Category Archives: Psychology

Allowing for Allowance is Allowed

rasha-let-go-and-allow At the urging of Mr. Booker and The Traders Podcast, as well as a shock-and-awe campaign unleashed on my Twitter account that would make H. W. Bush proud, I offer more of my views on the concept of allowance, as introduced in my Don’t Push the River post. In Episode 238, Rob asks if the idea of constant improvement is a myth, and whether or not it gets in the way of achievement.  Oftentimes the result of efforts to constantly improve are seemingly opposite of what is desired.  While the very concept of constant improvement seems counter to allowance, the two coexist and function quite harmoniously together.  I am definitely a “constant improver”, and when I find a way to improve, I allow that improvement to remain constant.  In simpler terms, when I find something that works, I get out of it’s F’ing way.  I do not, ever, try to ‘fix’ or improve it.  It works remember?  The degree to which it (whatever it is) works, is largely irrelevant.

Rob gives an excellent example of a common trader pitfall.  You have an trading system that is profitable, but you really want more trades than it produces.  You set about your efforts to increase the number of trades the system takes, obliterating any profitability the approach had to begin with.  Usually, the whole thing gets tossed out as fast as mucking with it vaporized your equity.  From profitable “trader” to “veteran new guy without a plan”.

Instead, I say this:  If you’ve got a trading system that’s profitable… Wait.  Stop.  Stop right there.  If you have a trading system that’s profitable, then well, you have a trading system that’s profitable.  It works.  Forget how well it works, or how often it works.  Get these irrelevant illusory measurements out of it’s way and allow it to do its thing.  If you’re not satisfied with the number of trades it’s taking, then by all means, go about your search for additional trades; but do it while leaving this thing alone! At the very least it’ll give you some padding as you spend your precious capital on your continuing search for more frequent trades.  Think in addition to, rather than in place of.

Here’s a personal example.  I am a short term trader.  I mean really, really short term trader.  Many of my trades last only seconds.  This is the way I like it.  I like to be out, so I trade on 1 and 5 minute charts.  However, I’ve got a particular setup on the one our chart that I take whenever I see it.  I do so knowing full well that it’s probably going to take a frigging week to play out.  That’s the thing.  It plays out.  Nearly always, it plays out.  In this case, whether I like a trade that lasts a week is irrelevant.  I’ve seen it work enough times, why would I not allow it to make a deposit into my account?  It’s not a matter of do I want to trade the 5 minute or 1 hour chart.  It’s not a question of scalping versus swing trading.  It’s a matter of allowing myself to benefit from something I know works.

Everyone knows I’m a huge proponent of process.  Allowance is definitely not a definable process or procedure, but it’s the final ingredient to any process.  The last step in every procedure.

There’s actually a process for process:

    1. Design the process
    2. Follow the procedure
    3. allow for results

It’s really easy, and only natural for human beings to intervene between steps 2 and 3 of the “Process Process”, in an asinine attempt to elicit results that exceed what is expected or reasonable in accordance with the procedure.

My idea of allowance, is actually an augmentation to a very deliberate approach to life. It is a perspective. I endeavor to have a very specific reason and intent behind every action I take.  Again while this may seem a little bipolar, there is a Yin and a Yang to it, a careful balance.  I take deliberate action, then allow the result to unfold.  What this means is that I don’t worry about too much.  I’ve mixed all the ingredients and I’ve put it in the oven.  The only thing left to do is allow it to bake.  We have much less control over our own existence than we would like to believe.  In other words, while we may have some degree of say in where we travel on the road of life, we are most assuredly NOT in the drivers seat.  Life can be a crusty old cabbie that doesn’t take direction too well at times, so I prefer to just give him a general direction and let him take me for a ride, enjoying the scenery along the way.

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When you accept that you’re not driving, you can take your hands off the wheel, and your eyes off the road.  With a little freedom to look around, you begin to see all kinds of “points of interest” along the way that you were oblivious to before.  It is exploring these opportunities along the way that will lead you out of your comfort zone.  Out here is where all the magic happens, out here is where you’ll allow all sorts of new and fortuitous experiences into your life.

Allow change.  You deserve it.

Change can be a real bitch.  We desperately need it, we’re decidedly terrified of it.  It’s what you seek, and it’s what you run from.  Human beings thrive on change, yet we seek to insulate ourselves from it at ever opportunity.  I am certain that there’s something you’ve wanted for a long, long time, that you don’t have.  Maybe you’re even beginning to give up, to just accept that you’ll never have it, or aren’t meant to, don’t deserve it, aren’t qualified for, etc..

Your actions communicate your intent.  There’s no magical force out there that wants you to fail.  Earl Nightingale points out that we will always gravitate to our dominant thought.  If this dominant thought is wanting, you create more wanting.  Never exiting the state of want, and never recognizing what you have.  Try taking a good hard look at what you’ve got as opposed to what you want.  If you allow, whatever you’ve got tends to grow and change into things you may not even know you want yet.

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Cut losses fast, and let your winners run (right into your stop-loss).

This concept is repeated as much as any in trading circles.

“Cut your losses early, and let your winners run.”  This comes from statistics that indicate most traders take their profits before they’ve reached their potential, but hold their losers open much longer; presumably with hope it’ll return to profit (or a more reasonable loss).

running-moneyLooking back now, it is this trader’s opinion that this statement is quite the double-edged sword for a trader struggling with a diminishing account, or grow a small one (or a big one for that matter).  The problem is that nowhere in this concept, of cutting your losses and letting winners run, is there any determination of the traders ability to recognize what’s reasonable in terms of taking profit.  I’d wager that a hefty portion of struggling traders who are given this advise, only need the advise in the first place because they’re not accurately determining reasonable and attainable profit targets.

As a retail trader, it is important to remember that there’s nothing to actually “win” in the traditional sense of the word.  The game is never “over”, with winners and losers.  In fact, throw out that concept of winning and losing all together.  There are no winners and losers.  There are those that quit when they were ahead, and those that didn’t.  I hear you, and you’re right.  You’re never going to make any real money trading if you never take more than a pip or two.  However, you’re never going to make any money at all until you stop losing it.  A trade that spends all day at 80 pips profit, just to stop out at -20 because some banker got up on T.V. and shot his mouth off, doesn’t make money.  Not to mention, how the trader feels afterwards, which is infinitely worse than had the trade stopped out at -20 immediately.

I found, that when I quit trying to “win money”, I immediately began to earn it.  If you must employ the concept of “winning”, define a win as anything that is not a loss.  When we realize our income is not satisfying our financial obligations, we often look for ways to save more, rather than earn more.  The reason for this is simple.  It is far easier to spend less than it is to earn more, and the results of spending less can be immediate and lasting.  Earning more, on the other hand, often requires additional investment of time and money, leading to results that may or may not materialize at some arbitrary point in the future, at which time the increase in revenue may or may not translate into a solution to the original problem.

In Episode 149 of The Traders Podcast, I discuss the idea that success (at least my own) in trading has been a “side-effect of not losing money”.  Contrary to what that nagging subconscious tells you when you see it on your charts, taking 7.4 pips of profit at the very beginning of a 200 pip rally doesn’t make you a doofus.  It  makes you a rock star.  Do you know how many traders had their lunch stolen on that same move?

I catch flack for it all the time from other traders, but I can’t even remember the last time I let a trade go to it’s profit target.  It’s even rare for me to let a trade get into the general vicinity of where I think it could go.  If I open my platform, and see a green arrow on the chart, chances are I’m going to close it.  You can laugh with me as I take it to the bank, but I recently closed a trade at 18 pips of profit, that went right through my “target” more than 100 pips further, within minutes of me closing the trade.  I know that’s the exception though, rather than the rule.  More often, if price hits a target that big, it means hours or days of meandering.  I’m not the kind of trader that deals with that well.  I’d gladly pay that 100 pips, for the opportunity to take 18 pips of profit and go fishing.

“Capital preservation” has been written about enough, but not taken seriously enough by many traders.  This, is my job description.  Take trades, don’t lose money.  I no longer have pip-goals for days, weeks or months.  Any time achievement of these goals is called into question, it drastically effects my ability to actually achieve it, and I’m sure this is so for many other traders as well.  The bottom line is that the equity in your account is going to change.  Before you focus on how fast it changes, make sure it’s changing in the right direction.  Start laying bricks.  Harness the power that comes from taking profit.  Follow the advice of cutting off your losses quick, but don’t be afraid of taking fast, easy profit.  Easy is what you want trading to be right?

Take that easy money for one reason.  It’s easy.  10 pips pays the bills, 1000 pips pays for Prozac.  Quit trying to wrestle a living out of the market, and instead be gracious about what it hands you.

I’d love to hear what others have to say on this subject,

Profit is as Process does…

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Trading is full of contradictions.  Downright irony even.  How many times, as traders, have we heard the phrase “Past performance is not indicative of future results”?  Even if your first exposure to trading was yesterday, you probably stopped counting last night.  Yet, as traders, this is exactly what we attempt to do; make decisions that directly affect our future results, based on past performance of whatever we’re trading.  Even when taken in the context of the Trader himself, this line of reasoning is anecdotal at best.  A more direct wording of the point being made is “hey don’t blame me if I’m wrong and lose all your money”.  Does anyone really think a traders past performance does not indicate, just a little bit, what kind of performance may be expected of him in the future?  Who’s ready to sign up with a mentor who’s lost half a mil over the last 24 months?  And don’t even attempt the mental exercise in futility that is trying to reconcile the “past performance” bit with the next standardized trader mantra: “This time is not different”.  Yeah… I know right!

Let me get to the point.  Past Performance IS indicative of future results.  Trust me.  If you’ve been losing money consistently, to me that’s a good indication that you’re going to lose some more going forward.  When I take a trade, the ONLY reason I do so is because I have seen something similar occur in the past, and with that information I’m betting (yep, that’s what we do) there will be a similar result, most of the time.  After all, past performance is the biggest indicator on anyone’s price chart.  Give in to this, and trading can become, [I hesitate to say “easy”] shall we say, less exciting.

Enter the Process.

Here’s the thing about “Strategy” and “Systems”.  They’re worth less than an Iranian Rial without consistency in every aspect of their application.  To ensure this consistency, build it into a process.  A simple, specific, infinitely repeatable process.  Don’t make the mistake of placing your goal at the end of the process, that’s not a process; it’s just another goal.  We’re no strangers to goals as traders.  We want to make a million dollars, or X amount or Y percent.  We want Z pips this week, and XYZ pips this month.  Or maybe you just want to get through this week with no less than you started with.

Something always goes wrong, doesn’t it?  Traders are driven to give up when faced with the rate of progress their $1000 account is making towards the $1M mark,  There’s only so many weeks in a row a human being can say “Ok, now I’m going to make $1M from $800, now I’m going to make a mil from $500, $250…”  Sooner or later the towel is thrown in or the account hits zero.  This is what happens when you wake up every day and tell yourself you need to make $999,000.

Face it, there’s no trading system in the world, that will tele-port you directly from point A all the way to point B.  Well, maybe if you’re trading 1,000 lots, one trade might make your million, but something tells me those guys aren’t interested in what I’ve got to say anyway.  The rest of us though, are limited to getting there an inch at a time, and for that we have the miracle of process.

We all use processes every day that we’re not even aware of.  Think of all the various routines you go through in a 24 hour period.  Most people have a morning routine to start the day.  Parents routinely get the kids ready and off to school.  There’s the routine route taken to the office.  Work-days routinely start with the same steps as the day before.  You’ve probably got a routine for lunch (lunch is a routine in itself).  I think you see where I’m going here.

Now look at those routines, and more specifically the processes that make each one possible from start to finish.  These routines have one thing in common.  The processes within these routines are all relatively easy.  If you’re like me, taking the kids to school might be a somewhat taxing exercise  as a whole.  Teenagers move like molasses on Hoth (Sorry Shonn, another Star Wars reference to be taken as “somewhere really cold”) in the morning.  Traffic around the schools here is a whole new level of “nightmare”, and getting back home is always every bit as tedious.  However, all of the little processes that result in the kids getting to school are actually really easy!  How many times do you wonder if you’ll be able to finish brushing your teeth?  Ever have doubts about whether or not you’ll successfully turn the key in your car?  There’s no real special skills involved in pulling that big lever down to the ‘D’ position.  Stepping on the gas when the light turns green is not exactly rocket science, nor is unlocking the doors to let the kids out at the school.  These are all tiny, super simple steps that are repeated time and time again.  If you keep stepping on the gas when the light turns green, and you’ve mapped out the proper route, sooner or later you’ll get where your going (please wait for the guy in front of you to go first, and he’s having a bad day, so no honking or “gesturing”).  It’s inevitable.

Process-roadA great example came up in a recent conversation with my friends Rob and Shonn (yes, that Rob and Shonn).  If I asked you to build a brick road from New York to L.A., that’d be a pretty tough job, and the sheer scale of the task is discouraging, especially if you’ve never built a road before.  You could easily spend months learning about surveying routes, studying topography, finding just the right mortar, worrying about the weather, the river crossings, and more.  You’re spending time, you’re spending money, and I still have no road.  Not only that, but my constant badgering about getting this road done has you pulling your hair out.  You’re not sleeping wellSo forget the road.  I don’t want you to build me a road anymore, I’ve got a much easier job for you.  Here’s a brick.  Please face west and place it on the ground in front of you.  Good Job! Thanks for the hard work!  Tomorrow, take another brick, and place it on the ground next to the first one.  Repeat this 6 days a week.  Each Monday, start a new row in front of the first row, and lay one brick each day again.  Look at that!  I’m on my way to L.A.!  Every week there’s a new row of six bricks!

I hear you.  “Yeah that’s great, but the Sun is likely to die before you get there”.

I don’t care.  All I care about is being closer to L.A. then I was yesterday, because I know a secret about laying bricks.  You see, once you start laying those bricks, and moving down the road, things are going to start happening.  You meet someone along the way, who happens to also be building a brick road, let’s call him Shonn.  After shooting the breeze for a moment, Shonn kindly tells you where he gets his bricks, and that he uses these particular bricks because they’re twice the size.  Great! You start getting your bricks from the same place, and now you’re making twice the progress with each brick.  Somewhere a little farther down the road, you meet another stranger named Rob, who is building a brick road of his own.   Rob introduces you to a new technique that allows you to lay 3 bricks at one time. So the next Monday, using Robs technique and Shonn’s double-size bricks, you make what used to be a weeks worth of progress in one swift, elegant move.   The more progress you make, the faster you make even more progress.

This only worked because laying one brick on the ground in front of you while facing the direction you want to go is easy.  There’s nothing to stand in your way, no reason not to just put that brick down.  No reason for you to talk yourself out of it, consciously or otherwise.

This approach is suited perfectly for trading.  I’ve built my trading account on 10 pips a day.  That’s my brick, the 10-pip-brick.  This is what I knew I could do at the time, with existing skills and knowledge.  Sure, I wasn’t making the big bucks, but every day I was 10 pips closer.  This was a radical change from the make-50-lose-25-lose-25-lose-lose-25 pattern I previously found myself engaged in.  The account balance was changing slower than before, but it was going in the right direction.

The fact is that if you want to trade for a living, you need consistency a lot more than you need big wins, and you already know that big wins don’t come consistently.  The implication is that looking for big wins is counter productive.  It’s smart leveraging of consistent, small gains that will keep your lights on.  Can you end each day with just a single pip of profit?  I’d bet, that if 1 pip is your target, you’re pretty likely to reach it, even if you have your cat take the trade on a coin-toss.