The full title of this book is “Mastering Trading Stress: Strategies for Maximizing Performance” by Ari Kiev.
Ari Kiev was a very famous psychiatrist that worked with traders at SAC Capital. A large chunk of the book is in the form of transcripts of interviews conducted by Ari Kiev with traders mostly I presume from SAC Capital. It is interesting to know that traders swinging hundreds of millions of dollars also have the same emotional issues as the small retail trader.
The coverage of emotions and trading stresses is very extensive. Probably any damaging emotion to trading that you can think of, it’s in the book. However, while the breadth is there, the depth may be lacking in some. It is not uncommon to have a section elaborating on a negative emotion / behavior (e.g. procrastination) but offering no solution or a one line solution that makes you go “hmmm”. It is always much easier to talk about problems and why they occur, than coming up with solutions. I have yet to find a trading psychology book that devotes more than 50% of its content to solutions. Most books find it easier to devote 80-90% of the book to explaining problems (e.g. why you feel the fear of loss, the different structures of the brain, the horrible results that can happen, etc.) which are self-evident. The last chapter of the book also contains some breathing, visualization, journal writing and image awareness exercises.
One interesting thing that I got from the book is how large hedge fund managers think in terms of setting a profit target. Typically a retail trader will trade and “receive” the result from the market. They do not say “I target to make 0.5% today” because they know that they don’t have the size to move the market. Whereas for the traders interviewed by Ari Kiev, it is a standard thing to set weekly and daily profit targets, which to me is an amazing thing, and speaks to the amount of influence they have on the market. This is a good thing for retail traders because these large traders need to meet their “quota”, so small retail traders can hitch on for the ride.
How to Stay in Losing Positions that Turned into Winners
- You know how painful it is. The moment it is working in your favor you want to get out, because that is a stress reliever. You have taken all that pain. The first chance you get to escape the dungeon, you go for it.
- You have held on in there, accepting the pain because you don’t want to lose any money, but you are building up a lot of tension inside and waiting for the opportunity to escape from the situation, even if you don’t have to run, because the liberators have come and you can walk out casually. Even when you realize you can get it back and then some, you don’t. You are not trying to play it for the maximum value.
- The best thing to do is to realize that under stress you are making an emotional rather than an intelligent decision. That’s when you should go back to your thesis to remind yourself what got you into the position so that you will have more staying power.
- At the most stressful times, especially in a market that is quite volatile, you have to constantly refresh, at a minimum on a weekly basis, why you are in the positions you are in, because the moment the market reverses direction and gives you a chance to get out, you want to get yourself out.
Play Offensively, Not Defensively
- When you are down, you have to keep playing as if you are up 5% for the month. Once you are playing defensively, you will miss every opportunity because you are trying not to lose money.
- That is when you are selling something that is up 20 cents when you thought it would be up $3 to $4. That’s when you stop playing your game.
Maintain Psychological Energy by Visualization
- Visualize your past successful trades. Experience the same sense of calmness you had when you were trading in the zone.
- Every day, replay your most successful trades in your mind and go in with a winning mindset.
- By consciously making an effort to remember good outcomes, you are counteracting a natural tendency to recall past failures.
- Visualize yourself achieving each of your goals for the day. Visualize on the train ride home at night, and again in the morning on the way in to work.
Set Your Goal and Reverse Engineer
- Set your profit target based on your investors, your company’s objective, and your track record.
- Figure out what you need to do to make that profit target.
- Reverse engineer to what you need to make each month, each week, each day.
- Size your positions to be commensurate with your objectives.
- Size your positions in terms of your level of conviction.
Deal with Discomfort by Doing More Work
- To make a lot of money you want to be early before the rest of the world gets into it.
- That’s not necessary comfortable, especially with a new idea.
- The only way you deal with that discomfort is by doing more work, by having more catalysts, more events, more perspective. That will give you the conviction that you need.
Take Bigger Risks with an Information Edge
- To take increased risk in the marketplace requires a combination of understanding the fundamentals and having the courage to trade your convictions.
- Four steps
- Create an information edge so that you are ahead of the curve.
- Have a thesis that you can support with data.
- Assess the sources of the data.
- Trade on the basis of this data against others in the marketplace.
- Data to assess
- Balance sheet, earnings reports, growth prospects, relative valuation compared to competitors.
- Estate of the economy, significant macroeconomic variables, interest rate cuts, cost of energy, cost of doing business, etc.
- Kind of market: trading on fundamentals? macroeconomic variables? sentiment?
- Relevant short-term catalysts — fresh earnings news, changes in top executives, new technology
- Price action, supply and demand.
- Risk/reward profile of the trade.
Put in the Effect Necessary to Reach Your Goal
- If you want something bad enough, and you live it every day of your life, I don’t think your size, your stature, or anything else has anything to do with it.
- There is so much power in your body that is only unachievable because you have a governor instilled in your brain that shuts you off way before you reach your limits. If you can find a way to block out that governor then you can find out how much power is in your body.
- If you find yourself stopped, you should ask yourself, “Why did I stop? Why did I stop putting forth the effort that was necessary to reach this goal?”
- Failure is nothing more than not making the effort.
How to Manage Risk
- Size your position
- Measure the probabilities of the upside reward against the downside risk
- Get out when things go against you
- Add when they are going in your favor
- Keep asking questions about what more you need to do to produce the results, or what may have dropped out of your trading approach when the results decline.
How to Live with Stress
- Learn to distinguish between your feelings and who you are. Your feelings and thoughts arise naturally out of stress. You can stand back and experience them without reacting to them.
- Allow your feelings to flow through you and watch them dissipate without making any impulsive decisions as a result of your reaction.
- Analyze your emotions and reframe them in a positive manner. Focus on the positive vision of things.
- Focus on your objective and take actions towards your objective so that you become absorbed in the moment in front of you rather than in your anxiety.
- Exercise regularly
- Eat right
- Get enough rest
- Mentally rehearse by mentally replaying difficult situations, practicing how to best deal with the stress.
Visualization Exercise for Stress
- Close your eyes or stare at a wall, and bring your mind back to a state of relaxation.
- Breathe slowly, evenly, neither forcing nor holding back the natural flow of air.
- Once you have relaxed and regulated your breathing, focus on some pleasant place you have visited or imagined. It could be a lovely beach, or a peaceful meadow, or a quiet room in a house.
- Imaging you are there, in this special place. Take in all its sights, smells, sounds, and feelings.
- Stay there, in this place, for as long as you can.
How to Think Through Problems
- Consider a problem or a breakdown you are currently dealing with — whether it involves recurring stresses, significant losses, relationship issues, or other difficulties.
- Write down all the elements of the problem that seem troublesome.
- Now, try to differentiate between the facts and the interpretation of the facts. What are the facts, and how much of what is problematic is your interpretation of the situation?
- Realize that you can change the circumstances or your perspective of the circumstances by creating a new interpretation or principle from which to lead your life. Using the same facts, write a new interpretation.
- Can you see any possibility in dealing with the situation from the viewpoint of the new interpretation? If you do, write about this new way of handling it.
Key to Move from a Breakdown to a Breakthrough – Act NOW!
- Every breakdown is the start of a breakthrough.
- The key to moving from a breakdown to a breakthrough is to act now. Don’t procrastinate.
- Your life can begin in the next moment. Every day offers the opportunity to create a new challenge or larger framework so as to move into that next moment.
- The issue is to keep taking steps to express your potential and become who you are capable of becoming.
Make-Up of a Master Trader
- Has a very sensible approach to handling outsized opportunities.
- Runs a very risk-managed strategy.
- When he is down, he gets into cash and waits for opportunities.
- He takes no extraordinary bets.
- He is not distracted by the success of others.
- He is confident and knows that eventually his opportunity will appear, and he plans to be ready for it.
- He shows a measured awareness of the dangers of wanting huge profits and excessive risk taking, but at the same time he is willing to call a spade a spade and deal as realistically with events as possible.
- Continues to do his work and look for evidence to support his developing thesis.
- He gets out of a losing position unless he is absolutely certain from his fundamental analysis that the rumors forcing the price down are unfounded. Hope that a stock will turn around does not play a part in his calculations. Rather, he prefers to take the loss and buy the stock back when it returns and starts moving in a more positive direction.
Advice for Various Personality Types
- If you are too analytic, increase your size incrementally on trades.
- If you are intuitive, make sure you justify your hunches with facts.
- If you are insecure, build up your P&L until your confidence returns.
- If you are a pessimist, keep a journal so you recall your successes.
- If you are too optimistic, discipline yourself to be aware of going overboard.
Advice for Various Emotions
- Fear and Greed
- Follow your investment plan.
- Recognize that you are feeling this way, but consciously choose to consider your actions in a critical light.
- Relinquish responsibility for what has happened, surrender to the forces of the universe or the market or some higher power, and accept relief.
- Be alert to any inclination to drastically alter your strategy before correcting what is wrong in your trading.
- First review your statistics to see what must be modified.
- Admit your anger. Learn to express irritation, anger, and rage so that you can become familiar with the behavioral and emotional responses of those emotions.
- Verbalize your feelings of anger without physical violence. The more you can begin to express these feelings, the more you discover that you are capable of communicating other feelings.
- Keep a diary of your trades, your subjective experiences to the market, and develop some “observing ego” about your trading that you can refer to in the future. You can then review how your emotions were influencing your trading decisions.
- Challenge yourself to take responsibility for your own behavior, your own expectations, and how things are working out for you.
- Schedule everything and manage around it. Impromptu meetings have to be scheduled to a free time slot.
- Check yourself to see if you in fact have a desire to be controlling when you are overly helpful.
- Take responsibility for your trading and remove the mental baggage of “poor me”.
- No advice given after a section devoted to elaborating the issue.
- Analyze what someone else is doing that is making you envious. How is he doing it? What steps can be learned?
- Relax and go back to your original game.
- Recognize your thoughts and feelings and allow them to pass.
- Accept your own imperfection. Release yourself from the fear of making mistakes.
- Take responsibility for your trading results and not feel like a hapless victim of circumstances (e.g. not everything is lining up).
- Establish starting sizes for an idea, a good idea, a great idea.
- The master trader gets in on a trade with less certainty and stays in longer as the trade develops, thereby maximizing his opportunities for profit. He realizes that he can learn a lot simply by being in the trade and getting a feel for how it is going from the trading action itself.
- Instead of worrying about what needs to be done to make one look better or to avoid making oneself look worse, traders should be channeling their energy into making a profit.
- The best traders learn how to set aside their arrogance or insecurities and let the work they have done and the choices they have made guide their decisions.
- Traders must go back to following a goal-directed daily strategy. The daily target gives traders a tangible reason to let go of those unnecessary risks and to channel negative impulses toward the positive desire of reaching a predetermined target.
- When traders seek to avoid negative emotions entirely, they only create a different set of emotions and a different set of problems.
- Keep heading in the direction you chose and those negative emotions will soon be irrelevant.