Trading Psychology

[DuaneG]

I came across an interesting article titled Trading Psychology and Discipline by Jason Van Bergen. I'm sure many folks here have already read it in some capacity, but it reminded me of how important it is to keep the human side of the trading in check. Thought I would share.

[theplumber]

What a shame, only 38 views. The most overlooked, unappreciated, underestimated element to success in anything is the right psychological mindset, and trading is at the top of the list as far as I'm concerned. One person I met and respect is Todd Harrison who runs http://www.minyanville.com/ and here 2 items some may enjoy. The screenshot is his own ten trading commandments and the text below is a "war story" he told one day on his website. Enjoy

War Stories
The Letter I Fiasco


Todd Harrison

You were "that" close!



Hoofy™



Note: This is the first installment in a series that will
discuss actual trades that have been impactful in my career.


Things were finally starting to come together. After joining
Morgan Stanley as a wet nosed kid in '91, I was doing the type
of things that earn you stripes. I arrived each morning by
5:00 am to "write up" positions for Chuck Feldman (this was
before there were such things as risk management software) and
spent most of my time clerkin', quotin' and fetchin'. I didn't
mind, actually, as I had my eye on the prize and it was there
for the taking.

Five years later, a single 2000 share order in Chemical Bank
somehow morphed into a small set of positions. Nobody on the
desk had been focusing on the banking sector and I inherited
the group by default. I wasn't allowed to facilitate at first
(take the other side of customer order flow) but I slowly
started to get more aggressive. In time, I was taking floor
markets of "2 1/4-5/8 50 up" and offering the customer "2
3/8-1/2 5000 up--whataya wanna do?" I "caught" their orders
and customers lined up to do business as word spread through
the Street. And all the while, I was putting money in mother
Morgan's till. Beauteous.

Keefe Bruyette was the biggest bank player on the Street and I
would do most anything to impress their head trader. Before
long, we had secured the majority of their flow and things
were hummin'. NationsBank, Manny Hanny, Citi...you name it and
I made it. I was only 26 years old but I had established
myself as an aggressive producer and was extremely customer
friendly. If you wanted to trade a bank, you came to Morgan
and you knew you would get taken care of.

The First Interstate position began like any other. The stock
was trading somewhere around 70ish when Keefe's head trader
asked Kim Dispigna (the Morgan salesperson) for a market in
the Jan par leaps (January 100 calls that expired the
following January). I checked the floor and the options were
three dollars wide and 50 up (meaning that the customer could
buy or sell 50 contracts on either side of the market). Odd
lotters! I tightened it up and increased the size tenfold.
"Whatever he needs," I remember telling Kim, "just get the
order."

After a few days of steady accumulation, I now had a pretty
sizable Letter I position. I was short the leaps to my
customer and bought stock (along with any other option series
I could get my hands on) to hedge that short side risk. Keefe
was getting increasingly aggressive on the buy side and I was
having trouble keeping up. The floor simply wouldn't sell any
paper and it was all me, all the time. Finally, after several
weeks, we fielded a question from the account regarding the
position limit. "8500 contracts," I replied, "that's as big as
they're allowed to get." We were almost there.

To say that I was involved in Letter I is like saying that
Barry Bonds is involved in baseball. I was the "ax" and if
somebody had something to do in the name, Morgan Stanley was
the call. I was short almost all of the long dated calls to
the customer and long a truck load of stock (and assorted
options) against them. To add spice to the mix, there was all
kinds of chatter floating around that the bank was ripe for a
takeover. The sharpest financial trader around was loaded to
the gills and I wasn't gonna be left in his wake. This was my
chance to make a statement--a BIG statement--and I was diggin'
in right beside him.

I traded around this monster for months. When I liked the
market, I pressed my long bet. When I didn't like the tape, I
shorted other banks against my book or looked for an index
hedge. At no point did I waver from my conviction or abandon
the position. Everyone in the room knew the story--heck,
everyone in the Street knew the story--and I was sitting atop
the train waiting for it to pull into the promised land.
Stress? Sure, but I had an edge and it was razor sharp.

It was a slow afternoon when Kim's distinct voice cut through
the quiet room. "How'ya makin' Letter I?" I looked at her and
smiled, figuring that she was toying with me as we were apt to
do on a trading desk. Still, as I'm a professional, I looked
at my screen and cuffed a market (I didn't bother checking the
floor anymore as they simply got in the way). "The floor is
showing 50 at 23 1/2, I'll make it 500. Whataya wanna do?" I
said, calling her bluff.

"He needs a two-sided market."

"Really?"

"Yeah."

I looked her in the eye, my smile long gone, still trying to
figure out if she was playing me. "21 1/2-23 1/2 500 up." I
offered, trying to sound brave despite the slight crack in my
voice. "He'll sell ya' 500 at 1/2" she shot back, "and you're
working 8000 behind it." I'm not sure if I breathed for the
next several minutes but I took the order to the floor,
slapped 500 on the tape and then called my NYSE broker to sell
some of my underlying exposure. Unfortunately, every option
lemming knew I had inventory behind it and had already knocked
the stock for a buck. And you wonder why option traders get a
bad rap?

The closing bell was an hour away and an uneventful day
suddenly became the most important session of my career. I got
my stock off--in the hole--and bid the customer (lower) for
more calls. He didn't wanna break his original price but
wanted to be kept up. "Keep reflecting bids," Kim said, "He
wants to get done today." The stock stabilized and I continued
to parcel out of exposure (I had told the customer that I
needed to make sales and he wanted me to "get in shape.")
Finally, with about 15 minutes left in the session, I stood up
and yelled to Kim "Figure bid for the balance!" (meaning that
I would pay $21/contract for the entire balance of his order).
Kim was talking on the phone and I was schvitzing out of every
orifice. "GREAT bid," she said, "but he's gonna hold tight and
finish up in the morning." Gulp.

It wasn't the first time that I had "legged" out of a position
but it was certainly the most sizable. I got to work extra
early the next day for no other reason than I hadn't been able
to sleep. It was about 6:00 am when the listed bank trader
walked over to me and said with a smile "You're still involved
in Letter I, right?" My heart froze. "Yeah...?" His face
hardened. "You're...you're still long it, right?" "Why?!?"
"Please tell me you're still long it." My mouth opened but
nothing came out. Bobby, who was as good a friend as I had at
the firm, turned and walked away without saying a word.

I didn't know what to do so I grabbed the Journal and went to
the men's room. About three minutes later, the entire floor
erupted as traders screamed and hollered with sheer joy. I'm
not sure how long I sat in that stall but it didn't matter--I
desperately wanted to stay there. I knew I couldn't, however,
so I took several deep, drawn breaths, left the Journal on the
floor, splashed some water on my face and entered the eminent
domain.

You would have thought that I hit a walk-off home run and my
teammates were waiting for me at home plate. Salesmen patted
me on the back, traders gave me the thumbs up and friends
around the Street had already left messages to congratulate
me. The head of the department walked up to me with a spark in
his eye and almost hugged me. "Way to go, Toddo, way to stick
it out!" There was only one small problem--I was short. Very
short. And the stock was trading up 35 points.

I won't get into actual numbers but the loses were of the
multiple seven figure variety. Wells Fargo had evidently been
in talks with First Interstate and the deal fell through. That
may or may not be the reason for the "out order"--I don't know
and it really didn't matter. The fact was that Wells Fargo
turned around and made a hostile bid which, at the time, was
almost unheard of. To add insult to injury, Morgan Stanley was
the banker and I immediately became restricted in the name.
That meant that the position was taken from me at the opening
print and I was no longer allowed to trade it. In other words,
I was screwed.

I don't think I moved from my turret all day. I didn't go to
the bathroom, I didn't eat lunch, I didn't make outgoing
calls, I didn't do anything but stare at this flickering "I"
that continued to wink and blink. Somewhere around 7:00 pm,
the head of my department called me into his office. Here we
go, I thought to myself, the end of my world as I know it. I
was so close yet after a single trade, my career was over.

As I explained the sequence of events to my managing director,
he stared intently into my eyes. I was still "up" on the year
but I was certain that it wouldn't matter. Forget, for a
moment, that I prolly woulda banked five to seven million
dollars if the deal was announced a day earlier. I had taken a
major hit and my confidence, moral and self-esteem was
shattered. His response? "Go home, get some rest and come
ready to play the next day." It was his view that my actions
were warranted and the mechanics of the swing out outweighed
the results of the at-bat.

Ironically enough, I was promoted that year and became one of
the youngest vice-presidents in the firm. I share this not to
champion my personal achievements but rather to make a very
important point. There are immense pressures in our business
and all too often they're self-induced. And while it's true
that we're judged daily and measured by the size of our bottom
line, there will be other trades and better tomorrows. Loosen
the grip on the bat, relax when you step to the plate and look
to hit for average rather than power. For if you swing for the
fences, odds are that you'll find yourself striking out a lot.


Good luck.

[DuaneG]

Coincidentally, a friend of mine sent me an article that looks at this aspect of trading head on. I'm unsure of the source, but I thought pertinent enough to share. Thanks to theplumber for adding to this thread.

Here are some of the things I walked away with after reading the aforementioned article.....

Once you reach a certain level of competency, mental skills become as important to performance as physical (technical) skills, if not more so. I would propose that 90% of our game, as traders, is half mental.

Look to sports psychology, excellence, and military strategy. What do elite athletes, surgeons and firefighters have in common with traders? Trading is a performance activity. We deal with stress and pressure on an ongoing basis. If you want to perform your best, you must prepare for it. Sports psychology has been called the science of success because it studies what successful people do. From the training room, to the corporate boardroom, let's take these ideas to your trading room.

...Observing, Orienting, Deciding, and Acting (OODA). These processes form loops, with new actions providing fresh observations and requiring renewed efforts at orienting and responding.