If you were to listen into the conversation of a basketball coach with a player, you would hear quite a bit about how to play the game. The coach might talk about getting back on defense or working harder to get position on rebounds or taking the high percentage shot, but the conversation would be about playing better. Whatever needed to be addressed in terms of psychology would be embedded within the coaching regarding the playing.
For example, if the player is not taking the high percentage shot at the top of the key (a failing for which I vividly recall being taken to task), the coach will address the psychology by making it abundantly clear that he believes in you and that you will never be blamed for missing a high percentage shot. The coach might also include a ridiculous number of top of the key jumpers in the next round of shooting practice. Such coaching *very* much addresses psychology, but in the context of actual playing.
Oddly, trading psychology is rarely approached in such a fashion. I find it refreshing (and unfortunately rare) to hear a trading coach talk about actual trading. It is as if the game inside the trader's head is completely separate from the game of trading and somehow, magically, the two are supposed to converge. I can't think of any other performance field where psychology is so completely decontextualized.
In coming weeks, I will be returning to regular trading and, yes, I will be reviewing my performance and coaching myself. You can be sure that I will not be exhorting myself to perform positive affirmations; nor will I be telling myself--in generic fashion--to follow my process and trade with discipline. I will review each trade like a basketball coach reviews game film with a team. In so doing, the psychology will be addressed within the context of what was done well and what needs improvement. That is what deliberate practice is all about.
My framework for trading is to break the market down into three components:
* Trend
* Longer-term Cycles
* Shorter-term Cycles
Trades are placed based upon the assumption that the trend and cyclical components that characterize the most recent market action will continue into the immediate future. That assumption of what is called stationarity is based upon an assessment of the stability of market participation from one time period to the next. It is for that reason that I trade at certain times (which, historically, tend to be stationary/uniform) and avoid trading at other times.
The time series of market action is based on events, not time. When we look at bars on a chart that are denominated by volume, trades, ticks, etc., we create more stationary time series and are able to find more uniform cyclical behavior within markets.
At the end of the day, I am looking to buy troughs of cycles in rising markets and sell peaks of cycles in falling markets. I have no particular macro stories to tell myself or chart patterns to divine.
I look forward to illustrating my trading--and my trading psychology. The most important thing is not the trading framework I utilize, but the integration of the psychology with the actual trading. We develop psychologically by doing things differently. There is no meaningful psychological development apart from doing.
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