Waiting for the Fat Pitch: Tested Preparation is the Secret
by: Peter Kaplan
Attachment to individual trades can result in tragic results. Learn how baseball can lead the way to trading enlightenment.
A trader once wrote to me and asked for tips on how best to manage his emotions during the trading day. Although he had spent many years trading, his moods continued to fluctuate wildly throughout the workday. He wondered if he would ever become the sort of calm, level-headed trader that he had so often heard extolled in trading media. Now I pose this question to the reader: Can anybody out there relate to this guy?
Personally I can completely understand how he feels. Luckily, I no longer experience the wild swings that he describes. Is it because I have so completely mastered my emotions that I have become a perfect trading robot? Do I now boldly stride the financial markets unaffected by the irritating disease called being human?
No, I?m afraid I?m just as prone to the whole ?human thing? as anybody, and if not for one crucial factor (which I?ll explain in a moment), I would cower through the financial markets with the full swarm of miserable emotions
biting at me like gnats. In fact, just a few years ago that?s exactly what I experienced. Every win used to send me into a deranged euphoria, while every loss felt like a family member had died. I can viscerally recall certain train rides home from the trading room?my head slumped against the window in dejection, my heart leaden with the day?s losing. Other days I spent the whole ride sitting gleefully upright, punching keys on a calculator as I projected the day?s gains forward into a yearly income. In both cases, I experienced an overwhelming sense of attachment to what had happened that day, as if I was personally responsible for every tick of every trade.
Over the years I have read my fair share of books and articles on trading psychology?having witnessed firsthand the various trading emotions and psychological traps described. Although addressing this issue intellectually may have some value, combing text after text may prove to be counterproductive to your goal?which is to address the emotional origins of negative behavioral patterns so that you may transcend or work within your emotional boundaries. I find that the first step to achieving this goal is to recognize that the emotional roller coaster ride generally consists of three distinct feelings:
1. Fear?both of losing and of missing opportunities
2. Regret?about doing either of the above
3. Giddy elation?after successfully avoiding either
When it comes to keeping these feelings in check, I only know of one nonpharmaceutical remedy that actually works. As I mentioned before, I used to feel personally responsible for every tick of every position I owned. This gets to the real heart of the issue: a trader?s sense of attachment to (and responsibility for) individual trades. Make no mistake about it, there is a great deal for which you are responsible in trading, but the precise result of any individual trade is not one of them. In other words, you must never look at any single outcome as representative of your success or failure.
Instead, look to the collective whole. Evaluate your entire outcome (profits, losses, etc.), and if the entirety of your trading in a particular style yields a healthy profit, then you can begin a serious assessment of that style. When you detach yourself from the outcome of every single trade and look only to the average whole, you can make adjustments and uncover inefficiencies. But all of this happens in the context of a working plan. Once you adopt this approach, you will see how much less you will care about the fate of any single trade.
The Fat Pitch
And how exactly do you achieve this mentality? I offer my favorite trading quote of all time as the answer. Warren Buffet wrote these words in his 1997 Berkshire Hathaway Chairman?s letter, and interestingly Buffet is referencing another man?s words:
?Under these circumstances, we try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his ?best? cell he knew, would allow him to bat .400; reaching for balls in his ?worst? spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.?
Friends, I kid you not when I say that this little paragraph about baseball has more to do with successful trading than anything I have ever read. The idea conveyed here is also the key to freeing yourself from all of the nauseating emotional ups and downs. Once you figure out where your own best ?cell? is in the market, then your job becomes extremely clear, and much less stressful. You simply, positively only swing at those pitches! That?s the whole game. You already know ahead of time what the results will be if you do this. Why concern yourself with each and every ball at bat? Some will be pop flies. Some will be grounders straight to the shortstop. But enough of them will be hits that you are all but guaranteed success. Maintaining this approach provides a sneak preview of the game?s eventual positive outcome, and thus allows you to relax and enjoy all the action along the way.
Determining Your Cell in the Development Phase
At this point some readers may be wondering how to figure out which cells are their best. That?s an extremely involved topic, and something that I can?t fully address in this article. For now I?ll mention a few basic points that should steer aspiring traders in the correct direction.
1. There is simply no reason to ever hit a live buy or sell button until you have done extensive back-testing and paper trading for a given approach. This is an absolute cardinal rule?one that far too many traders (myself included) violate at the beginning of their learning curves. Why start losing real money before you have reached a level of competency and clarity regarding your approach?
2. Every action you take during this development phase must be performed according to a clear set of rules. Even if the rules are far from perfect you still need to have them. It is extremely useful to have a distinct set of parameters that you can tweak and alter as you acquire more data. You want your results to be as consistent as possible.
3. Track everything you do carefully so that you can go back and measure your actions against the rules. Just seeing a final profit and loss total is not enough. Your experiments should yield highly categorized data so that you can dissect your burgeoning methodology and separate the parts that are most profitable from the elements that weigh you down. Remember, you?re looking for the absolute best cell in the strike zone, not a wide range that yields vastly different results every time you swing the bat.
4. It?s important to note that every trader should find a cell on his or her own. Teachers, courses, books and articles can help shorten the learning curve and guide an aspiring trader away from certain pitfalls, but ultimately the honing of a winning approach is a personal process. No two traders will ever precisely duplicate each other?s tactics, and likewise, results. Thus, of far greater importance than a list of specific techniques and tactics, is a general understanding of the context in which to hold one?s trading development. It is, in essence, a search for a narrower set of winning odds.
Better Odds in a Narrow Cell
Once you have developed a personal method and narrowed your odds, managing the anxiety and the resulting outburst becomes a simpler task. This brings us back to our reader from the beginning of the article. The fact that this trader is still feeling, in a visceral sense, all of the wild ups and downs occurring on his profit and loss screen, is an indication that he clearly has too many permissible ?cells? available in his strike zone. He continues to swing at an assortment of pitches about which he has no firm conviction. The fear, glee and regret discussed earlier all come from uncertain choices?actions that do not have carefully calculated odds.
Once you fully define those odds, and then force yourself to stay within the parameters, you will feel your emotional intensity begin to wane almost immediately. Instead of fear, you will experience mild curiosity about the result of any single decision you make. Instead of wild glee, you will feel a pleasant satisfaction in executing a plan correctly. And when you take a loss or miss an opportunity, you will simply see those as a natural and unavoidable part of being an odds player. Losing is never a joyful experience, but it can certainly become an eminently tolerable one, once it is viewed as a necessary part of one?s overall winning methodology. After all, even Ted Williams failed to get a hit the majority of the time.
So this is the great secret to controlling your emotions in trading. (It?s actually the secret to trading, but one thing at a time.) The moment you begin to get a grip on this concept, the conflicting feelings will leave you; the paralyzing sense of uncertainty fades away. You may never know exactly what will happen each time you step up to the plate, but you can be pretty darn sure how your season will turn out.
psychology is the key to success in trading. are you match tough?
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