The Mental Game

Reporting season as a live case study

I walked into work knowing that I was going to take a decent loss in an overnight position. I am triggered.

I have had a lot of practice at being wrong so I go through the motions to fully accept the loss. From this, I make a mental plan to exit the position with an Algo on the open so I can move on with my day. Automation for the win. I am more Zen again.

On reaching my desk I see a pop-up message. My manager informed me that all Algos are out for the day due to a configuration issue. I am back to triggered again. I say the wrong thing unconsciously. It all spirals. It’s a chat so it’s the worst possible forum for human communication as everything gets lost in translation. My breathing is non-existent and tension has risen through my whole body. I break to try and get my mind back.

Fast forward and the said stock is gapping down more than I envisioned on the open. I am really frustrated now. I clumsily dump the position near the lows and take the loss. Meanwhile, my preoccupation with this trade means I am not focused on the true A+ hand elsewhere for my system and miss fills with the short borrows not loaded. It is not even 10 minutes into the start of the day and I'm down almost $10k. Happy Friday.

Monday doesn't get off to a better start. I identified a strong short for my system with a solid negative catalyst, a choice daily setup, and early price action that ticked all the boxes. There is volume into the bids and it looks like it is game on. I am keen to make back my previous loss. From nowhere, there is a V-shaped reversal that blows through my stop. My stop loss automation is still down so I hesitate and process what is going on. Volume is light so I wait some more. Further indecision means I miss the only spot to cut where it matters. I now scramble to cut the position higher for a quick $11k loss*. This is the joy of the Trading game.

*(the stocks in question were: AGL overnight; SYR gap up fade; BPT morning drive;)

The mind working against us:

In these few examples, I have gone through the full range of psychological triggers and responses. Everything seems to be conspiring against me. The temptation is to blame the market, complain about external circumstances, and fight.

Does any of this resonate with you? Trading fully tests your emotional make-up in this way. Our brains are not biologically programmed to handle these tests as years of evolution are hard-wired. There is a dopamine system constantly working against us. Unaware, you can be a slave to it. This is even more so the case during the Reporting season with the increased volatility. Big moves and gaps = lots of stimuli = brain overloaded = impulse to do something. Your weaknesses get found out in this environment.

Despite being in the markets for years, I still succumb to the same emotional pressures.  As you can see, I still make mistakes as I am human. My mind has not been fully re-programmed. However, the good news is that I did manage to salvage both my days through some important tactics. Through practice and resilience, I have gotten better at heeding some of these signals and moving through the pain. This is what I want to touch upon below.

You can let things spiral. Or you can choose to confront your situation and your triggered state before it fully unravels.

Increase your self-talk:

Dr Katz is a performance coach who specializes in elite development across sports and trading. He has a Ph.D. in clinical psychology and has worked with some top hedge funds, traders, and high-level athletes. His recent video with Lance Breitstein was enlightening and I wanted to expand on some of the themes raised. He summarised that the best traders as those who are more self-aware, introspective, and understand the emotional and psychological variables involved in decision-making. Furthermore, the key trait is one’s ability to acknowledge one’s mistakes early and accept where they are wrong. These negative outcomes actually help propel them forward.

Let’s break down these two major insights: i) self-awareness and ii) acknowledging mistakes.

To wholly grasp the information in front of us, we need to be fully conscious and open. The ideal state to receive this is one of complete self-awareness. This enables one to update mental models in real-time to make good decisions after good decisions. For me, the tool to generate such a state is by writing. I have talked a lot about the importance of check-ins and report cards via writing in past reports. They cue the habit of self-talk and asking questions instead of getting caught up in the vortex. As a one-time special, I am happy to release my superpower tech tool to my readers. It looks like this:

It is an Outlook appointment alert. You are welcome. This simple reminder actions a quick checklist to make sure I am engaging in self-talk and executing my best plans before the open. You don’t see professional sports teams running out to play without a solid warm-up. In the same way, I am trying to replicate a warm-up for my brain for the action that is about to unfold. How you structure this is up to you, but it could look something like:

-What is my current goal?

-Have I fully planned my best ideas and playbooks Y/N?

-IF Y then visualize the pattern I want to see. Where am I right? Where am I wrong?

-IF N then what the fk am I doing Trading?

You may be scrambling to complete planning before the opening and thinking that you can’t possibly stop to write. That is literally the whole point. Slow down. Nothing good comes from charging in. Get your mind back because you are going to need it.

My check-ins do not stop there. My calendar gets even more exciting through the day and month:

It is all fun and games over at Bay Trader. Each of these reminders throughout the day cues the trigger to get back into my best state at different points of the day. Every. Single. Day.

Acknowledge mistakes:

The other major factor raised by Dr Katz was the ability to acknowledge mistakes. The successful traders I know do NOT have a win rate any better than 55%. Sit on that. You are going to be wrong a lot. If you can fully internalize this point, then taking a loss is not a threat or a hit to your ego. It is just what we do every day as the normal course of business. Sure some trades and scenarios are going to be higher conviction and require higher risk but you build this through experience and reps. Even then, those trades can go sour and you have to be willing to admit where the trade is incorrect. Your stop should reflect a point where a break of a price means it is going in the aggregate to move against you. Thus, it would make no sense to NOT immediately get out of everything.

If you can fully accept this every day, you are successfully prepping your mind for the inevitable.

The above are tactics to gain control of your mental state. However, just like in my introduction, there are always circumstances that will take us out of this idealized condition.

Know your Triggers:

You can remain a slave to what is going on in your head. Or you can attempt to go through the painful process of learning from it and trying to recognize the problem patterns that trigger our non-idealized selves. It is only through this can you truly re-program the defaults and make suitable solutions. If you asked me about my biggest tilt triggers, they would be:

• Tech issues

• Chatroom callouts or confrontation

• Mum popping off a marathon text message with typos and multiple question marks at 10am.

This requires a truly honest assessment. In all these situations, I do my best to be solution focused and put up guardrails. If some order functionality doesn’t work, seek help to get it fixed. If someone is frustrating you on a chat, turn off notifications. If a Broker goes down, get a backup account. Of course, there are going to be situations that you cannot manage such as a network outage…cough IRESS. All you can do is control what you can.

Off the top of my head, here are some other potential triggers that may resonate:

• Missing an entry

• A position that is working initially only for a sudden reversal

• Not getting borrow in a high conviction short and watching it go. You cannot do anything about it

• Missing an intended stop and seeing the loss compound rather than taking the initial damage

• Losing in an unplanned trade where you did not think and acted impulsively

• Exiting a position for no reason and seeing it follow through

• A stock that just will not go down despite bad news

• Seeing the “success” of others on Twitter.

Recognize your weaknesses. Create solutions for these areas to build a defence. Think deeply here.

Once you are on tilt, it is too late. Breaks are key here BUT it is just a first step. If you haven't fully let go in this break and reset, nothing has changed. You are still triggered. What led you to this emotional state? Understand it and then the corrective steps needed to get better. Then sit back down.

Double down on the worst days:

One of the most powerful takeaways from the Dr Katz interview with Lance was to put in the work on the good AND the bad days. Don’t personalize these moments but instead, embrace them as learning experiences. How can you use the information to move forward? Treat the mind as a mental muscle.

Greg Harden, who is best known for his work with Tom Brady, says mental fitness can be worked on in the same way as our physical fitness. A key indicator of our physical health is how quickly we can recover from rigorous exercise. When you work on your mind the recovery time from tragedies, failures, setbacks, and rejections is faster. In a similar vein, I make sure I am writing up my report card on those tough days to process it all and learn.

This is a good segue into a universal truth in performance: focus on the process and not the outcome. The outcome happens by making good decisions after good decisions. When you start focusing on the results, then your mind is away from what is needed at the moment. It is being driven by something else. The tactics here are doing the reps, and controlling the effort on a goal, not P/L. The goal is just to get better with a real process.

Conclusion:

I cannot possibly do justice to the plethora of psychological Trading books out there. However, hopefully, I have offered a few insights into how I steer the course through the emotional landmines. This was inspired by my recent losses, the Dr Katz interview, and the volatility during the Reporting season. I have subsequently managed to steer the ship before things spiraled. This is what we have to do over and over again as fallible human beings and Traders.

It is also really important to have balance outside of markets. You cannot possibly sustain the level of focus needed without an off switch and some level of destressing. Gym, walks, reading, time spent with significant others, whatever it is that works for you. Find that happy medium.

Thanks