Procrastination: A bad habit which affects many traders.

In my coaching work with traders, there have been many cases where I have found occurrences of procrastination.  Procrastination takes on many forms, the classic definition is ‘putting off to tomorrow what we can do today’, however I tend to see it the way Piers Steel, author of ‘The Procrastination Equation’, describes it; ‘one procrastinates when one delays beginning’. – In a trading sense this manifests itself in many ways; failure to plan, failure to stick to a plan, perfectionism – waiting for the perfect set-up and hence not acting, hesitancy in pulling the trigger, choosing the safer option by continuing to analyse and watch the market rather than place the trade, which often leads to the cry –‘I knew that was going to happen’, or something along those lines. – One of my favourite quotes on trading is by Warren Buffett: – ‘Predicting rain doesn’t count, buildings arks does’.

Procrastination is a deeply entrenched habit.

The problem for many is that procrastination is a deeply ingrained habit; it is something we have learned to do throughout our life. – I have often harped on about ‘the 10,000 hour rule’, and how practice makes perfect, well during our lives it is quite possible we have spent many thousands of hours practicing at procrastinating, as such this has formed into a well entrenched and fully automated habit. Fortunately there is help at hand, and that helps involves developing new habits, habits which override and usurp that bad habits which are part of procrastination. Unfortunately for many procrastinators, it takes time, commitment, planning, effort and application, and as we know that is one thing which many procrastinators are not good at.

I will reference a couple of articles which explain a little more about procrastination, some of the causes of procrastination, and steps we can take to start overcoming procrastination. Before I do however I want to introduce the following excerpt by Daniel Goleman, in ‘Leadership: The Power of Emotional Intelligence – Selected Writings’ where he talks about trying to from new habits as a way of usurping old habits.

‘Doing the wrong thing is a habit that you have become an Olympic level master at—your neural wiring has made it a default option, what you do automatically. The neural connectivity for that is strong. When you start to form the new, better habit you essentially are creating new circuitry that competes with your old habit in a kind of neural Darwinism. To make the new habit strong enough, you have to use the power of neuroplasticity—you have to do it over and over again.

If you persist in the better habit, that new circuitry will connect and become more and more powerful, until one day you’ll do the right thing in the right way without a second thought. That means the circuitry has become so connected and thick that this is the brain’s new default option. With that change in the brain, the better habit will become your automatic choice.’

Procrastinators will always be recovering procrastinators.

‘Old habits don’t die, they merely hibernate’: It only takes a stimulus from the old days to return for the dormant pattern to re-assert itself. This is why no one is ever considered cured of alcoholism; instead it is drummed into them by Alcoholics Anonymous that they will always be recovering alcoholics, this mindset helps keep them on guard against returning to the habit. This is something we all have to guard against when trying to form a new habit, hence it is useful to try and adopt a mindset that helps us to overcome these issues. Of course, procrastination does not have the same level of gravitas as ‘alcoholism’, and hence we are not likely to carry this around with us in our mindset to the same degree, also we cannot avoid the environment of work, like we can a pub or bar. However, we can take actions to try and keep it at the forefront of our minds; after all it is almost certainly serious enough to make a major dent in your earnings from trading, or even to be a cause of trading failure. I suggest placing small reminders around which are intended to jog our memory of the beneficial habit and thus avoiding returning to the destructive habit. Maintaining a journal, and placing reminders prominently in the journal are useful, also small physical reminders and inspirations are useful around your work place, and perhaps well located in your home.

Links to articles about procrastination and steps to overcome it.

The following link is to an article from the 'Psych Central’ website. It discusses some of the causes of Procrastination, included in these are Irrational beliefs, Perfectionism, Fear, and Disorganization, some or all of which are aspects which traders should be able to identify with.

http://psychcentral.com/library/procrastination.html

The second link attached is the follow-up to this, it includes how to tackle procrastination and how to take greater control of your ‘self’, which I believe should help lead to ‘better trading’. Amongst one of the steps recommended is keeping my old friend ‘the journal’, something which I strongly advocate to all traders.

http://psychcentral.com/library/procrastination.html

And finally, I shall finish with a humourous quote by Gloria Pitzer -

“Procrastination is my sin. It brings me naught but sorrow. I know that I should stop it. In fact, I will--tomorrow”

AUDUSD 3 Peaks pattern - Update 28th Nov 11

The AUDUSD continues to follow the idealised '3 Peaks and a Domed House'(3PDH) pattern. The recent retrace to 107 a few weeks back was greater than I thought, however it did not violate the pattern and appears since then to vindicated it if anything. - My previous post on this can be seen here, I have posted a number of articles on this pattern on the AUDUSD over the past 6 months, with the initial posting in May first suggesting the possibility of this formation, even before it had hit a peak (can be seen here).

Here is the latest update of the AUDUSD and the 3PDH pattern. - The update is at the foot of this image, the top part of the image is the idealised 3PDH, with the middle part, the update from 13th October.

Note I have a minimum target of around 0.8000 with a maximum target close to 0.6000, with target possibly to be hit in 2012.


Further to this I have looked back a little further at the AUDUSD on the longer-term charts, and it appears as this 3PDH may be a fractal of a larger 3PDH. - With the current pattern formed since 2008 representing the second half of the pattern 'The Domed House', and the period representing 2003 -2008 representing 'the 3 Peaks'. - I will revisit this bigger pattern over the next few weeks, however this pattern seems to explain the and allow for the AUDUSD to visit both targets I have mentioned; the less aggressive target in the low 80s followed by a sharp correction back to around par and then a deeper correction towards around 0.6000 some time during 2012 or 2013. - This chart can be seen below. 

My usual caveat applies; 'patterns work until they don't'.

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RIP - Gary Speed - One of the premiership's finest.

Understanding our natural and developed human tendencies can help improve trading performance

One of the most common mistakes we all make as traders and investors is to think that we really have 'free-will'. There is a saying which is often quoted by traders - 'You pays your money, you takes your choice'. - The underlying message being that we are totally in charge of our own choices. Having been a trader for 25 years, and now as a trading coach, I believe that is a dangerous illusion which derails many if not most traders and investors. At the core of this is my belief that traders and investors are affected by a wide range of psychological, philosophical, physiological and sociological affects which affects and limits their ability to think and act rationally when it comes to making their trading decisions.

All people suffer from natural and learned biases, traits and habits, which for the sake of this article I collectively term as tendencies. Many of these tendencies have evolved over millions of years, they are part of our natural make-up and have aided our survival and have helped us thrive in the natural environment. - A few thousand years of domestication versus millions of years of evolution have not been enough for us to lose these natural tendencies which are really our basic instincts. We also pick-up many tendencies as we grow and develop, these are shaped by our environment, our education, our upbringing, social factors, culture and belief systems, and help to instill certain ways of thinking.

These tendencies are either part of our natural make-up or have been influenced and shaped as we have grown and developed. They enable us to make decisions quickly and reasonably, they have helped us to learn and develop, and to fit in and adapt. As a result of these we are able to filter information quickly, to learn rapidly, and to move forward in the complex world we live in. However as a result we also do not truly receive and recall information in an objective sense, but colour it in any number of ways in order to match our preferences. Thus often we 'see what we want to see' and 'hear what we want to hear', we make decisions which are comfortable for us, that help to reduce anxiety and keeping us feeling safe and secure.

In the natural world we evolved in over millions of years, and in the social world we grow up into, these tendencies are often perfectly rational and beneficial. However in the somewhat unnatural world of the financial markets, these same tendencies can sway people's (traders and investors) decisions, choices, and behaviours in unfavourable directions. As a consequence traders and investors often display limits to their rationality, lack the necessary self-control required, and will become heavily influenced by social factors and their environment.

In the world of trading and investing there tendencies often lead traders and investors astray, sending them on false paths, and exposing them to 'decision traps'. I believe that increasing knowledge and understanding of these behavioural tendencies could make an invaluable contribution towards improving traders and investors’ self-awareness and increasing their knowledge base of themselves, others, and markets in general. Elimination of these tendencies is not a realistic goal; one cannot fight basic human nature and expect to win. However, by deepening one's understanding of who they are and how they work, one can provide important information which can help them modify their behaviours and strategies, in order to pursue a more optimal approach towards trading. 

Many of the world’s most successful traders incorporate strategies into their trading and their approach to trading, which have helped them, overcome these natural tendencies. By following these successful strategies they get closer to exercising free-will in their trading, free-will to choose a trade, free-will to execute entry and exit, free-will to correctly exercise appropriate risk and money management, free-will in being able to objectively analyze data, news and information. 

AUDUSD 3 Peaks and Domed House is still on, as is the SP500 pattern.

The 3 Peaks and a Domed House pattern which I have been following since May, still appears to be valid, despite the larger than expected rally to 1.07 last week. - Here is the link to my previous post on the AUD 3PDH. And here is the previous chart and the updated chart.

US equities (As defined by the SP500) are also continuing to trace out its respective pattern. He is the link to me previous (and extremely long-winded) post on this.

And here is the SP500 weekly chart at last nights close.

 

 

Firstly - My usual, I don't want egg allover my face, caveat: Patterns are not written in stone, and even the best of them can fail at times. (In fact failed patterns can be wonderful trading opportunities.) . Nonetheless both the SP500 and AUDUSD 3PDH patterns are tracing out really well, and confirming each-other. - IF this continues to follow through as per the typical 3PDH pattern, then this may be on the cusp of a very large ande volumous decline. - In terms of the SP500 we may be looking to a move towards 950ish. - It could surpass that, but right now that is where the indications are this may be heading.

Trading Biases - Ambiguity Aversion - Loss aversion's companion,

Ambiguity aversion is an aversion to uncertainty. This is a tendency to favour a known risk over and unknown risk, or security over insecurity, and quite frankly, who wouldn't. This attitude is central to much of what we do and how we behave, it is written into the fabric of our lives in so many ways, think of the many phrases and sayings which have become a major part of our language; 'better to be safe than sorry', 'a bird in the hand is better than two in the bush', 'better the devil you know, than the devil you don't', and so forth.

People generally hate uncertainty, though as with all personal characteristics, the aversion to uncertainty varies from person to person. - The higher value a person places on certainty and security, in relation to other values, the more likely they will be affected by ambiguity aversion.

How does this manifest itself in trading: One of the side affects is that people are unwilling to stay with risks. I have often seen traders take small profits on potentially winning trades in order to reduce uncertainty in outcomes, only to regret this later (I include myself at this, and often come to regret it). Ambiguity aversion is also a major cause of cutting trades preemptively rather than awaiting a predefined stop to be hit (Hello - another guilty trait). - I have also seen traders close positions just because the suspense was killing them, even though the trade had neither made a significant profit nor a major loss.

Together with loss aversion, 'ambiguity aversion' is one of the major causes of trader under-performance. - It is easy to understand why we possess these characteristics; in the natural world, where we have spent millions of years evolving, taking risks with uncertain outcomes could have been fatal. It was far safer to eat the berries of trees one would be familiar with than eat the berries and fruits of trees we do not know. That very attitude was a sensible and safe option and has become hard-wired into our thinking. However, that very same thinking in the financial markets has the ability to seriously derail a trading strategy; there is a price to pay for reducing uncertainty (loss of potential gains and cost of insurance).

Many of the most successful traders have developed strategies which work in their favour and against loss aversion; they have found ways to overcome this natural tendency. If one is to take their trading forward, this is one of the hurdles one must face and overcome.  

Beware the Inner Reptile.

A very interesting article on some of the work of Andrew Lo by Gillian Tett: MIT finance professor Andrew Lo's market theories draw on research from the fields of neuroscience, evolution, and econometrics

In an article called 'Beware the Inner Reptile', Tett describes Lo's interesting angle and contribution to the field of behavioural finance, in particular he suggests that humans behave in a perfectly rational way in “normal” times, but will resort to their animalistic behaviours during times of panic. He link his work to earlier evolutionary development studies of the 'Triune Brain' by Paul MacLean. 

Thus when markets go awry and things start to go 'bump in the night', traders and investors start to resort more on using both their mammalian brain and their reptilian brain. However, previous experience of markets has been confined to using and utilising the Hominoid part of the brain. One point of interest within the article is an interesting spin on the debate over the effectiveness of the EMH. The article can be seen here.