the right mental state. Dr. Steenbarger talks all the time about how there is an analogous relationship between us and professional athletes. Professional athletes, sure, you can focus on what are the plays that you need to run, lift, exercise, get your body in shape, you know, have the talent, be at peak physical performance. But at the end of the day, there's a reason that field goal kickers miss the game winning kick all the time. There's a reason that basketball players miss certain free throws that could be game winners. You know, it comes down to is the mental aspect of your game there, and trading is no different. You have to be able to put yourself into the mindset where you can perform at your best. And the longer you spend not thinking about that, the more likely it is that you can continue to make those same mistakes over and over again and not really understand what's actually making you do that.

Are there any tricks that have helped you as of late or any practices you've been putting into place to help you with the psychological aspect that comes with trading?

Yeah, so I think the biggest thing that I do is, you know, I'm not trading from 12 to 2. So during that time is when I reflect on the morning and prepare for the afternoon. So, you know, did I do a bunch of nonsense in the morning that was I not involved in the right stocks or was I involved in the right stocks and just executed improperly? Did something happen outside of work that has me, you know, off my basis today? Do I need to really look at my entries and exits in the morning and figure out, you know, what was going on? Am I tired? Am I, do I have too much energy? Did I expect too much from the day? All of that for me is really done during that two hour block where I can kind of refresh myself, go get some lunch, take a walk, prepare for the, you know, the clothes and, and really figure out where I'm at mentally. So that's one step of it. And the other two steps are, you know, pre market prep, relatively the same thing. You know, I take my energy levels, I think about, you know, am I tired and how am I feeling that I get a good night's sleep? Did I eat well the day before?

Taking physical journaling notes of all of that and keeping track of it, doing the same thing on the close, reviewing every one of my trades again, taking my temperature at the end of the day. Am I happy with how the day went? Am I not happy with how the day went? Why? What can I put into practice the next day to change that? So it all really comes down to review. I do things outside of work as well. I exercise as much as I can. I try to go to the gym every day, keep myself in a good headspace. My girlfriend is always on me about eating better. I don't say I eat the best, but I do try. And you know, that's all plays into getting yourself in peak performance state.

Now I'll share a couple short segments from a popular episode I recorded back in 2015. It's episode 39 with currency trader Tom Dante. And here he speaks to some of his observations while trading in prop.

It was understanding how seriously these guys approached the market that I think was one of my biggest lessons. But like I said, it's hard for me to give you specific examples because I took so much from so many different angles.

Another thing was composure under pressure. Watching guys have big down days and not seeing it rattle their confidence at all. Seeing them be able to walk up the office, head held high, with a big smile on their face, and you knew for a fact that the guy was down a massive amount on the day. Like, we're talking tens of thousands of pounds. And again, it kind of drilled into you that right mindset that you didn't have a pro trader get his ass handed to him on a day and then turn up the next day and go, oh, I'm fucking scared. I'm scared to click the mouse. I don't know what to do. And it just. It made you stronger, if that makes sense. It kind of made a man of you, I guess, if that's the right way of describing it.

You have a quote, which.

I really like it. I think it's an awesome quote. And it goes, if you're not working on your edge, someone else is. Now, I'd love it if you could expand on this for everyone listening and speak to the competitiveness of trading, right?

You should know that there are guys working so hard, so hard on their edge, and.

It'S often the guys that are huge that are working the hardest. Right? Which is why they're huge.

You often hear people saying that they want to get into this game so they can make loads of money and they can retire and, you know, sit on a beach sipping pina coladas and, you know, placing a few trades from their laptop. The fact of the matter is, is that these guys I worked with that have made enough money if they wanted to live that kind of lifestyle, do not. They are the first in the office every morning and they are the last one to leave. And the reason that they've done so well is because of the amount of hours that they've put in. And they are the guys that are essentially taking your money. These are the people that have done the work that most people are not prepared to do. And at the end of the day, you're paying them, right? So I'll give you an example. When I was in prop.

And I often tell this story.

There was a couple of really big, big guys there. We're talking like a couple of hundred grand a week that they would be making. And they were huge. And one day, one of the guys had had a stellar day. I don't know how much money he'd made. But we are talking a lot of money and everybody was kind of, you know, had heard about it and there was a bit of a buzz and he was just, you know, he was just cool. He was just staying emotionally cool, but had a smile on his face and was chatting with some of the guys and anyway, I left the office at about, I don't know, five o' clock and I got the train home. I got right to my front door and I realized that I'd left my key in the office to my front door. So I thought, I'm not going to call a locksmith. I'm going to have to go all the way back into central London to the office, get my key. So I get all the way back to the office. By the time I get there, right, it's about half past, I reckon it's probably half past nine. Like the market is closed at this time. Took me ages to get back and the market is closed now. I come into the office and all the lights in the office are out. There's just a little light on at the back of the office. And so I'm like, okay, somebody's here. But all the markets are closed. Lo and behold, there is one guy left in the office and it is that guy that had had that huge return and he is sitting there recording his trades for the day and he's writing down what went well, what went badly and making a plan for the next day. And that to me was just, it was a real eye opener because again, most people are thinking to themselves they want to make money in this game, to live the easy life. And yet the reality of it is that most of these guys that have got all this money are working so hard, a lot of them don't have balance in their lives. That's just the way it is. So when I say somebody is, if you're not working on your edge, somebody else is. I mean that these are the kind of hours that people are putting in. They are taking this game seriously. They know their statistics, they know their edge inside out and back to front. I mean, I personally spend a lot of time number crunching, so I crunch a lot of things to. When I see patterns in the market, I look at the probabilities of certain things happening. And sometimes I see guys call trades out, for example, on Twitter. And I think to myself, and honestly, I don't want to come across in a kind of smug, know it all way, because trust me, I get it wrong, massively wrong from time to time. But sometimes I see People call these trades and I think to myself, you know what, if you'd have done your homework, you would never be taking this trade because there's no, there's very, very little probability that you are going to see that, see that, make money. For example, I might see them, I don't know, trading a pattern that I know has a very, very low strike rate.

And again, it's not to say that I'm always right, but this is what I mean when I say that people have work and a lot of the time they're the guys that, you know, the newer traders are, you know, making ill informed decisions and ending up paying the bigger guys that have done the work and put that time and effort in.

The following clip is taken from episode 106 with Turney Duff. Turney's a former Wall street hedge fund manager at the infamous Galleon Group with one hell of a story containing plenty of excess. A cocktail of drugs, alcohol, sex, money and power. This clip comes from the end of our interview as Tony reflects on his current situation, having now moved on from the fast life.

My life is very simple. I'm paying 1300 bucks a month for rent. I barely get by every, every month, but I managed to do it. And I'm just trying to stay sober. I'm trying to write and I'm trying to be the best dad, friend and son that I can be. And you know, interestingly enough, I've, I've never been happier.

You, you made a lot of money during your, your stint on Wall Street. I think you said you made about $10 million. Where is that today?

Um, I wish I knew. So, you know, let's, let's say I made $10 million. You know, just for, for sakes will say, you know, I lost three of it just from three or four from taxes. I.

Was the owner of a fast food or a casual dining concept called Fat Burger for the state of New Jersey. So I put a million dollars in that. That ended up being a zero.

I bought a house in.

2007 at the height of, you know, the real estate bubble. I bought that for 2.1 million, put another half million into it. I ended up selling that for 1.2 million. So I ended up, you know, taking a bath on that. You know, in, in my early 30s, I was living in 2,700 square foot apartment paying 9,300 bucks a month in rent. You know, like I lived like that.

For a couple of years.

So it was a combination of some bad investments. A house, an apartment that I bought and living like an asshole for. For many years, and. And the money just went, yeah, yeah, sure.

And you say that you're pretty much never been happier than you are right now. Why do you say that? I mean, because I presume that when you were.

When you were living in this New York apartment and living life big, you must have been. You must have thought that was happiness at the time. Were you ever content with where you were?

No. So that's one of the things. I was never content. You know, when I was. When I was Morgan Stanley making $22,000 a year, I would say to my friends at the bar, if I could just make $50,000 a year, then all of my problems would be solved. And when I made $2 million, literally, I said out of my own mouth, if I could just make 3 million a year, all my problems would be solved.

So that was never going to end. And so there was a moment back, you know, in, you know, after I'd left the business where, you know, I'd kind of gotten my life back together, and I still wasn't happy. And so I ended up going to the computer, and I searched what the pursuit of happiness meant back in 1776 when they. When they wrote the Declaration of Independence. And what I learned was that happiness used to mean courage and integrity and honor, and it was about how you lived your life. And I was like. When I read that, I was like, what? Because I always thought happiness was pleasure and material things and stuff like that. And so on that day, I was like, you know what? I don't even want to be happy. I was like, screw it. And I kind of just said, I just want to live a good life. Like, I want to. I want to be a good person. And once I made that shift. So I went from a guy who wanted to live the good life to a guy who wants to live a good life. That's when it all clicked for me, and that's when I became happy.

Yeah. So I think a lot of people listening to this right now, and maybe even myself a little bit, you know, we understand exactly what you're saying, but are you only able to say that and actually believe it because you have experienced it, because you've had that life experience?

Yeah, I. I used to say. I'd be like. I would say, any who says money can't buy happiness never had any money. Like, that's. That was my.

My.

My frame of mind, you know, and I truly believed it. And so it's so cliche, and. And. And you probably hear it all the time. So it is, it's a difficult concept to grasp unless you, you get it because, and I'm not, I'm not pointing the finger at anyone, but like, no one, no one wants to look in the mirror and say, hey, you know, I could be doing more. Or, you know, if only.

You know, I had these things, my life would be so much easier. Because you know what? It's true. Money, money will make your life easier in a lot of respects. So it's hard to look beyond that.

Next up, a 10 minute segment from episode 30 with Tom Basso. Tom's a systematic trend follower of futures and currencies and a retired money manager. His firm, Trend Stat, grew from a few guys running an investment club to a fund with 600 million AUM. And Tom was also profiled in Jack Schwager's series of the market wizards books. Note just a little forewarning as you'll soon hear the sound quality from this segment. It isn't great. It's quite poor though. The content is quite good.

And I think I could almost quote you saying from other interviews that psychology is probably the most important aspect of profitable trading. So why do you believe this to be the most important aspect?

All right.

Well, I would say good trading falls into three different things that have to happen. The first one, which everybody spends all their time on, is the buy, sell decision. You have to have a way to.

Say this is how I would buy or sell a market, a stock or whatever it is that you're trading. Secondly, you'll have to answer the question of how much should I buy and what types of instruments should I buy. I call that whole area the sort of portfolio management, risk management, volatility management area, and that you have to be successful at that too. The third area, the most important one in my opinion, and the one that a lot of people spend the least amount of time thinking about, is your own psychology. Because you as the human being who ultimately, even in the case of fully automated Trend Stat, back in the day I had the power as the owner of trendstat to go in and pull the plug on the computer or override it or do whatever because I owned the company 100%. So if my psychology wasn't in good shape and my knowledge of what we were doing, comfortable with what we had created, then the first time I go through a drawdown, I'm going to start second guessing myself and all those computers and I'm going to start telling my computer staff, oh, we need a whole new way of Doing things. And let's go research this latest hot strategy that seems to have made 50% last year. And I could go buy black boxes or build black boxes. What's the difference? And keep switching and trading and fail time after time after time. Because my psychology wasn't right. So even though I was automated, you still have to have a good, balanced mind about what you're doing trading. Like, for instance, a good example that I've heard Dr. Tharp, Van Tharp talk about. Good trading is following your strategy that day. It is not whether you made money or lost money that day.

It's simply following your strategy. And that's a very profound thing. Hit me a long, long time ago when I heard him say that. I thought, yeah, that's perfect. That's exactly what I do every day. And that's why he and I worked together a few years at least. I helped him out with some seminars he was doing. And I found it fascinating to meet a lot of people around the world. And we had a good time doing him until my schedule got so busy it got unreasonable to do them anymore. But.

That was a very succinct and smart way of putting it. Good trading is following your strategy. It's not. Good trading isn't making money, and bad trading losing money. Good strategy development is what you need to do. Once you have that strategy, you need to follow it and to actually execute it. And the time to change your strategy isn't at the heat of the moment, halfway through the trading session, when your particular position is going against you by 3% and you're not sure whether you should pull the plug on it or not, you should have already figured that out and it should be just blindly done. And when you're out of the position and the markets are closed, if you want to sit back and think about what just went on and try to come up with a better way, all good and fine. I'm not saying anybody shouldn't be constantly striving. I was sitting here. One of the reasons I called you a little bit late today was I got completely mesmerized by some stock research that I was doing. So I still am doing it here at 62 years old, retired. And I think you have to keep working and getting better, but you have to stick to whatever it is that you're coming up with unless you can figure out a better way. And I think a lot of people don't do that. I think they pull the plug on it or they buy the black box and six months later they throw it out and they change everything they're doing and they're, they're adding so many layers of filters. I've had people at Facebook give me a message and ask me questions. They'll say, well, tell me what you're doing and I'll see if I can react to it. And I'll go into this involved explanation of all the different filtering this. And they only do it if the ADX is that. And on and on and on and on. I'm wondering how they ever get a trade to happen. They get so many filters in the thing that they're trying to achieve perfection and it's so complicated, it's probably not workable and they're likely to miss those two or three very large trades that are going to pay the way and because they filtered those trades out somehow. So I encourage people to really understand their own mind. I think some people are a little more cut out for trading than others. I think that sometimes extremely cerebral, highly intellectual, you know, they view themselves as smarter than everybody else. They're brilliant. They sometimes have a hard time with trading because they just know too much. And some of the best traders, if you look at some of the floor traders, the people that have come off the streets that really didn't know a whole lot about investing at all, certainly don't have the MBA or anything, but they're successful traders because they find something that works and they stick to it. And they don't let the markets beat them up because they don't really have that mental side of them that wants to analyze and theoretically understand everything out there. They just want to make some money and go home. So that's what they do. And so it's something to think about. Everybody needs to study their own psychology and try to ask themselves what could they be doing to balance themselves out more so that when they're doing actual trading functions that they can stay in the now, they can analyze where they want to be, be fairly unemotional about it and react quickly. That's really what good trading is. That's psychology. The first two, you can do all the work you want, but if you don't have the psychology, you'll never execute those first two.

And when Jack Schwager interviewed you for the New Market Wizards, he actually dubbed you as Mr. Serenity because of your cool, calm and collected style of trading. So I mean, how were you able to actually achieve this and maintain this evenly killed mindset even through times of drawdown?

You know, I've asked myself that question a number of Times and the only thing I can think of that seems to play in my mind about history and you know, my life looking back is that I was so darn busy doing so many things that didn't involve sitting by a phone or in front of a quote machine. And I had so many varied interests that were outside the markets. I've run into people that in the middle of the night wake up and they want to see a quote machine down by their bed to know what the Euro's doing tonight. Or weird. That's absurd, obsessive to me. I like golf, I'm gonna cook dinner tonight. I.

Like helping other traders.

Yesterday was pruning my front yard. I love to do sort of an Italian landscape scheme with everything's flowering. I hand prune all my bushes and trees and do it myself. And there's so many things for me to fill up my day that trading just becomes sort of one of the many, many things. And by doing that it sort of removes the attention to my conscious brain of all the different pre crisis is doing this and oh my God, gold's up $10. And you know, all these different things that go on that could capture your mind and all of a sudden pull you down some kind of a psychological hole. Because I was so busy, because I allowed the computers to do their things, because I spent time programming those computers to do what I wanted them to do and I knew they were doing that. It sort of gave me that peace of mind to, you know, wonder what I was going to cook for dinner that night or something else or concentrate on my golf game or have fun vacationing someplace I didn't have to be obsessed with every day. You know, read the paper, read the quote machines, look at the charts, you know, agonize over everything. That's where I think a lot of traders, including Jack I believe back in the day when he interviewed me, he was very caffeinated.

New York, you know, fast go go personality, constantly driving and a lot of the market wizards that he interviewed, some of which aren't around anymore.

You know, we're pretty fast, high risk guys in the end. And some of them blew up and didn't make it over the long run by comparison I was pretty boring. But where I was unusual was the kind of the systematic keep it simple, don't get stressed out over it. I think that appealed to Jack in a way because he sort of wanted to adapt some of that for himself. He was just the opposite and I think that he found it appealing in a way and that's probably how that chapter got written somehow, but it was a fun process. I enjoyed Jack and he's a great guy.

I'll now play for you two parts I've pulled from my interview with James king. See episode 133. Having studied sports science and performance psychology, James was brought on as the performance director at a commodity trading firm in London. Here James talks about building resilience and stretch goals, a method for expanding your comfort zone.

So here we're talking a lot about resilience and you're using some pretty, I guess, advanced methods of training for resilience or testing for resilience. For the trader who's at home, the trader who's listening to this, are there any methods or exercises they can try to help build their own resilience? Because you're kind of mentioning it here as though it's a key trait to have can be very beneficial for traders to build up their levels of resilience. I mean, what would you suggest to someone at home? Might be a couple things they could try to help.

Right. Well, this is where I guess I'm going to be controversial. The thing I would suggest is that resilience is something that's in everyone already. It's there. If it's something you're struggling with consistently, then there's probably some more deeper sort of root cause problem you might want to look at. And it all comes back to that first point. Make sure you're chasing the right goals in the first place. Make sure you're using your strengths, make sure you're doing something you genuinely, sincerely find meaningful and make sure you're clear about what you're getting from doing that. Again, when you're in that sweet spot, you're instantly at the best operating at the highest level of resilience you sort of have in you. So that's where I'd always start. Because the goal is not. If you're not sufficiently motivated to pursue the goal, then you'll find any excuse to be unresilient and you'll be constantly distracted and you'll constantly want to perhaps minimum effective dose everything and do the bare minimum. And if you find yourself doing that, then I would certainly. First thing is I'd remind you that that's not you, you are not resilient. But what is happening in those sorts of situations is that it's a clear indication to me that you're probably chasing the wrong goal. And it's not really got your phone on all cylinders with regard to motivation. The second part of that is that Resilience is built by stepping out your comfort zone and making sure that you sort of take in taking small steps and it's a capacity that's expandable. So the other thing that could be happening is that if you are finding that resilience is perhaps an issue for you, then perhaps your steps are a bit too big. So what I'd encourage someone to do is before we start talking about any resilience, quick tools or hacks, these are the foundation things. The first one is make sure you're chasing the right goal in the first place. And then secondly, check the step size. For instance, if you're sat on the couch for three months, you suddenly decide you want to go out and run a marathon, and then the next day you start running. Every day I'm going to go out and run five miles. And then you find yourself that you've given up, not doing it or quitting halfway through and making all the excuses under the sun. The point I'm sort of arguing is that you're probably trying to do too much too soon, and you need to build your capacity for that. And small, slow, steady steps are going to be better. And what happens is you set yourself small targets, you complete them, and then the unconscious message to yourself there is that I said I was going to do that and I did it, and that reaffirms and it becomes sort of a spiral of sort of uplifting sort of success there. And that's where you build your identity around. I am resilient, I am confident, I am motivated. So make sure that your sort of step sizes is appropriate. I think we do live in a society where people watch an advert or sold on something and then go from 0 to 100 very quick. I think it's really important to really reflect and before you pursue any goal, make sure you really are aligned with it. And then secondly, baby steps, and then those will very soon compound and you'll find yourself going exponential but general resilient tools as well. I mean, a lot of people are talking about meditation. Works with some people, doesn't work for others. I think it's about just experiment with stuff like that. I think it'd be silly not to try these things out. Trying them on. Apps like Headspace are great. And I know, I think that almost, almost every trader I've met sort of has that app somewhere, pulls on it from time to time.

One of the things I've heard you speaking about in the past is a thing called stretch targets. Now, I'm not sure if this is something you've come up with, or if it's something that's maybe a little bit more widely known, but it sounds kind of interesting, I'd like to hear a little bit more about it. I mean, what are stretch targets and how are they used? Amongst the traders you've worked with stretch.

Targets, if you can imagine three zones, the first one would be your comfort zone, and that's the zone in which you know what you're doing. Okay. You don't learn anything or adapt or improve anything in your comfort zone. It's maintenance at best. Although probably some entropy sets in when you stay there too long. And then the next zone would be your stretch zone. Essentially, the stretch zone is an area where you're having to switch on in order to sort of successfully operate or to perform.

In that area. And what that does is it creates a gap between your current ability and the ability required in order to be successful in that moment. And it's that gap which causes your body, your brain or body to take, you know, make the changes physiologically and neurologically that will enable it to successfully complete that task. And then, then essentially what happens is your. Your comfort zone expands and what was initially stretched would become comfort. And that's the process of learning and growth beyond. Beyond the stretch zone. You've got your panic zone, and that's when essentially you haven't got a clue and you're really fitting yourself and it's just too much. And as you just absolutely. Body's full of cortisol adrenaline and because of that, it's just too overwhelming that no learning, learning occurs. So it's really important to get that.

Sort of.

Steps you take in order to improve small, iterative. And then you can progress as your confidence and resilience to deal with sort of more stretch increases.

I think where I heard you speaking about these stretch targets was a video that you created for Mandara. I'm just trying to think over the example you gave in the video, which was kind of cool. You said, oh, I think I know.

Okay, so this comes back to. I think I know what you're talking about now. So this comes back to. So earlier we're talking about, you know, when you see this sort of pattern of thinking whereby, okay, I'm crystal clear on my current condition. I know what everything's like. You know, everything looks like then I've got my target condition over here, which is why I want things to look like. Now, where we talk about stretch targets, there is that if you, if we were to ask a Guy at Mandara to, okay, you made this, just for example, say, okay, you made a million last year, we want you to make 1.2 this year. The problem with that is that.

The sort of solution that most people jump to there is, okay, well I'll just do a little bit more of what I'm doing now because I need to make a little bit more of what I'm doing now. Whereas if you sort of almost 10x that you'd be like, okay, well I want you to double that next year. And also I'm going to remove this resource from you. You're not allowed to do that. Also I want you out the office by four every day because it's not sustainable. The hours you work. It suddenly forces the individual to look at the problem in just a completely different way and they've suddenly become a lot more creative and their lateral thinking sort of goes through the roof.

What are some of the ways that you would encourage them to rethink things? I'm just trying to think like if someone at home or someone who's listening to this wants to try and put in place some kind of stretch goal, stretch target for themself, I mean, what might be a good way to think through that or actually try to apply this type of thing?

Starting off with a blank, blank slate. So forget everything you're doing at the moment and just look, okay, this is the target. How do I do this? And then think about where you have leverage. Okay, so where can I leverage something in order to produce a new result? It could be, okay, so there's a classic ones time and effort which everyone sort of jumps to the capacity, oh, let's hire more people to do it. Then there's things like that become and there's other areas which are sort of out of the box. So there might be things like, okay, well I could, what if I designed a new tool? What if I leverage technology? What if I shared a resource here? What if I partnered with this individual? What if I, you know, even looked in a completely different area? What if I started trading more products?

What if I started trading new time zones? What if I automated half the stuff I'm actually doing? Because that, that is sort of taking up 60, 70% of my time. So it's asking those sorts of questions, looking at every area, what have I sourced expertise from an individual here or there? Or what if I go and speak to someone who's had this problem before? But they're the sort of general questions and that's where the sort of human Ingenuity comes in and that's what we're good at, really brainstorming, but brainstorming solutions. But again, it really helps doing that if you're crystal clear on what your process actually looks like and actually get down on paper, how you spend your days and how you actually engineer the results.

This next snippet features Charlie bathgate on episode 73. Trading has been a part of Charlie's life pretty much for as far back as he can remember, as his father was a professional trader. And today Charlie's a partner at Sang Lucci and and a true fanatic on psychology and biohacking matters. I'd like to ask you, what is it about this aspect that really fascinates you and what makes you think that it is such a big part of a trader's profitability and success?

I think that the, you know, it's just the way that psychology has always been the way that when I look at the world, that's what explains how things work. It just kind of makes sense. I think everyone to a certain degree, from a natural predisposition has something, some discipline that when they try to understand why things are happening the way they are, that explains it. For some people it's physics or economics or whatever. And for me it's just psychology makes sense.

A lot of it comes from experience. Both watching my growing up with my dad, with watching a lot of other traders that we knew. They were kind of close to my family and whatnot. The guys that had a grip, a handle on their psychology, on their mental health, on their consistency, tended to trade better. They tended to not blow up. They tended to not make poor decisions, impulsive decisions, decisions for the wrong reasons. They tended to execute their strategies with more discipline. And the guys who had other issues, a lot of times it really bled into their trading. Oftentimes some of the guys were really, really smart, really talented.

It didn't matter how much knowledge they had in their brain.

If the filter to execute it was broken. If they had a mood disorder and they were emotionally all over the place, it doesn't really matter how smart you are or how good your understanding of the markets is, you don't have a shot at that.

I gravitate to the mental health side of things sometimes, but oftentimes it's not that severe. It's just like if you're sleep deprived, if you've slept for two hours a night for the last four nights, your ability to make decisions and to react quickly and to execute is diminished. There's a lot of Guy. I've heard a million times from people who are like, oh no, actually I'm like, I can get by with two hours of sleep. It doesn't really affect me. I'm like, you're full of shit, you're a human being. I'm sorry. At the end of the day it's going to add up, it's going to affect you. Maybe the adrenaline in the moment can get you through, get you back up to where you would be for a five or ten minute span. But you're going to come down.

I.

Think just in part from personal experience, watching it happen over and over with people that I knew in my personal life. Then once we started doing everything that we're doing now, witnessing it more on the professional side.

Both in the traders that we've provided education to and then also people that we've either worked with in the hedge fund or considered working with.

In moments of honesty. When people were saying, okay, really, this is the reason why I can't trade consistently or whatnot, it's often they just turn to the psychological side of things. They're just like, I can't get my head around xyz, I really can't focus because blah, blah, blah. So I don't have any beyond just a lot of personal experience and watching it in observation. I think it also comes down to me and my own obsession with it. I mean, I just, I think I get kind of obsessed with like.

You know, like the compass effect, right? So if you have a compass, if you're standing in the middle of the woods and you know, you have a compass and it's pointing, you know, directly north and you start walking that direction, you're going to end up just walking directly north, right? If you move it one degree and you take one step, you're not going to be that much that far off from where you would have been, you know, had you stayed on true north. But if you do that for a mile, the distance how far off you are is from where you would have been if you would have stayed. Going north is pretty far. If you extrapolate like, okay, if I had my sleep cycles down, if I did this, if I did that, if I went through a list of things that I could do in each one of these things, maybe improved my performance, maybe improved what I was capable of by 1 to 2%, let's say I do 10 of those things a day, I give myself between 10 and 20% more. What effect, what compounding effect is that going to have? Over 20 to 40 year, career. That's how I think about things. I don't think about it as much in terms of the day to day. It's much more like, okay, long term, what do I want to look back on and say, damn, I'm glad I did this because it gave me that much more and it allowed me to achieve that much more, I think in my own life and really always trying to foster the resilience that is required.

In an entrepreneurial setting. I've just learned I really have to be on my game in terms of taking care of myself otherwise I'm not going to be able to make the best decisions on the fly. I'm not going to be able to have difficult conversations with employees or partners or whatever and you don't get to choose when those moments come up. That's the pain in the ass of it. If you could just say, all right, all my difficult stuff, the market is only going to throw shit at me on Mondays.

That would make things a lot easier. But it's just not the case. You always have to be prepared.

Then I think growing up.

With my dad and seeing not only the fluctuations in his sort of temperament and his psychology, but also other people in his life, I just saw firsthand, I experienced it on a really deep level.

The degree to which the markets can whipsaw you around and can really come to dominate your life and affect every area of your life, not just your professional life. If you don't have the walls built up around you.

If your psychology isn't really robust about it, I just think I both from an entrepreneurial side and then looking at other traders and saying I don't want anybody to have to lose control of how they feel and what they're capable of on a day to day. If you can build up a robust psychological.

Profile and kind of approach to things, then you're just giving yourself a much, much better opportunity to be in control of your life and I think to execute at a high level.

Coming up now, equities day trader Peter to, who was a fantastic guest Featured on Episode 98. I've included this clip in the mix because yes, Peter is a talented trader, yet he's also quite forthcoming about his vulnerabilities when it comes to psychology and the influence it can have over his trading. Well, let's get into that a bit more. I think that's, that's really interesting how you kind of embrace the fact that you aren't a cold blooded assassin as you described it and that you do allow your emotion to get to affect your trading in some ways. And I was reading on your blog before we got on this call and to anyone who hasn't seen your blog, I strongly encourage you to check it out. It's, it's incredible. You do a really awesome job of it. You spoke about a point at the end of 2015 where you took your longest break from trading. You kind of like lost confidence in what you were doing. Do you want to tell us a little bit about what happened?

It really wasn't anything crazy. Like in hindsight, it really wasn't anything crazy worth like I'm gonna like the f. The, the Fannie Mae trade that I made, which is my most popular blog post, which is my big, also my biggest loss ever. That was a crazy thing that happened. You know, that's one of those where did that come from?

Type of loss.

What happened in November of 2015 when I took that break is, I think it was just a really gradual build up where, you know, I was, I was, I would have these on off periods where I would just get, get into trading, get burned out, get into trading. I would take a one week break and then a few months later, two week break and then a few months later a three week break. And in November, my emotions were kind of like at highs and lows simultaneously. So it kind of exacerbated that effect because I had made my best trade in the first two weeks of November by shorting this biotech avxl and then I gave back more than half of that money by just being an idiot, you know, and like just donking away money, by God. And you know, it just built up all this like all these negative emotions that I couldn't, I just couldn't really deal with at that time. I, you know, I would wake up and I feel all this dread about trading and I'd be like, I'm sleeping in today. I just, I don't want to have to deal with my mistakes from yesterday. And that's one of my, like kind of one of my weaknesses. A lot of really good traders that I admire, I was like totally jealous of this. They're just, they just tweet things like, oh, I lost, I lost a ton of money, but hey, next day is a new day, right? You know, I can tweet that, I can say that, but it will never actually be that sincere feeling that I feel inside. You know, I can carry a lot of baggage with me and you know, I'm a bit of a front runner. That's why consistency is very Important to me make being green almost all the time. Because when things kind of when the wheels fall off, like I start, I get really, really hard on myself. I, I start to feel that self doubt, you know, creeping in and it just becomes impossible to trade. So I decided I have to take a break. I can't take this anymore. I hate trading. You know, it's a love hate relationship. I hated it. So it wasn't anything crazy. It was just bad trading, you know, run of the mill bad trading.

Right. And is taking breaks something that you like consciously decided that you were going to do or is it just something that, you know, like you said these, these mistakes kept kind of happening and you just didn't want to face them and you just kind of got to a point where you couldn't be bothered. So you're like, I'm not trading this week. Or was it an actual something that was predetermined as like a good thing that you would have a week away from trading?

When a boxer gets like knocked out by a punch, did he decide to lay down in advance? That's how I want to put it. That's just the visual that came to my mind. You know, you just reach, you just reach your limit and then you're done. Like, I mean that's, that's, that's how.

It is for me.

You know, I didn't, I didn't calmly sit aside and say, okay, I'll just take a loose period and it'll be like, and then everything will be okay afterwards. It's just like, I'm just like, I can't do this, I can't do this, you know? And like I don't know when I going to come back and trade. I really don't. Like maybe I'll never trade. I started having these worries that I'll never trade again. And I think that's what makes me trade again. So I'm always kind of on that emotional edge. In fact, I'm on that edge right now. I actually did have my worst month this October. It's my only red month. So I'm actually kind of on that edge. Not to the same extent because I've had a good year overall, but still I'm actually dealing it right now as we speak.

So why do you think that October was your worst month? Is there anything you can pinpoint that to?

I started trading these OTC names again. They used to be such, so lucrative for me. I haven't been trading them for what feels like two years because the order flow just Died and people moved on. And then they started trading again, and.

They just became. I mean, there were. The way they traded, it was just so crazy. Like, the market makers take away all these routes, and you can only route through arca, and it's like, it's just so hard to get in and out of the stocks. Whereas, like Philly, executing on the OTC used to be a strength, it just became a sudden liability. I would get into the size, and I couldn't get out of it. And so if I thought I was risking X, I ended up realizing a loss of 3x. And that just kept happening, and that got to me emotionally, and I started revenge trading, and it just became like this terrible spiral. And.

Yeah, so there are structural reasons why I lost the money. I feel like I kind of ran into a buzzsaw in some Kens, but in another sense, there's some indeterminate percentage of my losses that I would attribute to myself. And just I took existing losses, I probably made them a little worse.

Now, last of all, I'm tacking on to the end here another clip from episode 86 with mental game coach Jared Tendler. Jared was also included in part one, but whereas in part one, Jared spoke about various types of tilt, in this clip, he speaks more so about emotion in decision making. And, you know, we're starting to get into the emotional aspect of it. So, you know, this is one of the things you're an expert in, is removing emotion from decision making.

Talk to us a little bit about that. Like, why would you want to remove the emotion, and what's the benefits of doing so?

I guess I should qualify it and say negative emotion or in a sense, excessive emotion, you know, because you can be excessively positive as well. You know, almost too happy, too overconfident, too excited can be problematic. And the reason is because it's going to impair your decision making. That is not just.

An opinion of mine. It's sort of a neurological reality. And this comes from something from.

Some research on the brain. And also a pattern that's been. Was realized about 100 years ago in something called the performance stress curve. And so putting those two concepts together, you have a process in the brain that many people think of as the fight or flight mechanism, but that really only. Really only kind of like, oversimplifies what this reaction is doing. But the basic idea is that when your emotions rise too high, they actually have the power to shut down higher brain function. So people often think about their decision making, right? The thoughts that go on in their head. They think about that space in their mind in a way that is inaccurate. That when your emotions rise, it actually starts to eat away at the number of things that you can think about and the strength of those thoughts to turn into action. So if you've ever had a situation where like, you know that you shouldn't not be exiting this trade or you should, you know, you should not be forcing, you know, a mediocre trade and yet your hand still moves over and clicks, you know, exit or enter and you're wondering like how the heck that can happen. Well, it's happening because the emotional system has become overactive and it's decreased the strength of your mind to take that thought and turn it into action. And so that is the main sort of reason why we want to remove the emotion is to be able to retain sort of full conscious control, clarity of mind and then obviously precision in terms of execution. So this performance stress curve basically shows the relationship between. It kind of looks like an upside down U, right. If you kind of think in that bottom left hand corner of this graph, in that scenario you have very little emotion and your performance is also very low. So you could think about that as a scenario where you're super bored or you're just really tired, your performance is going to be poor. Well, your performance is going to be equally poor on the other side where your emotions are super high and your performance is also going to be really bad. There you're very excited, you've made a ton of money and now you're going to keep trading or you're super angry, really fearful or greed has taken over. So in that scenario you're equally as bad because the emotional system has done roughly the equal thing to your decision making process. Now as you kind of climb the hill in a sense to the peak in the middle, that's where your emotions are most balanced. And that's what we're after. That's the point where you're in the zone, where you're in that flow state or in peak performance. That is where there's almost no friction from you. Being able to access the technical expertise that you have acquired over the years, matching it with your senses of the market and being able to create those intuitive reactions where you kind of just know what's going on and you're able to make lightning fast decisions without any hesitation, as I said, without any friction. And so really what my job is about is in essence removing those points of friction. I kind of liken the mental game or what I'm doing in my job to like the oil in an engine, right. The engine is really what makes you profit. That's your skill. And if you don't have enough oil, right, too little or too much emotion, then, then the engine's either going to overheat or it's going to seize and, and obviously not perform well. But, but when you have things just kind of humming that, that's where you're making the most money because your decision making process is at its peak.

How do we get into a state where we're, as you called it, humming? Like what are some of the, some of the exercises that you run through with the players and the traders that you work with to kind of help them keep their emotions balanced?

Yeah. So to be fair to like what I'm trying to accomplish with players, it's not a simple thing, but it's also not overly complex. And I say it's not a simple thing because part of what I've tried to do with my, with my work has been not to take the sort of traditional sports psychology stuff and just kind of plug it into poker or trading or even golf. And the reason I say that is because a lot of sports psychology will say block out the emotion or try to use previous experiences where you've been humming or been in the zone as a sort of a reference point to try to recreate it today. And I don't think that works long term. It might work temporarily in the short term, but something that we might not be able to prove is more than a placebo, right. Like a sugar pill that isn't really producing anything of real effect. It's just a temporary manipulation of the mind. And so really what I'm after is isolating all of the specific reasons why your emotions are either going to be too high or too low. Right. And so we look at anger, for example, as a cause of too high or a lack of focus or a lack of motivation as a cause of a dropping too low. And we actually try to systematically go in and understand why it is that you're getting angry in those spots, why it is that you're losing motivation or focus in other spots, and put in specific corrections for those things. And as a byproduct of making those corrections, you are automatically more emotionally balanced. It doesn't make, doesn't mean that you're going to be permanently emotionally balanced and humming because there's a constant evolution that exists within your skill set, within your mental game. And so there's a constant need to be improving all aspects of your trading. But at a minimum, anybody that's listening right now, the first thing that you can do, and I think the most important thing to do, is to start to study your own emotional reactions that you have throughout the day. Right. So often when I start working with new traders, or not new traders, but new clients, their knowledge about their skill set or about their emotional skill set is really poor. Right. They, they, they'll come in saying, you know, I'm losing a bunch of money here. I feel myself, you know, kind of hesitating. You know, I, I'm forcing trades here, I'm losing focus here. But when you actually start to break it apart, they don't really understand why. They don't know the specific situations in which it's occurring. They can't recognize the thoughts or the reactions that they're having in those spots. And I'm not saying that what they're coming to is not something I can work with. Right. It's a start. So the easiest way you can start doing this is to start by identifying the specific trading errors that you have.

The trading errors that you have may give you an indication that there's some emotional reaction, whether too high or too low, that's present. And when I say may. Right. It's really important to know that sometimes a trading error is simply a tactical one. Right. I'm not going to over prioritize the importance of the mental game, but here is where I can almost guarantee that a trading error is caused by a mental one. When you have continually made the same trading error year after year after year, and you keep trying to learn more about the markets or learn more about the stocks or the companies that you're following, you think that the solution to that trading error is more technical knowledge. Then you know that it's mental. Right? Then you know that there is some anger, some hesitation, some lack of discipline that is present in that spot. So basically you're C game, right? In poker, people really just in sports, people think about their A game, but they don't often think about their C game. The worst aspects of their decision making. That's a really important thing for people to begin paying more attention about. What are the situations in which you suck?

Right.

It's very easy to just say, oh, that was just the market went crazy, yada, yada yada, I lost a bunch of money, or to say, oh, you know, that only happens once a month. Not a big deal.

Right.

But the problem is that by not fixing those mistakes, you are limiting your ability to continue to progress as a trader, not to mention the amount of money that's being lost there. So I know I haven't gotten into really specific nuances about how to actually fix this stuff, but hopefully this framework is at least helpful to get started.

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