The Anatomy of a Losing Streak

This lesson applies specifically to traders, but it can also be more broadly applied to anyone who is in a business or endeavor in which performing under pressure is essential.  We have all heard of the “hot streak.”  You are “on a roll.”  For a trader, this might mean that everything she touches turns to gold.  For a basketball player, he is hitting every shot.  Of course there is also the opposite scenario, the “slump.”  The “cold streak.”  No matter what you do, it doesn’t work.  You will never be able to regain your touch.  You have just been lucky this whole time. 

Some statisticians might argue that purely based on odds, streaks are a mathematical certainty.  But, it turns out there is much more to a streak.  There are actually some deeply-rooted biological dynamics involved.  Anyone who has read what I write knows how important I think evolutionary biology is; it is everything, and understanding it can provide a huge edge. 

I want to take a look at the “Anatomy of a Losing Streak.”  Having experienced a brutal losing streak in my own trading during the month of September, I took away some lessons, and was also fortunate enough to stumble upon some new knowledge that helped tie everything together. 

The specifics of my losing streak certainly defy all statistical possibilities that would be a result of just “bad luck.”  No question, there was something seriously wrong with my perception of the markets.  I was not seeing what was going on in an objective manner at all.  I perceived the market as a threat, as opposed to the opportunity that it really is.  So what had changed inside of me?  What biological mechanisms were at play? 

“Financial risk taking is as much a biological activity, with as many medical consequences, as facing down a grizzly bear,” says John Coates, in The Hour Between Dog and Wolf.  It is worth noting that Coates is a Research Fellow in Neuroscience and Finance at Cambridge University, with experience in the financial markets.  There might be no better source on this topic than him.  

He goes further in stressing that trading is also a physical task, and how could it not be?  Our mind and body is one; a cohesive organism that provides feedback within itself.  “Few professions, with the exception perhaps of air-traffic control or the military during times of war, compare with finance for the amount of information that must be sifted and processed in real time,” says Coates.  Information is processed physically, not just mentally, as many seem to believe.  This has very important ramifications in understanding the anatomy of a losing streak: when you are in a losing streak, serious physical changes are taking place.

During short-term stressful situations, we experience a release of cortisol and dopamine in our brains.  Small amounts of moderate stress are actually quite healthy.  However, long term stress that comes from a losing streak turns on the cortisol drip and leaves it on.  When you are in this state, your body is prepared for an immediate emergency, but stays that way for an extended amount of time.  Humans are really not meant to deal with this sort of prolonged response.   Our stress response is meant to turn on, and then turn right back off.  So, when it stays activated, your immune system weakens, digestion becomes much more difficult, and your sex drive diminishes.  The reason is that when your body perceives an immediate threat, all resources go to dealing with that threat – so metabolically expensive processes like those mentioned above, shut down. 

At some point, after a certain amount of losing trades or losing trading days, my stress response turned on and stayed on.  This helped to exacerbate the “streak” that I found myself in.  Instead of looking for opportunities, I looked for ways to AVOID risk.  I was looking for trades where I wouldn’t have to take risk, which is of course not possible.  So I was making foolish decisions in the hope of avoiding further damage. 

I also found myself seeing patterns where there were none.  This is very common in trading, and is often referred to as forcing trades.  “Shell-shocked traders…become pray to rumor and imaginary patterns,” Coates explains.  To use the basketball analogy, it would be like a desperate point guard trying to take a foolish shot under heavy coverage.  The boxer takes wild swings without using proper technique and defense.   Our minds (and bodies) start desperately searching for patterns when under the stress response; and this literally caused me to start interpreting meaningless noise as opportunity.  Armed with this knowledge now, I am much more equipped to recognize when I am prone to making a decision based on desperation, rather than one based on sound technique. 

Another important consideration is the “winner effect.”  This is another very real phenomenon.  “When two animals face off they experience a pronounced rise in their testosterone levels…Testosterone thus prepares an animal for a competition, but it is what happens next that drives the winner effect.  After the fight is over, the winning animal emerges with even higher levels of testosterone, the loser with lower levels…if you have just lost a fight, you had better retire into a bush and nurse your wounds; while if you have won, you can expect an increased number of challenges to your newly elevated status in the social hierarchy,” explains Coates.  So what is the implication for trading?  Well, if you are experiencing losses, you are actually becoming more prone to more losses!  The response your body has is one of caution, so you are naturally going to be more risk-averse! 

Hopefully, this provides more insight into what actually happens during a losing streak.  Winning streaks are similar.  The importance of recognizing our biological reactions to either winning or losing cannot be understated.  Realizing when you are susceptible to making desperate decisions based on noise that, because of the stress response, appears to have meaning, can save the trader a lot of money.  Escaping the dregs of a losing streak requires a trader to gain their confidence back, but you will keep making foolish decisions unless you are able to compensate for your distorted perception.

Holistic Trading

I’ve said it before and I have no problem saying it again: trading is one of the most demanding and challenging businesses in existence.  This is marked by the failure rate for a beginning trader, which is in excess of 90 percent.  If you started trading today, you would likely lose all of your money. 

Why is this likely?  What is interesting about trading is that anyone can access the markets.  It takes no degree, no connections, and no superior level of intelligence to start placing trades. This leads to a fascinating fact: most people who get into the markets are wildly unqualified.   Many of these individuals would not find success in another endeavor, and so they also don’t find success in trading.  However, simply because it is so easy to get into, novices think that the business of trading must be easy to succeed at.  This presumption often leads to complete emotional and financial devastation for those who aren’t fit to be traders.

What about those who are the right type?  By “right type” I mean the kinds of people who would likely find success in another career such as law, medicine, academia, or sports. These are the kinds of people who often have an extremely high level of emotional intelligence, akin to that of a pilot or an air traffic controller.  These are the kinds of people who work hard, have discipline, and lead balanced lives.  These types of people are far more likely to succeed in trading, but their path to success is still a very long one that will inevitably be laden with sweat and tears, but hopefully not blood.

Would you feel confident going under the knife for a major surgery if the surgeon was a person who was “giving it a try” as a potential career.  I sure wouldn’t.  But this is the attitude a lot of traders.  They just “give it a try.”  They don’t come in ready for years of hard work, emotional toil, and the horrific feeling of total self-doubt that one inevitably must endure while trying to make it in trading.  Successful traders approach their trading education like it is medical or law school.  Their tuition is the money they are prepared to lose while learning, in addition to the hard work and sacrifices they will have to make.

Anyone who has a realistic expectation of the trading game knows that they will be directly competing with some of the most intelligent people in the world.  Trading can pay big bucks, so naturally it attracts the best and brightest alongside those with little more than trading hopes and dreams.  This means that, in order to rise, a trader must have every single possible edge in addition to the will to work harder and be more disciplined than the next person. 

Any day that you sit down in front of your computer to trade you must be 100 percent, absolutely no exceptions.  Problems at home?  The market doesn’t care and will gladly part you from your money while your attention is elsewhere.  A bit tired from being out late?  Mr. Market says “thank you.”  99 percent is not good enough.

So what other edge, outside of the statistical meaning, do you need to succeed?  I call it “holistic trading.”  Normally when I think of the term “holistic” I think of all of the vegans (why do they always look so angry?) I see at Whole Foods.  Frankly, the term is a bit of a turn off because of this association, but the term truly is best to describe my approach to trading.  Essentially, this approach rests on the idea that the body and mind are one entity.  The healthier the body, the healthier the mind, and vice versa.  This healthy reciprocity can be gained in a myriad of ways. 

It isn’t necessary to look like you belong on the cover of Men’s Health to make it as a trader, but having the energy that comes from being in shape is a definite edge.  Trading requires intense focus, and as studies have shown, exerting self-control actually requires a lot of energy.  If you aren’t eating properly, that is going to be a disadvantage.  If you aren’t spending some time every day getting exercise, then that is also a disadvantage.  I love to think of things in terms of evolutionary biology.  If cavemen did it, then it is probably good to do.  Our DNA hasn’t changed much at all since their time, so it is important to respect that.  This isn’t hippy-speak, it’s simple logic.  Our ancestors had to run and were constantly on the move.  Processed foods loaded with chemicals and sugar didn’t exist either.  So, to boil this down: exercise and don’t eat that crap.  The relationship to trading is actually pretty simple: feeling more awake and alert every day is going to be a big benefit to your bottom line.

Meditation is also a powerful tool, with short-term and long-term benefits for traders (as well as others).  Ray Dalio is one of many large fund managers/traders who are into meditation. According to Ray, who, mind you, is worth $10 billion and manages around $154 billion, meditation is the single biggest contributor to his success.  It “makes him feel like a ninja,” allowing him to better process things as they happen.  Sound important to a trader?  He is not alone in his view on meditation either, but you can google that on your own.  One description that I have heard about meditation is that it is like a shower for the brain.  I think this is accurate based on my experience.  Meditation is also a useful exercise to help relax in the morning before the trading day begins.  Again, this can be a big advantage for the trader.

Your relationships with friends, family and significant others is also important.  Negative relationships sap your energy.  Positive relationships have the opposite effect.  If you are in some type of relationship that isn’t healthy or positive, either change it or end it.  Because, guess what?  The market doesn’t care what else you have to worry about.  If you need to, take some time off from trading while you resolve whatever issues need resolving, so you can give 100 percent of your focus to your trading. 

To consider this approach in action, let’s take a look at a day in the life of a trader, Gus, who doesn’t find value in this “holistic” approach.  Gus might wake up and have a breakfast consisting of coffee and a donut or something else with a hefty dose of sugar.  Actually, let’s make it an energy drink instead of coffee, just to ensure that a sugar crash is inevitable a few hours down the road.  Gus trades for a bit, gets tired, and takes his lunch break.  For lunch, a deli sandwich is something that most people seem to think is mildly healthy, so a deli sandwich it is.  After lunch, Gus comes back and finishes up the trading day and heads home.  Chances are that, at this point, Gus is tired.  When he gets home, maybe he will take a nap or watch some TV.  Exercise is not on the agenda, but a fight with the significant other is.  Perhaps not even a fight, just the usual, dull, interaction.  Dinner time finally arrives and Gus orders a pizza and has a few beers.  Due to that nap he took earlier, he has trouble getting to sleep after dinner, and when he finally does his quality of sleep is slightly diminished because, well, that is the effect that alcohol has on sleep.  So, the next day he wakes up, grabs his energy drink and donut breakfast, and the routine repeats. 

It is easy to see how this negative cycle easily perpetuates itself.  If you feel crappy after work, you probably won’t want to hit the gym.  If you don’t hit the gym, you don’t get that extra boost of energy and confidence.  You don’t sleep as well, and then…well you can take it from here.

Now onto the next trader, Marsha, who lives a more healthful lifestyle.  Marsha recognizes the advantages of having extra alertness and clarity of thought.  Marsha wakes up, probably a bit earlier than Gus.  She might start out her day with a run or a quick meditation session.  Either way, she is already setting up to have more energy in the morning than Gus.  She cooks some eggs and blends a veggie juice.  Marsha doesn’t eat a huge breakfast that will take inordinate amounts of energy to digest.  Instead she eats a bit more lightly than Gus, and brings a snack to have mid-morning, perhaps after the European close at 10:30 AM.  Lunch time comes around and Marsha meets up with her trader friend, Archie.  They grab Chipotle (avoiding the tortilla and sour cream), talk as friends do, and then go back to work.  Marsha finishes up the trading day and goes home.  At this point, she is probably a bit mentally exhausted, but not in dire need of a nap.  She might go for a walk or review her trading day.  She chooses to forgo the mindless exercise of watching TV.  Marsha eats a dinner of quality, real food, maybe has a glass of wine, and then gets a good night of high-quality REM sleep.

In contrast to Gus’ situation, here we can see how this positive cycle perpetuates itself.  Marsha will wake up feeling more energized and more likely to have a positive mentality toward engaging in her healthy habits, and therefore her positive cycle is more likely to continue.

So, summing up this approach is simple: eat well, exercise, and meditate. Keep wary of things that introduce stress or negativity:  Don’t drink too much or do drugs.  Don’t eat crap.  Understand that all of the elements in your life are connected to your success as a trader and the importance of building a positive cycle. 

Note: While some of this “wisdom” comes from my own experience, the book “Market Mind Games” by Denise Shull touches on a lot of these topics.  Additionally, basically any modern book you read about evolutionary biology or performance will highlight the connection between mind and body.  Feel free to email me for some names. 

Journaling Your Trading Journey

Since the first trade I ever made, I have always been compelled to keep some type of written record of what I do in the markets.  I’m not totally sure why.  On one hand, it may just be because keeping a journal is highly recommended by most successful traders; on the other, maybe it just makes me feel like trading is more of a “job.” 

There is something known as the Protestant Work Ethic, which is a concept rooted in hard work and diligence.  It has been used to describe how traders feel the need to make trading feel more like the traditional 9 AM to 5 PM work day.  The trading work day is highly unique.  What other job offers the possibility of going into the office and leaving poorer than you were when you arrived?  More importantly, what other job presents the ability to make a tremendous amount of money for doing what really feels like nothing? 

This is quickly devolving into a stream-of-consciousness rant, but bear with me and it will come together at the end.

As a trader it often seems like you make money by doing nothing.  Sometimes, it doesn’t really feel like you are actually working, despite how difficult trading is.  For myself, I feel as though I keep track of statistics, write ideas down, and stay abreast of macro-economic developments, sector-specific news, and monetary policy not only for the obvious reason of having an edge in those areas, but also to make trading feel like work. 

If you read the interview I had with Chip Kenyon last week, this might sound familiar.  Chip mentioned how traders would often make a lot of money very quickly.  If a trade works out, you make money, and if it doesn’t, then you lose money.  While you do have to constantly reevaluate what the developing market is telling you, it still doesn’t feel “right” to make thousands of dollars or more for what seems like just sitting there.  Maybe, just maybe, journaling provides you with some of that necessary work ethic so you actually feel like you deserve what you are making.

In the spirit of keeping this rant going, I quickly want to touch on another point made during the interview with Chip.  It is actually not too difficult to make a good trade and make some decent money.  Therefore some traders do exactly that, but then they feel that they don’t deserve the money, so they make flawed decisions that lead to losses.  This is a very real phenomenon of the subconscious.  The incredible irony here is that although it is easy to make one good trade, it is very, very difficult to trade well consistently, largely because of this phenomenon.

Back to journaling.  I have saved all of my journals since I began trading.  I have some that go back as far as 2007.  They are almost all legal pads and I always kept them numbered.   There are probably about 40 of them, full of notes, many which are difficult to read. While I was waiting to begin trading again this past month, I decided to pull all of them out and read through them.  What I found was pretty astounding as well as enlightening.  A lot of what traders go through is quite personal, so I won’t go into too much detail here.  I will say, however, that there are themes in my trading which have played out consistently over the years.  For example, I seemed to have some type of aversion to making money due to the nature of trading and the aforementioned Protestant Work Ethic effect. 

That is something I am past now, probably because I am aware of it, and probably also because I do work harder than I ever have, only not in the ways that I expected.  Another theme worth noting is how much more simple my trading strategy was when I was less-experienced.  But it actually worked a bit, and in looking over my notes, I have reincorporated some of those concepts. 

I had a very busy week and admittedly I had no post prepared for today.  I had this idea about posting about journaling, so I started writing it and I think, in the end, it is worth publishing.  I suppose I am recommending to any beginning traders that they keep a journal for multiple reasons: to make yourself feel like you have more of a real damned job, to track your own progress and clarify your thought process, and, finally, to have an archive to look back at a few years down the road and see how you have developed. 

Chip Kenyon

I am very fortunate to be in a unique position to sit down with one of the greatest people ever to don a trading jacket: Chip Kenyon.  When I sat down with Kenyon, I intended to learn about a trader; but, by the end of the interview, I realized that I had learned about a man.  I have read interviews with other trading greats and, since I don’t know them personally, it is hard to picture them as people.  They are so skilled at what they do it is almost easier to think of them as superhuman or some type of emotionless robot.  Chip, however, is clearly no robot.  He is a man who integrated his life principles into his trading.

Kenyon got started in the trading business right out of college, kicking off his career on the floor at the Chicago Board of Trade.  He traded through what is widely thought of as the heyday of this business.  Fortunes were made and lost every day in the pits.  While there is still a tremendous amount of money to be made or lost today, at the time Chip began trading, the fact that so much trading talent was concentrated in one place is truly remarkable. The floors of the Chicago exchanges must have been THE most exciting place one could have worked. 

The following is some of the discussion I had with Chip.  The insight that I gained from speaking with him is clear, and I am gracious he allotted some of his time to sit down with a trader who is following in his footsteps, albeit in a different era. 


Can you tell me how you first got into the trading business?

Yes.  I got out of college at 23 and I was aware of the business but I wasn’t sure how to find an opening to pursue it.  I talked to my parents and they introduced me to my neighbor who was a floor trader at the CBOT.  I sat down with him and he took a liking to me, took me down to the floor and had me sit on the sidelines and eventually gave me one of his extra seats free of charge. 


What years were you on the floor?

I started in bond options in ’86 and then moved into the futures in ’88.  I eventually bought my own seat.  I left the floor in 2004 once the market was mostly electronic.  Once it got to about 80-85% on the screen on the computer, I said “That’s enough.”


After you saw the floor with your neighbor, were you attracted to trading right away?

Yeah, I did like the competitive environment.  Much like an athlete, I think you can do well by having a strong mindset and having a little hunger.  But I told my neighbor, “I’m not sure I’m ready,” and he said “You gotta go in and figure it out.  Learn by the seat of your pants.”  So, I remember the first trade I made, my hand was shaking and I couldn’t even write down the numbers.  But once you see a little success, whether it is making $30 or $50 a day, you want more.  Not out of greed, but you want to keep improving.
My neighbor always said we have to get the right breed in the business.  I tried to help out 13 guys but only 1 of them made it.  We want to pass it down to the next generation and have stable guys in the business.


That sounds like a pretty standard number, 1 out of 13 or even 1 out or 20 making it. 

Yeah, these were all good quality guys.  It’s not an easy business.


The guy that did make it, was there anything about him that you would attribute to his success?

Very level-headed, composed, no ego.  Never would try to trade outside of his parameters.  He was steady, never emotional.  He was also a big time hockey player so he also had that advantage.


Ego – how would you say your lack of ego is a benefit?

Once you start thinking you’re too big or the market can’t beat you, or you start making too much money and get full of yourself, you’re  gonna be humbled.  I always left everyday, whether I made or lost money, as the same person.  I always thought I could do better.  There were times when I thought someone stole my market,  but I wouldn’t scream and point and yell.  That takes you out of your gameplan.

I saw a lot of guys who were too cocky and they got put into their place.


This mind-set you’re talking about – remaining level, egoless and unemotional – is this something that you learned?

I had that discipline, but you train yourself.  It becomes a habit.  My wife would say that she never knew if I had a good day or a bad day.  I wouldn’t sulk or feel sorry for myself or start drinking.  I would have the same routine.  The best thing about trading is that you get back on the horse the next day.  I looked forward to the days where I got put in my place because then the next day I’d correct everything and I’d be a little more polished.


How long would you say that it took you to become confident in your abilities on the floor?

A couple of years.  It’s a gradual process, a slow process.  Every month I’d get better.  It wasn’t like one day I was trading 100 lots and the day before I was trading 1 lots. Always get better, every month, every year. 


Did you ever get impatient with yourself?

No, no, no. I was making enough money for a 24 or 25 year old kid which was probably more than I could have been making at a bank in New York.  I always thought I had a lot more upside.


How did you handle having a losing day?

I’d think about it; get angry at myself.  I’d look at my mistakes and tell myself it would never happen again.  Of course it would another month down the road, but I would just rehearse in my head why I did something.  A lot of my mistakes were from me being emotional or stubborn.  The worst day for anyone is when you’re adding to losers. 


How about a big winning day? 

Well I would go buy a new car and go on a bender (laughs).  No, I would go think about the opportunities that I missed.  I was never patting myself on the back.  The challenge is can you do it again?  Can you keep it up?


Was that one of the things you liked about trading?  That you always tried to improve?

Yeah, yeah.  It was never the money.  I would always think that I have more to offer so you constantly pushed yourself.  You learn a lot about yourself.


Tell me about some trading-related mistakes that you saw guys make.

Well I gotta tell you, the main one is how many people I heard on elevators or hallways saying “I should have bought it,” or “I knew it was going up.”  People lacking conviction and guts.  If you see something you react and take a stand.  There are a lot of people who have regrets and there are a lot of “hindsight traders” as I call them.  Well, they should have done something about it.  A lot of guys are afraid.  If your gut tells you to do something, then do it.


Do you think these guys would be upset with themselves about missing a trade and kick of a negative cycle of thinking?

Yeah.  Those are the types of guys that always make excuses.  Instead of saying I screwed up, it’s this excuse or that excuse.  The beauty of trading in the old days is that it’s never anyone else’s fault. 


I would say that the same is true today unless you are part of a team or have a partner.  It can be tempting to blame the market, but for example, I keep a journal where can see what I am doing wrong.  There is never any excuse.

There was this clearing house that had this card of “Dos and Don’ts.”  I kept that card in my pocket for 18 years.  It was the most obvious stuff.  You have to remind yourself over and over again. 
Cutting losers is number one.  But letting profits run, or adding to profits, is probably the hardest thing.  Everyone has bad days but when you have a profit, it takes a certain kind of person to ride it because you are thinking “Wow, this is a lot of money.  I should just take this and call it a day.”  But it takes a brave person to add on and let it go.  That’s how you really succeed in this business.


Would you say a good analogy to that is a baseball player knowing when to hit a single, double, or a home run?

Yep.  Or a hockey player that has 3 goals in the first period.  Does he say “OK, I’m satisfied, time to go home?”


Talking about sports, how do you feel your experience in college Lacrosse helped you as a trader?

The discipline, which some of it is inherent.  Competitiveness, drive, fire.  Playing college sports helped me train those skills that are important in trading. 


How about major lifestyle mistakes that you saw guys making?

There are a lot of guys who would make a certain amount and then call it a day.  I mean they would trade until 8:30 AM and then go to the bar, go play golf.  You shouldn’t have a limit on where you stop.  If you make money from 7:30 to 8:30, why not 8:30 until 2:30?  That always bugged me.  Guys would just skip out of the pit.  And these are the guys that are struggling now.  They live on their parents’ couch.  It’s a somber story but you see a lot of it. 
There is one trader who I was talking to recently and he said “You were right Chip.  I remember one day I made some dough and I was leaving and you said ‘Where the hell are you going?’”  He didn’t take advantage of the situation.  You don’t say “I deserve a break.”  You have to stay hungry.


Do you think some of these guys behaved this way because they were scared to give money back?

I understand that concept, but it’s just work ethic.  The thing that angered me the most is that if I left the pit and then I would hear about a trade I missed, it would burn me up.   So I would rather sit there for 5 hours and not make a dime than miss a potential opportunity. 


The barrier to entry for this business is so low.  To perform surgery on someone’s brain, you have to go to medical school for a long time.  But to start trading, all you need is some money.

Right.  I hate to say it but a lot of these guys were clerks when they were 18 and then making six figures when they were 22 and they can’t handle it.  You can’t get caught up in the money.


What did money mean to you?

It was just a way to see that I am still improving.  In early 2000s, I didn’t see progress with myself because the game was changing.  That frustrated me.  I decided to move on.


What did you like most about trading?

I think it’s important to like your job.  I looked forward to the competitive environment.  I could have been a teacher or a banker, but I would have missed the thrill factor of trading.  It’s the next best thing to being a professional athlete…or rock star.


What about things you disliked?

Um…it was very impersonal.  You might spend a week not talking to anyone.  Everyone had their own angle.  It’s not a nice business and why should it be?
I kept to myself.  I don’t think anyone was looking out for my well-being. 


Did you ever have feelings of guilt after making a lot of money?  How did you reconcile that?

Yeah, yeah.  One trader said that people can’t stand the guilt so they are dying to give money back.  They think it is stupid money. 


That is sort of ironic because making money consistently as a trader is extremely difficult, but having one good trade is not. 

Yep.


As Ed Seykota said, everyone gets what they want from the markets.

Exactly.  You can’t think about the money.  You focus on doing the best you can.


Did you do anything each day before the open?

Not really, I was really a reactionary trader.  I would get to the office 20 minutes before the open and that was it.  On the ride downtown I might talk to myself a little, but that’s it.


Would you want your kids to get into trading nowadays?

No.


What about back in the day?

Yep, I would, but not anymore.  I think it’s really difficult.


What do you think is more difficult about it? That the edge from the pit is not there?

Yep, yep.


For myself, the remedy is to not scalp, but just make a couple of good trades today.

That was hard for me, because I had a pit mentality.


How many trades would you make a day?

Hmm…maybe a 1000 round turns.  I think one day I did about 45,000 round turns, which was a big percentage.  I was always in the market.  I could trade with an opinion and be in the market the whole time. 


So your style was strictly scalping?

Yeah, scalping with an opinion. 


When you were having a losing streak, how did you deal with that?

I would just try to have one winning day and then all of the negative thoughts are gone. 


From what I have felt and read, it seems like a common experience during a losing streak is to think that you never actually knew what you were doing as a trader.   It has all been luck up to here.  Paul Tudor Jones said something along those lines.

Yep, but one good trade or one good day and you feel good again.


What about winning streaks?

That was the time to push it, not take a break. 


What about life outside of trading?  I think it is important to have balance.  You can’t drink a lot or do drugs, you should have good relationships with people; you need to be stable.

It’s important to have a routine.   I would either go work out or coach youth sports.  I would then have dinner with my family.  There was no wiggle room…it was stable. 


People have the false impression that traders are just guys that happen to be very smart or gutsy.  But I think maturity and stability are the more important attributes. 

Definitely.  I don’t think I went to bed past 10:00 PM for 15 years.




One of the key themes that we touched on during our discussion was the need for a professionally dispassionate attitude.  It may be somewhat ironic, then, that it takes a very real human to maintain that level of professionalism.  The person that Chip is outside of the pit largely affected who he was inside the pit.  That much seems clear.  His confidence in himself and his abilities were perfectly balanced by his humility and respect for the market.  He led a life in which family, coaching sports, and other extracurricular activities helped to provide him a much needed break from the demanding life of a pit trader. 

Despite not having initial success, Chip maintained confidence in himself and his ability to learn.  Trading is a business that will quickly humble the best and the brightest, so staying modest and persistent are necessary ingredients for success.  The flip side of that is that when things start going well, you need to stay level-headed and disciplined.  Making money as a trader is tough; keeping it is even tougher.

After this interview I was admittedly excited to see that a legend like Chip had indeed experienced many of the problems and feelings that I deal with.  It goes to show that while the business of trading may be one of the most dynamic businesses in the world, what it takes to find success may forever be static. 


Special thanks to Chip Kenyon for taking the time to let me pick his brain a bit.

The Essential Non-Trading Trading Books

There is so much trading literature available that sifting through all of it to find value can be a daunting task.  There are some classics such as the “Market Wizards” series,” Reminiscences of a Stock Operator,” and “Pit Bull.”  There are also some newer books which I think are great like “Hedge Fund Market Wizards,” “Traders at Work,” or “Market Mind Games.” 

While I intend to take a closer look at these trading books further down the road, right now I’d like to point out the tremendous value to be found in books that aren’t explicitly about trading.  So, this week, I present to you the list of Non-Trading Trading Books.  I will provide a brief description of the book, its relation to the trading game, and then offer some relevant quotes and what they mean for traders.    

Letters From A Stoic by Seneca

Seneca was a Roman Stoic Philosopher.  “Letters From a Stoic” is a collection of essays disguised as letters to a friend of Seneca’s.  One of the main themes in the book is the importance of dealing with uncertainty and things outside of your control with a dispassionate attitude.  Adopting this sort of attitude can seriously help one in trading.  After all, once you put on a trade, what happens is out of your control.  The only thing that you do control is your reaction.  Aside from the near-explicit trading lessons to be found, there is a lot to learn about how to live, which also affects how one trades.

“Halt before every good which Chance brings to you, in a spirit of doubt and fear; for it is the dumb animals and fish that are deceived by tempting hopes.”

 Trading Translation: Hope kills traders.  Be wary of easily gotten gains. 

“Our lack of confidence is not the result of difficulty.  The difficulty comes from our lack of confidence.”

 Trading Translation: Confidence is absolutely key to trading well, but don’t forget to balance it with humility.

Deep Survival by Laurence Gonzales

This is one of my top five favorite books of all time.  Gonzales looks at some extreme situations in which people had to survive – being stranded at sea, stuck in a jungle after a plane crash, lost in the wilderness.  He then figures out why they survived.  How did they think differently from those who perished?  What traits did the survivors have?  Trading in the financial markets throws the participant into what is basically an electronic wilderness.  When real money is on the line, how you think and deal with yourself is what will separate the winner from the loser.   Having the “survivor personality” is absolutely critical to success in trading.  I have read this book a few times and it never ceases to amaze me how much Gonzales’ perspective applies to trading.  A few quotes to show what I mean:

“There are things you can’t control, so you’d better know how you’re going to react to them.”

Trading Translation: You can’t control what happens when you are in a trade, so be ready to react to any possible scenario.

“…they displayed that quality which is perhaps the only one which may be said with certainty to make for success, self-control.”

Trading Translation: Can the importance of self-control in trading ever really be stressed enough?

“Stress causes most people to focus narrowly on the things that they consider most important, and it may be the wrong thing.”

Trading Translation:  If you are in a losing trade and the market is moving against you, your brain is going to focus on information that you want to see; information that confirms that you are correct.  You should actually be looking for information that is saying that you are incorrect instead!

“In nature [or the markets], adaptation is important; the plan is not.  It’s a Zen thing.  We must plan.  But we must be able to let go of the plan, too.”

Trading Translation: Planning every day is important so you know how you will handle different scenarios.  But plans can quickly be invalidated in trading, so you need to be able to forget your original plan and come up with a new one.

The I Ching or Book of Changes by Brian Browne Walker

The I Ching is a classic Chinese text that was believed to be written between 475-221 BCE.  To use the I Ching properly, you are supposed to throw specific Chinese coins to come to some sort of answer.  However, the text alone provides a lot of lessons that can be learned and applied to trading.

“A challenge lies ahead.  Ready yourself by deepening the stillness within.  Anxious anticipation only weakens your abilities.”

Trading Translation:  Every day that a trader wakes up, he faces the challenge of a new trading day where it is impossible to know what is going to happen.  Having feelings of anxiety is a common experience.  This quote is one that I try to keep in mind at the beginning of the day to keep things in perspective. 

“Recognize the beginnings of improper action.  The superior person corrects herself while it is still easy to do so.”

Trading Translation:  After I have a couple of bad trades in a row, I know that my vision of the market is probably not objective anymore.  Instead of continuing to press my trades, it is always a better idea to recognize my flawed judgment and correct it.

“The superior person avoids making excuses.  Recognize errors, correct them, and there will be no misfortune.”

Trading Translation:  Trading is a business in which the participant is 100 percent responsible for his or her results.  It is never the fault of the market that the trader lost money, and if the trader believes otherwise, that trader will never learn from their mistakes. 

Thinking Fast and Slow by Daniel Kahneman

This is a pretty popular book that takes a look at how our brains work.  One of the main themes is that we can much more easily spot the mistakes of others than we can our own.  Kahneman also discusses what he calls “System 1” and “System 2.”  System 2 is in charge of self-control while System 1 is more impulsive.  This is all rooted in evolutionary biology.  Knowing how we think can help us to work around innate biases that might have adverse effects on our trading decisions.

“The best we can do is a compromise: learn to recognize situations in which mistakes are likely and try harder to avoid significant mistakes when the stakes are high.  The premise of this book is that it is easier to recognize other people’s mistakes than our own.”

Trading Translation: The stakes are always high in trading so working to avoid mistakes is always necessary.  And what about the idea that it is easier to recognize other people’s mistakes than our own?  Mistakes any traders make are lessons for the smart trader to take into the future.  I believe the savvy, experienced trader can see other traders making mistakes in the market and then exploit them to advantage.    

“The conclusion is straightforward: self-control requires attention and effort.”

Trading Translation: I don’t think most people see self-control as the biological process that it really is.  It is not something that you either have or you don’t.  It is something you can build and in order to use it properly, you need to be eating well, sleeping well, and exercising.  These things all help to maintain a healthy lifestyle and energy levels, which directly influences success in trading. 

“…effortful mental activity appears to be especially expensive in the currency of glucose.  When you are actively involved in difficult cognitive reasoning or engaged in a task that requires self-control, your blood glucose level drops.  The bold implication of this idea is that the effects of ego depletion could be undone by ingesting glucose, and [this hypothesis has been confirmed in several experiment].”

Trading Translation: Your brain craves glucose as a result of effortful thinking, so eat more bananas when trading.  Seriously though, keeping your energy status in mind is important so you can know if your discipline may not be where it needs to be.  Thinking takes energy!

“Another remarkable discovery is the powerful effect of mood…They [experimenters] found that putting the participants in a good mood before the test by having them think happy thoughts more than doubled accuracy.  An even more striking result is that unhappy subjects were completely incapable of performing the intuitive task accurately…when we are uncomfortable and unhappy, we lose touch with our intuition.”

Trading Translation: Having a positive attitude is necessary when trading.  You need to have confidence to be able to rely on your intuition.

I could keep pulling quotes from this book for hours, but I strongly suggest you read it yourself. 

The Inner Game of Golf by W. Timothy Gallwey

The title is pretty self-explanatory but, just to be clear, this book is about the mental part of golf.  The concepts apply to trading with incredible accuracy, so I will let the quotes do the talking.

“…slow-motion videotapes revealed that the best golfers do a great deal that is individual or unique and that there are relatively few constants in the swings of the pros.”

Trading Translation: The same can be said about great traders.  They all have a method and style that is unique to them.  Tiger Woods can’t teach you your unique swing; although he can probably give you some good tips.  Likewise, Paul Tudor Jones can’t teach you how to trade using his style either; he can only offer general tips, one of which would probably be to figure out your own style.

“I concluded that the walk between shots is one of the most critical parts of the game.”

Trading Translation: Waiting between trades is difficult.  It takes a lot of patience.  Patience with the right mind set.  You can’t overthink and you need to be prepared for whatever happens.  You have to keep your thoughts positive so you remain confident in your ability to make correct decisions. 

“Doubt is the fundamental cause of error in sports.  It is self-doubt that causes the skier to tighten…”

Trading Translation: Self-doubt also causes the trader’s “vision” to narrow until the only things visible are the objects of fear.  The result is that the trader often gets what he or she fears most.

The Talent Code by Daniel Coyle

“Practice makes perfect” should be replaced with “Practice makes myelin,” according to Daniel Coyle.  This may sound like a self-help book, but it is all about the chemistry of the brain and it is the most fascinating book I’ve read in years.  Essentially, repetitive action (practice) causes myelin to wrap around the nerve fibers that are firing as you are performing a specific action.  Myelin insulates the nerve fibers causing them to fire faster and faster.  This is exactly what skill is on the chemical level.  Myelin is something that has scientists very excited right now and reading this book will give you a whole new perspective on whatever it is you do.

“You will become very clever through your mistakes.”

Trading Translation: Mistakes are truly a beautiful thing because they are really arrows pointing to what you need to improve on.  This is as true in trading as anywhere else.

“We think of effortless performance as desirable, but it’s really a terrible way to learn.”

Trading Translation: Struggle is the best way to learn anything worth the effort.  Without struggle, your brain is literally not making the connections that it needs to make to enhance your skill.

“’Things that appear to be obstacles turn out to be desirable in the long haul,’ Bjork said. ‘One real encounter, even for a few seconds, is far more useful than several hundred observations.’”

Trading Translation: Watching the markets may be a good way to learn about how they work, but experience is what really counts.

This book is worth a book (or maybe just a blog post) on its implications when it comes to trading. 

The above books are all much better read as a whole rather than a few select quotes.  Hopefully the sampled quotes will provide the evidence needed to understand that these books do carry valuable trading lessons. 

A lot of new traders start off by figuring out ways to analyze the markets.  What I think is far more important than that is learning how to analyze yourself.  The trading environment is very unique and our innate traits set us up for failure from the get-go.  Having every possible advantage is necessary to succeed in this business.  At one point it was thought that mind and body are separate, but now it is scientific fact that they both influence each other dramatically.  So while the above list may not directly address trading, they address an important aspect of it: you. 

Boxing and Trading

Certain sports provide solid analogies to the world of trading.  Golf is a very mentally intensive game.  You can’t overthink your swing or you are going to screw part of it up.  You have to stay confident but maintain a sense of humility.  In baseball you have to know when to hit a single or a double.  Or maybe it’s time for a homerun.  Football has an element of strategy that is familiar to traders.  Fishing requires a tremendous amount of patience. 

There is no question that having some athletic background will give one an edge in the trading game, all else being equal.  For instance, golfers have to learn how to be levelheaded and control their emotions.  They have to be able to perform well under pressure.  That is something all traders struggle with.  Baseball provides my favorite analogy, however.  Knowing when you should hit a single, double, triple, or home run, is applicable to trading.  Should you let this winning trade keep going?   Or is it time to get out because the trend is going to turn?  In my opinion, knowing when to hit the single versus the home run is what separates the good trader from the great trader.  While I am not personally a huge football fan, a lot of guys at my old prop firm were big into the Madden videogame series and likened the strategic aspect to trading.  And fishing has some obvious parallels as well.  You have to sit and be extremely patient, waiting for the perfect opportunity. 

I can’t claim to have any extensive experience in any of the above sports with the exception of golf.  But one sport with which I am very familiar, and may actually provide a very apt analogy, almost never gets compared to trading: boxing. 

To the untrained eye, a boxing match simply appears to be two humans attempting to hit each other in the face.  To the more experienced patron, it is a game of chess in which everything comes down to technique, measured risk-taking, and knowing when to go for the kill. 

Most casual fight fans like to watch brawlers go at it.  They like to see fights such as Rios-Alvarado, Ward-Gatti, or Corrales-Castillo.  These were wars were the opponents put it all on the line.  These guys came to entertain.  People love fighters like Manny Pacquiao who relentlessly attack their opponents with flurries of devastating punches.  They want to see knockouts and perhaps blood.  I do enjoy these fights as well, but not nearly as much as I enjoy watching a masterful performance from a fighter like Floyd Mayweather, Andre Ward, or Guillermo Rigondeaux.  You have probably heard of Floyd Mayweather who is the “Pound 4 Pound” best fighter and highest paid athlete in the world.  Ward and Rigondeaux are known well by hardcore fans.  All three have the same things in common:  they are absolute masters of intelligent risk-taking, fighting on balance, and adjusting in the middle of a fight.  They are the masters of the “Sweet Science.” 

“Good trading is boring trading.”  Have you heard that before?  If not, you might be missing out on some great trading literature.  The point is that trading comes down to a grind.  You sit there; you wait, and then you take a trade.  Then you take another.  And another.   The glamour that is often seen in movies and other media just doesn’t exist in the real world of trading.  Trading is a tough, tough business and you have to be mentally fit to sit through the hard times, the boring times, and most importantly, the good times.  After all, it is during the good times that you may be prone to overconfidence and as a result, dropping your guard. 

People who don’t understand trading are sometimes drawn to it because they expect this sense of glamour, but those who do understand trading know what the reality is.  The same can be said about boxing.  The top fighters all have styles that seem boring, but if you know what you are watching, then it is truly a thing of beauty.  Watching Andre Ward set up his opponent to make a mistake that leads to a left-hook KO two rounds later; Guillermo Rigondeaux schools one of the hardest hitters in the sport with his incredible timing; Floyd Mayweather proves to be more elusive than the ‘Holy Grail’ is in trading.  These are all beautiful, quiet qualities of these boxers.   Distracted by the blood and guts, the casual fans don’t get to witness the marvelous technique that makes the Sweet Science so sweet.  .  Imagine watching one of the best traders in the world get out of a trade with a small loss in order to avoid a larger one.  Is that exciting?  Not really, but it is proper risk management.  Imagine watching another trader take huge risks and making big profits.  That is exciting to watch, but with that lack of money management (think about a boxer using proper defense, hands up), the trader is bound to get blown out (like the boxer would get knocked out for the lack of defense). 

Take a look at Floyd Mayweather, one of the best defensive boxers of all time.  He is a master of protecting himself and taking intelligent risks.  Every time a boxer drops his hands, he is open to being hit.  Every time a trader takes a trade, he is open to taking a loss.  Knowing when it is time to take the risk and when it is time to protect yourself is vital.  If the market is not providing an opportunity, then you keep your hands up.  If there is an opening, you take it, and then get right back to protecting yourself.  Some boxers will keep their hands down and throw less-than-stellar shots hoping to score a knockout.  This leads to a lot of unnecessary risk being taken as a result of hope.  Good traders don’t hope.  Floyd Mayweather doesn’t hope.  This brings us to the next point…

…Staying on balance.  If you are not on balance in the ring, you can’t throw a proper punch.  If you are not mentally on balance, you cannot make objective trading decisions.   Staying on balance, both mentally and physically, is difficult, but few things are more important.  This is what discipline is all about in both endeavors.   Throwing a punch off balance can easily lead to the puncher being knocked out.  Taking a trade when you are not seeing the market clearly can lead to a blowout.  You don’t see the best boxers taking wild swings.  If they miss a shot, they get back to the proper form and prepare for the next one.  Likewise, if a good trader takes a loss, he realizes it is just part of the game and prepares for the next trade.  Less experienced traders will take a loss and then immediately take another, lower quality trade to try to make their money right back.  Elite traders don’t take those trades.  They get back to playing defense and then wait for the next solid opportunity.   Taking a loss or getting hit with a punch is just the nature of these activities.  Taking multiple losses or getting tagged with combinations over and over might be an indication that your discipline needs to be checked.  

Adapting to changing conditions is tough and requires an open mind.  Staying defensively responsible and not wasting your energy or capital helps you keep this mind set.  The markets are always changing their tune.  They will change when you are in a trade and you might have to adapt right away.  A fighter might try a different approach against his opponent and then the opponent must adjust.  If you don’t adapt, you lose.  Mayweather is known for being able to adjust in the middle of a fight.  When he was fighting Miguel Cotto, he slightly adjusted his straight right to hook it around Cotto’s glove and hit his face.  Similarly, a good trader will recognize a change in volatility or market state and adjust accordingly.

Sports analogies are generally very helpful when it comes to trading, especially for the former athlete.  I never played baseball but I see the wisdom in knowing when to hit a single or a home run.  I have never fished but I know that being patient is important.  Whether you have boxed or not, hopefully these analogies will help you see your trading from a different perspective.   Adapt or else.  Don’t waste energy on foolish opportunities.  Never strike unless you are on balance.  Taking a shot here and there is okay, but don’t get hit by combos.  And finally, keep your hands up and protect your capital at all times.  

GIF source: http://giphy.com/gifs/11MPo03qPTjjhu