Maintaining Focus

Regret is an ugly word. Regret can lead to remorse which manifests itself as we sit and stew about the action (or inaction) that we regret. The most common secondary emotion from regret is anger. “How could I be so stupid!” “What was I thinking?!” and other such phrases are commonly heard. I’d like to focus on the inaction of trading that leads to regret as it can lead to low probability trading.

Kahneman and Miller did research on what’s called counterfactual thinking. Basically, individuals imagine the opposite of a current event and contemplate what might have happened. The psychological impact of contemplating a result that is better than the actual event itself causes feelings of frustration, grief, anger, or insecurity. We’ve all looked at charts and seen the trades that “got away” even though we knew about the potential. We’ve all sat and wondered why we didn’t take the trade, it’s easy to point out mistakes and criticize. Times like this are when your future performance as a trader is at the proverbial fork in the road.

I’d argue that it’s more damaging to a trader’s belief in their skills/system when a “big winner” is noticed after the fact. As an example, let’s say a stock was on my watch-list and I’ve been waiting for a high probable setup to trigger. A bit of good news comes out and the stock gaps up over my entry point by a few pennies and thus the opportunity is missed. The next day I’m looking through my watch-list and I notice the stock I barely missed had a nice 4% increase without my participation. The thought of what could have been is more damaging to the psyche than say 3 max loss trades in a row.

That sucks, no question, but if it gets in your way and clouds objectivity then the real damage can occur.  Having a well defined trading plan and following it objectively with discipline goes a long way to keeping your emotions in check. Most importantly, you’ll also be able to focus on the task at hand and over time the thoughts of what could have been will be fleeting. If you trust your system and follow your trading plan then opportunities will present themselves again. If you remain objective and not dwell on the missed opportunity, you’ll be ready.

My Stocktwits Interview

Thanks to Dr. Phil and Justin for throwing this together, I enjoyed it. Not sure why I sound like I’m in the shower as my camera/mic are high quality and my office is not that big. At any rate, this should give you a better understanding of what I do and why. Let me know if you have any questions.

What’s your plan?

How many of these statements could be used to describe your trading ?

• Indecision, difficulty recalling and organizing details required for trading
• Poor time management, losing track of time
• Procrastination
• Avoiding trades that require sustained attention
• Difficulty initiating a trade (paralysis from analysis)
• Difficulty completing and following through on trades (cutting losses and letting profits run)
• Difficulty managing multiple trades
• Difficulty shifting attention from one trade to another (get caught up in the “should have, could have” rhetoric)

If you answered yes to 6 or more of the above statements, odds are you may struggle with ADHD. These statements above are the criteria that a counselor/psychologist would use to diagnose you. The only difference is that I replaced the word “task” with “trading” and added the parenthesis. A well defined trading plan can lend itself to keeping ADHD in check during your trading. Find yourself, then trade.

Trading plans are designed to help maintain focus and manage emotions, not eliminate losses.

Bullish Percent Index

The Bullish Percent Index (BPI) is a unique way to measure market breadth. The BPI is calculated by dividing the number of stocks in a given group (S&P 500 for this example) that have given a buy signal via Point and Figure charts, by the total number of stocks in that group. The group is overbought when the BPI is above 70% and oversold when below 30%.

What I found interesting was that the BPI is giving overbought signals at levels that haven’t been seen since the summer of 2007. I’m not suggesting that the S&P will drop like it did back then, because we are not experiencing the same catalysts as back then. What this data does tell me is that this rally off the March lows, which has been suspect since day one by so many, is truly impressive.

I’d never take a trade based off of this indicator by itself, or any indicator by itself for that matter, but the parameters for buy/sell signals are as follows. Buy signals occur when the BPI falls below 30% and then reverses up by at least 6%. Sell signals occur when BPI rises above 70% and then reverses down by at least 6%.

Multiphrenia

I had mentioned that I was re-reading one of my favorite authors/books this week, Kenneth Gergen’s “The Saturated Self-Dilemmas of Identity in Contemporary life.” I first read this book back in graduate school over a decade ago and the internet was all the rage as the dot com bubble was about to burst. A medium such as Facebook, Twitter, and LinkedIn weren’t even around and trading, for the most part, was still done by picking up a phone and contacting your broker.

Gergen talks about the concept of a saturated self wherein one is increasingly engaged in relationships—real, virtual, and even imagined. When you think about all the distractions we each face in today’s world, he was way ahead of the curve here. One of the terms Gergen coined is Multiphrenia: The condition, largely attributed to technologies that increase social contact, of being simultaneously drawn in multiple and conflicting directions. I’ve dealt with traders who get caught in such a trap and their trading suffers as a result.

My suggestion was always the same—unplug. Have you ever had difficulty with a piece of electronic equipment, called tech support and they say something like “unplug the power source for 30 seconds” and voila! the issue has fixed itself? Amazing, I know, but how do you unplug from trading?

• Take a break and walk away from the computer
• Turn off the TV
• Stop reading blogs and books about trading
• Turn off Twitter
• Go exercise

When you come back and sit down at your trading desk odds are good that a fresh prospective has been gained. Oftentimes we as traders rely on too much “stuff” when it might be best to revert back to the basics. If you’re still in a fog, then perhaps an extended break of a day or more is needed.

As a follow-up to the break I like to remove all the noise from a price chart and just focus on the price action alone, nothing else. Regaining objectivity by removing the deluge of noise that can so easily enter our lives is not easy. In fact, much like an addict, withdrawals can and do occur. If that is the case for you then I’d suggest some self-journaling to better understand why that “need” exists.