By David Hobart, Director, PsyQuation Consulting.
Trading consistently is not about prediction. Rather, it is about identifying possible outcomes, assigning probabilities to them, and then structuring bets around those probabilities. Having a process which consistently identifies suitable opportunities, overlaid with robust execution and risk management capabilities, will allow you to remain unconcerned about individual trade outcomes.
Despite your best intentions, even when you have a good process, attachments can nonetheless creep in to your trading. When they do, it is usually due to a number of common reasons.
The Sources of Attachment
Outcome focused, not process oriented
Focusing on generating X% over the month/quarter/year, and not simply focusing on your process and allowing the returns to turn up in their own time. Trying to shift the market with your will is unproductive; rather, shifting your will about the market creates a space of freedom to listen and observe, allowing you to capture the genuine opportunities as they arise. Like surfing, you can’t force a set of waves to turn up, but by listening and observing the ebbs and flows of the ocean, you’ll be able to paddle into a position to ride them.
In my trading process, I have a macro-economic (macro) and geopolitical framework from which I identify possible trading opportunities. It involves identifying markets that common sense economics would dictate are unsustainably out of balance. Harvesting trading ideas based on a macro framework can offer fantastic risk reward opportunities. It is easy to think that this strategy revolves around prediction and often investors will want to know what I think about the future. When I fall for this trap and project my idea of the future onto the markets, I become attached and lose flexibility.
For my strategy to work, it requires patience and objectivity, both of which remain elusive if you attach part of your ego/identity to an idea. It is helpful to communicate with those around you in such a way that you and your trading style are not identified with a particular market direction. Whether they are investors or your immediate family, setting up expectations and educating those around you can be of great help in ensuring you remain flexible in your approach.
If you are reliant on certain profit outcomes within unrealistic time horizons, you will at some stage inevitably experience attachment. Make sure that your trading business has enough room to weather the inevitable drawdowns that are reasonable within your strategy. If you are under capitalized, your thoughts around scarcity will project onto the world, and it becomes highly likely that you’ll run into difficulty. It is possible to trade profitably when under capitalised, but it takes considerable mental discipline.
It seems to me that human beings have two wills. There is one will, which is intrinsic and in the flow of nature. The other is conscious, able to observe, but often resists the natural flow of the other. I call them the creative will, and the ego. When they are in harmony, life works. When they are in conflict, life is difficult.
Ultimately, the source of all attachments is related to ego. This is simply because the ego is often dissatisfied with merely observing the world. To have expression, it projects its own ideas sourced in the past, onto the future, creating cycles and repetitive behavioral patterns.
The alignment of these two wills can only occur in the present moment. It is only in the moment that you can observe. So long as you are projecting your (past) ideas upon the future, you are not observing what is currently going on. Your ego becomes attached to its ideas, as they give it identity. This is the source of all conflict and attachment. Stay in the moment, and your life and your trading will work.
About David Hobart
David has been a trader and portfolio manager since 1994. He has managed teams of traders for global investment banks and hedge funds including BT, Macquarie, ABN Amro and Blue Sky Alternative Investments. He has worked with numerous traders and portfolio managers as a trading coach/performance consultant. For a detailed review of David’s CV, please see his LinkedIn profile.
If you would like to find out more about David’s trading coaching/performance consulting programs, check them out here or email email@example.com .