The treadmill desk - For real. (Trade and Exercise all at once)

It is quite likely that many traders will be making new year resolutions  Doing more exercise, losing weight, not reading trash reports from brokers with no skin in the game, not getting sucked into buying near the top/ selling near the lows. - The last two usually go together by the way..  

When it comes ot the exercise, lets face it, exercise is good for you in so many ways: As well as helping to lose weight, it reduces stress and enhances brain-power. This leads to better, clearer decision-making, improved objectivity and thus greater rationality and creativity around our decisions. It sounds like a win-win. 

 - Well get ready for this: The treadmill desk

Yes this is for real. - Available on Amazon - the treadmill desk.  I'm sure there is plenty of room on there for Bloomberg screens, pricing systems, charting systems, and all the other paraphernalia that goes with trading. 

Now you can trade, exercise, and lose weight all at once. --- :-)

GBPUSD FX trade idea, set-up and some trading psychology.

Occasionally I like to look at and write about what I view as favourable trade set-ups. This year, I have only documented a few, however most of them have had a good record, even if timing was not quite right. My favourite calls this year have been long USDJPY at the start of the year, though on the trade I had on, I took profit too early, though I wasn't complaining about an 8 big figure gain. I also have been long USDJPY since late October and remain so, with a 'in the money' trailing stop guarding it. Another trade which worked well for me earlier this year was long EURNOK, though I don't think I documented it in this blog, it was mentioned in this article here (See performance coach, championing it as a trade). I also dabbled in AUDUSD, calling the bear early in the year, and the recovery a little later, though my timing was slightly out, and I traded it far worse than I analyzed it, which has always been my challenge as a trader. Overall I'm glad to say that my trading account, which is merely a hobby for me these days, is significantly onside,though some ugly attempts to get in and out markets at times, usually in EURUSD have helped erode gains somewhat.

Now I think I may have found another trade I like. - Long GBPUSD spot (or Cable as us FX types call it.)

First let me sum-up my usual formula for identifying what I consider as potential good value trades: I don’t tend to base my view from fundamentals, though I like to consider fundamentals in the equation when I feel I have a good view of them. My preference however is to look at a set-up technically, if I like it I then look at the risk reward, is it favourable relative to where a stop would be and to account for the volatility of the market?  If it has what I consider a decent fundamental case to back it up, then even better.

Currently the long GBPUSD for me largely fits this set-up, I am not altogether sure of the fundamental case, after all both the UK and US currently have recoveries, if only modest ones. Like most trades, I am sure if I need to then I could fit a good supporting fundamental argument later, if it goes the right way!!!

Technically there are a few things I like about this trade:

1) The 'Failure' of the multi-year 'Bear Triangle' to follow-through on a downward breakout and the subsequent reversal: I love failures, people rarely look at them, they prefer to look the other way for completions and continuations, but failures can be great trading set-ups, and few are better than Triangle failures. The fact that it has broken through the top side of the triangle line, now adds to this. Potentially failures can have very sharp and relatively quick reversals which can move far further than people often consider. The long-term weekly chart below shows this clearly.



2) A Weekly 'Bull-Flag' formed over recent months: The breakup of the Bull-Flag has coincided on the move above the top line of the large triangle. This projects, using traditional technical analysis measures, potentially to around 1.7600ish and change.

3) An shorter-term (Using the 4 hourly chart) 'Bull-Flag', formed over the past couple of weeks.

One final thing, which is interesting; note the similarity of the above two charts, this year's weekly chart, and the lower 4-hour chart. Its almost like there is a fractal relationship, where the lower chart is repeating the set-up of the above chart. It could be merely be co-incidental, I may be looking for patterns within patterns, where none really exists, however I have seen similar market price action in the past, which have as I recall occurred prior to large moves. (Psychological point: I may be accessing selective memory and recalling a situation to fit a desired outcome, that is one reason I use protective stops.)

Psychological perspective: As this blog is principally about the psychology of risk and trading, and as a trading coach working to help enhance trader performance, I thought I'd add some psychological perspectives: In this case I would like to talk about some of the major 'Cognitive Biases' which affect traders, and how this could impact my performance on this trade.

- Loss Aversion:  We are all prone to Loss Aversion; Loss Aversion is a feature of who we are, not a flaw in our make-up, as some people seem to think. Loss aversion is basically our innate need to avoid losses rather than seek gains, as such it biases our behaviours in certain ways. The most common affect seen in trading is to run losses, so as to avoid crystalising them, but to quickly grab at gains, thus locking them in. Hence we make small gains and suffer large losses. This behaviour can be highly destructive to managing a trading book or portfolio, in my own trading I try and put trades on with a favourable risk reward profile so as to help counteract this bias, and always use a stop to protect my self from running losses.

In the above trade I have placed the stop a little below last week's 1.6290 low, adding some room to avoid getting hit by stop hunters. I have a target around 1.7000, this means currently my risk reward on this trade is potentially 3.5 to 1. A very favourable return. I have also entered a risk amount equivalent to about 2% of my trading capital, thus I am unlikely to have highly elevated emotions driving my behaviour. We are more likely to fall victim to basic destructive default behaviours, such as loss aversion, when we are more emotionally charged: Having too much at risk, relative to capital can cause this. On the other hand if I am right, on this trade (And remember there are no guarantees) then I could return about 7% of my capital.

- Over-confidence/Over-optimism:  This might seem slightly odd, here I am talking about our natural aversion to losses, which seems a little 'Cup Half-Eempty' and yet at the same time we are bias to believe in rosy outcomes, i.e. 'Cup half-full'. Research after research shows that we are mostly over-confident in our belief in our own abilities, and over-optimistic that the future will be bright. This is not necessarily a bad thing, one needs a high degree of confidence and self-belief to be successful and to keep coming back when so often beaten up, as markets can do. However, the ying to this yang, (or is it yang to the ying!) is that many traders immediately discount a favourable outcome to their trade, and possess over-confidence in their ability to forecast the market. As a consequence they may take a larger risk than maybe prudent.

I am no less vulnerable than the next person when it comes to over-confidence and over optimism, as I said above, these are features of who we are rather than flaws in our character. However, it is good to be aware of these, and to understand how they can damage your performance. - In order to help overcome or offset this bias, having a structure to how you take risk is important. With regard to my trades, I carefully set my trade size relative to capital, this ensures that I do not over-expose myself, in addition I also size my trade relative to how much I am willing to lose, not to how much I expect to make. Note, I am a firm believer in adding to the trade if it moves in my favour, if that happens in this trade, I will look for favourable risk-reward areas to add value, using gains I make along the way add leverage.

- Confirmation Bias: This is another significant and potentially damaging cognitive bias which we are all vulnerable to; it is something I have been particularly susceptible to in the past. (These biases don't go away just because you know about them). Confirmation bias is where we try to prove our point, or back up a belief we have by seeking confirming evidence. The danger with this; people close their eyes and ears to potentially conflicting evidence, sometimes digging their heels in and becoming stubborn in their beliefs. One step to helping offset this is to investigate one's intuitions and analyses a little more deeply, taking a more objective perspective, and perhaps even trying to disprove one's views. Sometimes trying to disprove a view can make it more robust. Of course this is not foolproof, we are all 'blind to our own blindnessess', and as mentioned above, prone to over-optimism.

In the above trade, I started by a taking a quick look at the 4-hour chart, I liked what I saw. Then I felt I needed to look at the longer term charts in order to see how it looks there. I first took a slightly longer view, the weekly chart, then looked at the much longer charts. In both cases I actually felt more convinced the trade was right. This was a simple trade, and that description, I admit is pretty simple, but that kind of sums it up.

- Finally my philosophy: 'I could be wrong, and if I am , then so be it'. Trading requires losing in order to win. Accept that you could be wrong, it helps!

Trading: Emotional Capabilities versus Intellectual Capabilities - Which is most important?

I have been fascinated by many of the recent comments under a Linked-in group discussion I originally posted back in May 2011, and which still continues to attract interest even today. The discussions question was : What is more important for success as a trader - A high level of Intellectual Intelligence, or a high level of Emotional Intelligence?

[If you are interested in reading, following or contributing to the discussion, the link is here. If you are not already a member of the 'Trader, Trading & Risk Psychology' Linked-in group you can join the group here. Non Linked-in members will first have to join Linked-in.]

I would like to thank everyone who has responded and provided many fine contributions to the discussion. I would now like to add some of my own perspectives to slightly update the original question and to include some of my own thoughts to some of the recent comments.

Regarding my original question, I believe that mastery of the emotional aspects of trading is by far the most important differentiator of success when it comes to trading. I am not intending to dumb down intellectual intelligence in any way, it does matter, but as Warren Buffett said, 'Success in investing doesn't correlate with I.Q...Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.' As a trader for 25 years, and now as a performance coach, I have had the pleasure of working with some brilliant and highly intelligent traders who themselves are and have been extraordinarily successful, however I believe for these individuals it is their strong emotional capabilities which are the key to their success. 

When it comes to the discretionary aspects of trading, the ability to manage, regulate and optimise emotional capabilities is the major advantage. I would however like to add a significant caveat: The more the type of trading involves complexity, and the less discretion is required, the more I find intellectual intelligence advantageous to achieving success. Examples include trading and managing complex products and portfolios, trading which requires high level analysis to identify value, and the creation/implementation of systematic trading approaches. Even in those situations however, I still believe that a high level of emotional capability is a significant factor to achieving success.

In the original question I used the term Emotional Intelligence (EI), I do feel with hindsight that this an over-simplified concept, and that in actual fact I believe the correct statement should perhaps have referred to ‘emotional skills and capabilities’ versus ‘intellectual skills and abilities’. In short I see emotional skills and capabilities as how one works to manage and regulate their emotions and anxieties, thus enabling them to work in conjunction with our rational cognitive abilities, so as to help them effectively direct their internal resources in a productive manner towards achieving successful outcomes. This raises many further questions, though I prefer to condense this into a few key points: 

1. What can one do to enhance their control of their emotional, and unproductive personality aspects/character?
2. How can one learn to productively use their emotional capabilities and thus project their strengths and manage their weaknesses? 
3. How can people learn to live with themselves, and thus be comfortable in their own skin? (All successful traders I meet are comfortable in their own skin).

A number of people have spoken about these aspects in the discussion, though perhaps in different ways to how I have expressed it. I believe just about anything a person can do to answer these questions and then to implement solutions into their trading, should prove beneficial. The aproaches, tools and practices people use will vary depending on their own particular needs, requirements, beliefs and individual perspective. I don't think the answers are necessarily easy to derive and execute, though for some they may be much easier for others. For example a willingness to be open to new ideas, concepts and thinking, (ironically qualities which are themselves sign of emotional maturity,) will make searching for and accepting solutions and ideas that much easier.

Some of the potential solutions discussed have included raising awareness and understanding of one's self and one's behaviours. This includes gaining a perspective on how one views the world, how one processes information and how one acts upon it, as well as recognizing unproductive behaviours and patterns both in the application of their trading, in the analysis beforehand, and the management afterwards. - To add to this I would mention that I think it is useful to increase one's own human knowledge and understanding (The group and blog are to a degree dedicated to this, as are many others). I believe it is helpful to understand who we are as a species and why we act the way we do (i.e. Human biases, cognitive distortions and limitations are part of our nature; we are not robots). Traders should also look at practical behavioral solutions: For example, improving and enhancing one's approach to risk and money-management. So much trading failure I have met stems from the emotional repercussions of poor money-management, though often the failure to implement effective money-management has its roots in a person's individual psychology. The surprising thing is that good money-management practice is so simple to effect, Chris Tubby's recent suggestion in the discussion is a very simple example of this. 

In the end I like to think of it is developing one's emotional capabilities that enables one to become effective in that crucial space between ‘stimulus’ and ‘response’. To quote Viktor Frankl: ‘Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.’

Image "Head Puzzle On Monitor Showing Human Brightness" by Stuart Miles courtesy of http://www.freedigitalphotos.net

Article on ‘Why We Make Bad Decisions’

As an Executive Coach/Trading Performance Coach probably the most common types of questions I get asked fall under the category of ‘How can I make better decisions?’ Examples include: How can I make sure I run my profits? How can I ensure I exit and enter trades at optimal times? How can I ensure I have sufficient risk on when I am on the right trade? How can back my ideas more effectively? How can I ensure I promote the right people to the right positions in my team? How can I effect change in my business unit without alienating members of my team? Etc. I am sure you get the point. – However this goes further, another type of question I often get asked is ‘How can I raise my level of self-confidence or self-belief?’, this may not directly be about making the right decisions, but indirectly it is a huge factor: As we make more correct decisions, our levels of self-efficacy (self-confidence and self-belief married to ability) will rise.

One of the first places to start is to look is to understand how and why we make ‘bad decisions’. An excellent article has come across my desk today from the New York Times which discusses just that. The article, by Noreena Hertz, is called ‘Why We Make Bad Decisions’. Hertz makes some excellent points, many of which I have discussed before in various articles. – However I felt it might be useful to highlight some of the key points of Hertz’s article: Note, the article refers to the medical professions, hence some of the following excerpts make references to that.
‘If we are to control our own destinies, we have to switch our brains back on and come to our medical consultations with plenty of research done, able to use the relevant jargon. If we can’t do this ourselves we need to identify someone in our social or family network who can do so on our behalf.’ – This is a vital point in trading. – I does not matter how bright or intelligent one is, we are all prone to switching-off either consciously or non-consciously. – As Daniel Kahneman says ‘We're blind to our blindness. We have very little idea of how little we know. We're not designed to’. In fact it is possible that the more qualified and knowledgeable a person is, the more they may be prone to falling victim to this point, this is re-emphasised later in the Hertz’s article when she says ‘I’d learned in my research that the super-confident, doctor-as-god types did not always perform well’. A combination of excessive Ego and Over-confidence can lead to poor decisions, however this can be exasperated when other people are placing their trust in these experts and thus effectively switching their own brains off (applies to watching CNBC or reading analyst research). I don’t think it is any surprise, that many of the best traders I have worked with and coached are some of the most humble and grounded people you would ever wish to meet, which ironically runs contra to the traditional depiction of traders as ‘Ego-maniacal Masters of the Universe’.

A further interesting excerpt from the article applicable to trading situations: ‘Anxiety, stress and fear — emotions that are part and parcel of serious illness — can distort our choices. Stress makes us prone to tunnel vision, less likely to take in the information we need. Anxiety makes us more risk-averse than we would be regularly and more deferential.’ – Anxiety, Stress and Fear, few traders will fail to identify this deadly combination as often present when trading, fear more anything has the ability to affect your decision-making, I often notice that traders who are really struggling to move forward have ‘fear’ present to a large degree and at regular times. – This takes many forms, fear of losing money, fear of being wrong, fear of regret, fear of missing out, fear of looking (or feeling) stupid, etc. In these situation, fear is in control of your trading, whereas successful traders need to be in control of their trading, whilst recognising when fear is present, and consciously dealing with it. Hertz addresses this point in the article when she writes; ‘We need to know how we are feeling. Mindfully acknowledging our feelings serves as an “emotional thermostat” that recalibrates our decision making. It’s not that we can’t be anxious, it’s that we need to acknowledge to ourselves that we are.’

Hertz takes this a step-further and echoes Kahneman’s point about us being ‘Blind to our Blindness’ when she writes ‘it is also crucial to ask probing questions not only of the experts but of ourselves. This is because we bring into our decision-making process flaws and errors of our own. All of us show bias when it comes to what information we take in. We typically focus on anything that agrees with the outcome we want.’………….’We need to acknowledge our tendency to incorrectly process challenging news and actively push ourselves to hear the bad as well as the good.’ ………..’When we find data that supports our hopes we appear to get a dopamine rush similar to the one we get if we eat chocolate, have sex or fall in love. But it’s often information that challenges our existing opinions or wishful desires that yields the greatest insights.’ In the final part of the above excerpts Hertz is describing what is termed by the behavioural sciences as ‘Confirmation Bias’. This is extremely common in trading and can have an extremely harmful effect on people’s ability to remain objective and subsequently generate positive returns.

Finally the article concludes with the following piece of wisdom: ‘With brain switched on and eyes wide open, we can’t always guarantee a positive outcome when it comes to a medical decision, but we can at least stack the odds in our favour.’ As we know, trading is about winning in an environment where uncertainty is part of life. One of the paradoxes of trading success is that winning traders can often get things wrong and lose money, yet still end up being successful, whilst losing traders can often get the market right, have many successes, yet still end up losing money.

The full article can be seen here: ‘Why We Make Bad Decisions’: 



"Good Or Bad Ideas Signpost" Image courtesy of Stuart Miles at FreeDigitalPhotos.net