Week 35: Hills and Valleys
Trading is an emotional, tiring, incredibly fun game.
Hi. Welcome back to Fifty Trades in Fifty Weeks!
This is Week 35
50in50 uses the case study method to go through one real-time trade in detail, about once per week. This Substack is targeted at traders with 0 to 5 years of experience, but I hope that pros will find it valuable too. For a full description of what this is (and who I am), see here.
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Update on previous trades
CIBC stock is still trading higher on the strong Canadian data and China reopening optimism while EWZ is a bit lower as there is still post-election uncertainty with regard to the finance minister appointment. Neither trade looking especially great at the moment as the 50in50 story continues to be one of hills and valleys.
Hills and Valleys
In 1996, when I was less than one year into trading FX at Citi New York, I was all bummed out about a trade that had gone against me. My boss at the time (and still my friend now) said to me:
“Hills and valleys, beeper. Hills and valleys.”
A few weeks later, I was fist pumping an awesome trade after taking profit and he turns to me and says:
“Hills and valleys, beeper. Hills and valleys.”
Simple, sage advice. Don’t get too high. Don’t get too low. There’s always another high coming and another low right around the corner.
(He called me beeper because I was the only trader who was nice to the brokers and hence got the nickname: BP (broker’s pal) which eventually turned into “beeper.” Believe me, befriending the brokers was positive EV optimal metagame, especially if you needed playoff tickets.) :)
In December 2007, I was beaten down and frustrated. It was my worst trading year ever and it looked like I might finish negative on the year. When you work in a market-making seat at a bank, it is fairly uncommon to have a down year and I was proud of never having finished in the red. After this long and frustrating period, all I wanted to do was finish the year in the black. Even by $1.
Every time I got close to zero P&L, I would lose money again. By mid-November, I had gone from down $2.5 million back to $250,000 in the black and was thinking about making one last push to finish with a number that might be at least respectable. I finally felt mildly optimistic for the first time in ages, after almost an entire year of battling repeated cycles of frustration and despair.
Then, a brutal turn. A salesman slinked over to me with his tail between his legs and told me there was an outtrade in my book. Negative $700,000. That put me back to minus $450,000 with less than two months in the year. Gross. I grinded out the next few weeks and was finally up again YTD, just tiny, about $200k, on the very last day of the year.
At 10 a.m., our toughest client called and wished me a happy new year by ripping my face off to the tune of $600,000. Despite what felt like a heroic effort to the very last day, I ended the year in the red.
This is impossible. I am the worst trader in the world.
I e-mailed my wife: “This is impossible. I don’t think I can do this anymore.”
I walked out of the office miserable that day. New lows.
But the sun came up on January 1. Slowly, the frustration dissipated a bit, and the prospect of a new year gave me some hope. Despite that exhausting and disappointing year, I hung on and kept going.
Twelve months later, I was staring at my best year ever: Over $50 million of P&L. Sometimes the thing is just to keep going. As Joe Mauro said in his classic 2016 e-mail to the Goldman Sachs analyst class: "Keep running".
One of the hardest things about trading is that humans generally feel 2X the pain from losses as they feel joy from gains. And even when there is joy from gains, traders are afraid to feel it or express it for fear of jinxing themselves. This can mean trading becomes this endless series of grinding days full of self-hatred with blips of happiness interspersed but barely acknowledged.
The pain of loss is 2X the pleasure from gain
Thoreau said it best:
“The mass of men lead lives of quiet desperation. What is called resignation is confirmed desperation. From the desperate city you go into the desperate country, and have to console yourself with the bravery of minks and muskrats. A stereotyped but unconscious despair is concealed even under what are called the games and amusements of mankind. There is no play in them, for this comes after work. But it is a characteristic of wisdom not to do desperate things.”
Trading does not have to be that depressing!
You need to allow yourself to be happy. Whenever people ask me “Don’t you find trading stressful?” I reply: “Yeah, but it’s good stress.” Like playing professional baseball is stressful. Or flying a fighter jet is stressful. And sure, the stakes are high but it’s not life or death. It’s important. But it’s not life or death.
Don’t beat yourself up because you did not trade perfectly. Perfection is not the goal in trading. The goal is excellence, consistency, and self-control. Process is more important than outcomes. If you rigorously executed your process today and lost money… You can still be happy with your performance.
In trading, and in life, the quest for perfection is commendable but the expectation that the world, any situation, or any trade will be perfect is flawed. You need to know when you have reached “good enough” or you will wait forever for the perfect trade, perfect spouse, or perfect job. This doesn’t mean you settle for a crappy relationship or put on sub-par trades, it means you must have the wisdom to understand that life is not meant to be perfect. Perfection is rare and fleeting and anything perfect should come as a positive surprise, not as an expectation.
As the Italian proverb made famous by Voltaire says:
Perfect is the enemy of good.
This applies to self-evaluation too. Many traders spend way too much time beating themselves up. Unless you finish the day at the ding dong highs, you will always wish you took profit earlier or had a bigger position or did something a little different. Assess your performance rationally. Set high standards but do not expect perfection from yourself, or every day will be a disappointment. When you do a good job: be proud. Don’t niggle away at small performance glitches when you have generally run well. This is draining and pointless.
Good traders have the right perspective. They take the job seriously but do not allow it to consume them.
There are two sides to the emotional coin in trading. Hills and valleys. Hills and valleys.
There is nothing more gut-wrenching than a major trading slump. No matter how many losing streaks you have experienced, each slump brings with it the same array of negative emotions. Self-hate, frustration, self-doubt, physical nausea, a lump in the throat, the urge to smash keyboards, sadness, confusion and vertigo are all normal symptoms of a trading slump.
Slumps can come completely out of the blue. One day you seem to know what will happen, before it happens. The next day, you have fat fingers, you hesitate, you miss the great opportunities and double down on the bad ones. Suddenly, you’ve lost money eight days in a row and you feel like you might never make money again. Trading is hard.
The first thing to understand is that there are probabilities at work. A trader with 55 percent winning days will average two or three 5-day losing streaks per year and probably one 6-day losing streak. A 6-day losing streak is enough to make the best trader feel like a complete moron. But he isn't. It's just probability.
It is easy to say this… And a totally different thing to embrace and accept it. That is why slumps can be very dangerous. They can morph from a simple run of good decision / bad outcome into something much more nefarious. If the run of bad outcomes leads to process breakdown and bad decisions, what was initially just bad luck becomes a negative feedback loop. If you are normally a 55 percent winner and you came in this morning angry, frustrated, and a bit hopeless... What do you think your odds of making money are going to be today? 40%? 35%?
The first key to dealing with slumps is good self-awareness. Recognize physical signs of frustration and acknowledge them. You cannot deal with a trading slump if you are not aware of it or you are in denial.
Once you realize that you are in a slump, the first action is slow down. Breathe. Take a day off or cut your positions down dramatically. If I usually trade 100 million USD positions, I might cut myself down to 20 million. If I lose money again, I’ll drop to 10 million.
Why not stop trading completely?
This is a matter of personal preference but I rarely stop trading completely. I might take one day off to mentally reset but if I am at work I keep trading, just in smaller size. Short-term trading has a rhythm and you are apt to lose that rhythm if you stop trading completely. Instead, cut yourself down to something small enough that it will not matter if you are right or wrong. The object at this point is not to make money but to reset your emotions while still maintaining a connection to the market.
If things are going really, really badly, and I feel really dejected or down, I will stop trading altogether for one or two days and jump into a research project. I keep a file of ideas and projects so that when I hit a very rough patch, I can step away from the market and still feel like I am doing something useful. It’s hard to do research when you are in the zone trading so I try to see bad slumps as blessings that finally let me get to that backtesting or correlation research project I have not had time for.
Some traders prefer to completely disconnect from the market by pulling out temporarily but as Jared Dillian once said: the markets are like a story. You can't just flip ahead 10 pages and know what is going on.
My view on taking scheduled time off is different. Vacations are a necessary part of a healthy trading process. Your brain cannot process billions of bits of market information efficiently 52 weeks / year. You need to turn off the noise now and then.
Three or four days away from the market should be enough to clear your brain and allow you to come back fresh. The only way to achieve this is to go on vacation and stay flat while on vacation; otherwise, your brain will be running all the scenarios about possible SPX outcomes instead of just digging holes with your kid on the beach or enjoying the music at Ibiza or whatever it is you do to unwind.
Go on vacation flat at least once per year. Any positive P&L you might generate with your holiday positions is more than offset by the mental damage you do to your brain when you refuse to let it disconnect from the matrix.
With experience, you will know when a slump is over. Things will seem easier again. Each losing trade will not trigger an emotional or physical reaction (tight throat, white knuckles). Given my belief that trading is very much about probabilities and process, I don't stay in defensive mode for very long. Once I feel OK, I go back to my normal size. The best cure for a trading slump is a perfectly-executed Five-Star trade.
A different type of slump is one precipitated not by a run of bad luck but by a concrete externality. This type of slump is totally different from a normal slump and is triggered by something outside the market, not just random variance. Your health, financial security, marriage, mental well-being, an addiction or something of that sort. If a slump like this comes along, get flat right away and figure things out before you come back.
Trading is not an escape and there are cheaper ways to forget about your worries. Until the issue is resolved or dealt with in a way that will not interrupt your train of thought at work, stay flat. Trading is stressful enough; if you are shaking with anger as you just hung up the phone after a fight with your sibling about who will take care of your sick mother.... Take the rest of the day off.
Next-level trading is when you know yourself and you consistently put that knowledge to use. Don't let externalities ruin you. You will never know what kind of trader you have the potential to become unless you give yourself the opportunity to succeed. Part of this is knowing when to trade and when not to trade.
How I deal with slumps
Here is my step-by-step strategy for handling slumps:
1: Square up
First, I cut all existing positions so that any residual frustration related to those losing views can dissipate.
2: Trade smaller
Then, I cut my position size for new ideas to about 20% of normal for a few days (or more) until I get a strong feeling and high conviction idea. Some people recommend not trading at all for a bit but I find this disconnects me too much from the market and I lose my feel. I would rather trade small, wait for a Five-Star idea, then fully re-engage. If I am feeling extremely frustrated (angry lump in throat) or recognize my state of mind is poor (bad health, external real-life issues) I’ll stop completely, but this is rare.
3: Talk about the slump
I find just talking about a slump makes me feel better about it. Frustration boils inside but releases when you open up. Some firms have trading psychologists around but you can also just talk to your peers or friends or boss. When you discuss your trading out loud, it helps crystallize your thoughts and leads to forward progress and a calmer state of mind.
4: Read and do research
When I’m trading well, my entire focus is on the market and on staying in the zone. When things are not going well, it’s a chance to catch up on reading, do some cool research projects I haven’t had time for and get back to basics by re-reading stuff like the Market Wizards books.
5: Get some perspective
I am one of 8 billion people sitting on a huge, spinning rock hurtling around a spherical ball of hot plasma in an infinitely large universe. Meanwhile, this is the safest time in human history to be alive. My wife and kids are healthy. It’s sunny and warm outside. No matter what happens in G10 FX today, the sun will still come up tomorrow. Markets always get better, you just have to ride out the tough times and stay resilient and optimistic.
Believe it or not, there is more to life than trading. Think about the long game and your entire career. While it is fun to trade all night and live a fast and exciting life, you cannot do that forever. Trading does not provide a path to happiness, no matter how much money you make. Financial freedom is one small part of happiness, but most research shows true happiness comes from other areas: Health, relationships, family, friends, and a feeling of purpose.
In fact, the relationship between money and happiness becomes very weak once you break above a certain level. That level depends on the individual but is generally lower than most people think. The money/happiness curve flattens out pretty fast. I wrote a longer piece on money vs. happiness here:
Get some perspective
A life of trading is a life full of hills and valleys. Every time you lose more money than you ever have before, it hurts. Right in the gut. And every time you make a new "best day" or hit your lifetime high water mark, there is a giddy sensation that is hard to regulate. If you are a good trader, you will trade with more and more capital and bigger and bigger positions as the years go by and therefore by definition your biggest up and down days will get bigger and bigger over time.
Some traders (including myself up until about 5 or 6 years ago) are afraid to feel happy or admit their satisfaction after a great day or a great trade because they don’t want to jinx themselves. This creates an asymmetry where you feel bad after bad days but you don't give yourself the right to feel good after good days.
Over the years, this can be incredibly draining because you only let yourself feel the bad emotions. If you have a good day, feel good about it. Be happy. Go celebrate. Buy the better bottle of wine. But don't celebrate until you have taken profit! Celebrating while in a winning position is a recipe for upcoming disaster. Take profit, then go be happy.
So again, it is fine to feel good about your trading. It is fine to give yourself credit where credit is due. Don’t dissect your great days to find the tiny thing you could have done better. Just be happy for one day.
Make lower highs and higher lows emotionally as time goes on. Avoid euphoria but give yourself permission to be happy and to feel fulfilled when you are trading well. A life of hating yourself when you’re down and fearing the next drawdown when you’re up is not healthy.
A major requirement for staying positive is you must have a risk management system that you trust. If you know you can trust yourself and your risk management, the sick feeling of having blown through your stop loss can be avoided. Many world-class traders are only right 50% or 55% of the time. There is no reason to feel bad on days you lose money. Imagine if Michael Jordan got down on himself every time he missed a shot. He would be a sad person, full of self-loathing.
The time you should feel bad is when you planned to risk $200,000 on a trade and you lost a million dollars. These are the cases when you should feel bad because deep down inside these days make you wonder if you can really trust yourself and if you are truly in control of the process. This is the worst possible feeling. It’s scary.
You need to have clear risk management rules and then treat every day as a separate unit and compartmentalize your feelings. You run into problems when your risk management is bad and it spills into the next day and the next because it puts you under pressure or forces you to change your process or abandon your plan.
Don't break the rules.
No. It is very, very difficult. Everyone knows that if you eat too much and don’t exercise, you will gain weight. But there are still plenty of overweight people around. Knowing the rules is easy. Following them is hard.
Always remember though.... Hills and valleys. Hills and valleys. Don't let yourself get too high or too low. Regardless of your P&L, the sun will still rise tomorrow, your kids will still love you and even in the most extreme situation where you end up losing your job as a trader, life STILL goes on.
Normally trade ideas in 50in50 relate to the topic of the lesson. Today, I wanted to write about slumps because I have received a lot of requests from readers asking me to cover that topic. And it’s an important topic.
Even after 25 years, I still get bummed when things don’t go well. I am still a bit on edge about the random performance of the trades in 50in50, even though I expected the results to be medium because I am forcing it at times in assets where I have no edge. That lingering voice saying “dude, you suck” still haunts me sometimes, even after all these years of trading.
Anyway, if we’re talking about hills and valleys, nobody has bigger ones than Michael Saylor. His stock has gone from zero to infinity to zero and back to infinity and now is heading back towards zero, I think. The collapse of FTX is a massive event and will significantly damage confidence in crypto for months or years.
The break of 18800 puts 10000 as the next target for bitcoin and MSTR looks wildly expensive, even down here. 10k bitcoin is not good for MSTR.
So I go short MSTR @ 200 with a stop at 282, looking for sub-100.
This is not investment advice. This is an educational Substack. MSTR is wickedly volatile and the borrow is EXTREMELY expensive. Please do your own due diligence. There is also gap risk. In the time it has taken me to finish this, MSTR is now 186. I’ll mark the trade to market when I finally hit send. It’s volatile!
Crypto is broken and we are entering a new leg down. MSTR fair value based on its bitcoin holdings minus its massive debt is closer to $50 than $200. It’s one of the last meme stocks still worth selling (along with TSLA).
Trading and life are full of hills and valleys. Try to make lower highs and higher lows emotionally as your trading career progresses. You don’t need to be a robot, just maintain perspective. Listen to your emotions, but don’t let them control your actions. Act rationally.
And don’t forget to buy the 2023 Trader Handbook and Almanac.
That’s it! Thank you for reading.
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Trade at your own risk. Be smart. Have fun. Call your mom.
DISCLAIMER: Nothing in “50 Trades in 50 Weeks” is investment advice. Do your own research and consult your personal financial advisor. I’m putting out free thoughts for people who want to learn. This is an educational Substack. Trade your own view!
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I will print this article and keeping on my desk.tkss
Grazie mille!! ;)