Musings of a Trader
Just a collection of thoughts and a story from the past.
Disclaimer: the following post is an organized representation of my research and project notes. It doesn’t represent any type of advice, financial or otherwise. Its purpose is to be informative and educational. Backtest results are based on historical data, not real-time data. There is no guarantee that these hypothetical results will continue in the future. Day trading is extremely risky, and I do not suggest running any of these strategies live.
I've been trading daily for the past couple of weeks. It has been a while since I have been able to do this. I let my manual trading go while I was focusing on research. However, you can't make money in the market if you aren't participating in the market, so I have taken up my manual trading practice again and made it a priority.
One thing I am reminded of (again) is that while my manual trading strategy is systematic in nature, the methods I use to define a stop and target are very different from how I define them when researching and testing strategies. In a coded strategy, I tend to use indicators to define targets and a factor of an instruments ATR (average true range) for a stop if I even use one.
In my manual practice, I use price action and price levels to determine my targets and stops. I don't use any indicators when planning entries. I will look at a mean reversion indicator (RSI, money flow, CMMA, I'm experimenting) or trend indicator (MACD) if I want to get a better overview of the market, but I only look at them in higher time frames. On the 15-minute chart (the one I trade on), I only use price levels and watch price action.
While I have a system, and only two or three setups I like to trade, I have rediscovered the effects of fear and anxiety. It's amazing how you learn to work with these feelings. Its amazing that some people ignore them or don't think they should be considered when trading.
Admittedly, I don't actually know that many traders. I don't have a mentor and I just started chatting with other traders (subscribers) while trading recently. Despite that, I am willing to bet that every trader experiences the same feelings. Veteran traders are probably just more used to the feeling and know how to make good decisions and stick to the plan, regardless of their mental state.
Not surprisingly (or maybe surprisingly to some), this feeling is the exact same one when someone's life is on the line. It doesn't matter how many patients you have treated. There is an anxiety and fear that surfaces every single time you get a real patient. It is the same feeling you get before rolling out on a high-risk mission and it's the same feeling that catches you off guard when you are complacent.
Not every trauma scene is the same. Sometimes, as the senior medic on scene or transporting medic (read: the one responsible for the patients pulse), your job is to wait until rescue personnel bring the patient to you. Funny things happen during that waiting period. Heart rate, looping thoughts, panic, you name it. It can all creep up. Your job is to handle it, make sure it doesn't effect your actions, and then act in the best interest of your patient.
This is the same thing we do when trading. First, we plan. Then, we wait. When the time is right, we act. Finally, we manage the trade. For those of you waiting for the cliche, here it is: this is your OODA loop. Observe, orient, decide, act. US Air Force Colonel John Boyd popularized this concept to explain how individuals and organizations make effective decisions. You can look more into it via the internet machine if you are interested. All you need to understand is that you don't want to disrupt the process.
It feels an awful lot like story time doesn't it?
...
Yeah.
It does.
There was a period of time during my tenure at the fire department that I caught a lot of bad car accidents right before shift change. That means I had been at the station for 24 hours. Maybe I slept, maybe I didn't. It's the worst time to catch a call. You are tired and you want to go home.
The call came out bad, a head on collision on a state highway (high speeds). It had just started raining and it was about 30-minutes before shift change. My partner was a knowledgeable fire fighter and EMT. I also had a new hire paramedic training with me. He was a Grady medic (if you know, you know) that knew his shit. He was also a former 11B and had deployment history. That means I had a competent extra pair of hands if I needed them (I did).
We got on scene just after the first engine. Command was a minute behind us. There was a dump truck off the side of the road attached to a giant oak tree and just one foot away from sliding down into a 20-foot drop before the next trees would stop it. It was precarious af. There was a second vehicle (truck) on the other side of the road. No survivors. The driver of the dump truck was unconscious and had multi-system traumatic injuries. He wasn't helping get himself out of the situation.
The next 10-15 minutes went by in slow motion. We had enough experienced hands on scene to handle the rescue without the transporting medics being involved. My partner (the firefighter one), along with a former Orange County Florida firefighter, handled extricating the patient. Someone secured the dump truck to a loaded semi stopped in traffic, to help keep it in place. At some point, our captain (RIP) climbed through the windshield (like a bamf) to help get the patient out.
All this time, I had to sit back and wait and plan. We got enough glimpses of our patient to know that we had some work to do when we got them. To keep it from being R rated, I will keep the description of injuries simple. A tree branch came into the window after collision with the tree, which was after collision with the other truck, and obliterated the patient's face. I was amazed that they were still alive.
This is a paramedic's worst nightmare. There is no recognizable anatomy left for securing an airway. And before I can work on the patient, I need to get everyone out of the back of my ambulance so we can get moving to the hospital, which is an hour away. No helicopter is coming in this weather and we might be faster anyway. One of the extra medics is having a full on deer-in-the-headlights moment after seeing the patient. All he can do is keep repeating that we need to make sure the patient stays warm...
This is were time starts to do funny things. Your heart rate is climbing and your OODA loop has 100 different decisions to get through. Luckily, I already thought ahead and had all that decision making done for me. First, remove the unnecessary extra hands. I operate lean. 1 badass medic (that's me) is good, 2 badass medics is just right (the "trainee" and me). Everyone else, get the fuck out.
Now, what's going to kill this patient first? No major exsanguination? Let's secure that airway. Two events happened during this process, but they were absolutely some of the most disgusting things I have ever seen happen with a trauma patient, so I won't go into the details here. I secured the airway blindly. Given that there was no recognizable anatomy, I had to insert the blade, stage a bougie, and hope. I asked the patient to give me one more breath and told them I would take over from there. He obliged and I sent it home.
The patient got bilateral chest decompressions. He is sedated and we have push-dose epinephrine on standby. He maintained pulses all the way to the trauma center. He was eventually flown to Grady for extensive surgery. Many months later he showed up at the fire station to thank the crew that transported him. He only got my partner, poor fellow. Eleven bravos are an acquired taste. ;)
Training can only take you so far when preparing for situations like these. The same can be said for trading too. It is hard to mimic the feeling without real risk. In the physical world, this is something that training can help. It makes the decision making process automatic. That is why it is imperative that you don't waste any reps. Training should be taken seriously and practiced with intent.
This next part is an opinion. I am always willing to adjust my opinion as I learn. If you think I am wrong, put it in the comments, or message me. We can talk about it.
This doesn't necessarily translate in trading. While you definitely should get practice reps in, we have to actually control our urges to subconsciously react and adjust. Instead, we have to rely on the system that we have put in place to make decisions for us. The market, and price action, is not predictable. People can get close, people can become accustomed to price movements that repeat, but there is no guarantee that it happens the same way in the future. It is the future and no one knows what it will bring.
When we train physically, we are creating that system in our subconscious and muscle memory. When we are training to trade, we have to recognize that those reactions are likely going to hinder us more than help. It is the opposite of intuitive. That is why we research and design trading systems to help govern our decision making process.
There is a catch though. Practice trading won't mimic the feeling of adrenaline you get when trading with real money. When you finally trade with real money, you have to compartmentalize those feelings and trade your strategy. Since you can't predict the future, you have to manage the trade the way the system was designed or the rep will count for nothing. You have to ignore the urges to cut losses sooner or take profits sooner. The system dictates our decisions because we can't trust our gut.
I can (er, could?) look at a patient and know within just a couple seconds if they are sick or not sick. This comes with practice and lots and lots of patient contacts. We sometimes subconsciously pick up on signs before we recognize them consciously, allowing us to make rapid decisions. The market does not follow rules like the human body does, therefore we can't trust our gut when trying to make fast decisions. Instead, we have to trust our system.
If the market doesn't follow the rules of the physical world, and it doesn't really follow the rules of most mathematical models (normal distributions, anyone?), how do we improve the skill?
I've got a few ideas. Let's look at one. By the way, I'm just a dude writing down his thoughts. Don't take this shit to the bank. I could be wrong.
First up, discipline. It's hard to argue against needing this. I would suggest that you look at getting some even if you aren't a trader. If you are a trader, you can develop this without trading. Going for a morning run routinely isn't going to help your strategy perform any better, but its going to make YOU perform better. It also develops discipline. Developing a consistent, hard habit like running (or whatever else) can help you understand yourself better, which will help you when you are developing your trading habits.
I bet discipline doesn't have to come in the form of physical work either. This could be a meditation or prayer practice (or whatever). The point is that it is something that is done consistently and that you sometimes don't feel like doing it. That last part is important. The habit you are developing can't be so enjoyable that it isn't hard to do consistently. I don't think playing video games everyday would qualify, or smoking a blunt. Do people still smoke blunts? I digress.
Do something hard. That's how you develop discipline. Studying, designing, and trading a trade system is hard. It requires rigor and discipline, even if it is a simple strategy. Trading it according to the rules, ignoring your gut, and documenting (journal, data) it for further study is hard.
Doing hard things makes our brain grow. Specifically, a part of your brain called the anterior mid-cingulate cortex (aMCC). It's an interesting topic and it shouldn't take long to find a reliable podcast/study/article to learn about it. The one I learned about it from is linked below:
Huberman Lab Podcast -- How to Increase Your Willpower & Tenacity
In the book "Thinking, Fast and Slow" by Daniel Kahneman there is a chapter titled "The Illusion of Validity". In this chapter, the author discusses the illusion of skill. Specifically, he discusses the illusion of financial skill associated with professional investment advisors. He talks about a time where they had the chance to review the results of 25 wealth advisors for eight consecutive years. He ran a correlation test for each of the advisors results over the previous eight years and determined that there was no correlation (0.01). He came to the conclusion that the "skills" the wealth advisors thought they had amounted to nothing more than luck, or the roll of dice.
I constantly find myself thinking about this. If a professionals results are simply luck, and most ETFs don't outperform their benchmarks, then is there really a way to trade and be profitable?
If you look around on the internet, you will find plenty of people who seem to be great at being a profitable trader. If we assume that they aren't lying and their performance metrics are real, how do we explain this?
Is Kahneman wrong? Are the internet traders lying? Am I pursuing a red canary?
I'm aware that a wealth advisor and a day trader are very different professions. I'm also aware that Kahneman's discovery in that chapter is pretty anecdotal. When it comes to day trading, I don't think it's about being able to beat a benchmark or predict price moves flawlessly. Instead, I think it is more about planning a trade systematically and then managing that trade appropriately. It's closer to gambling than it is to designing a retirement portfolio. Regardless, there are a lot of people out there who say it is all luck and no skill.
Is it?
Feel free to comment below or e-mail me if you need help with anything, wish to criticize, or have thoughts on improvements. You can also DM me or start a chat thread. Red Team members can access this code and more at the private [HGT GitHub repo](https://github.com/Hunt-Gather-Trade). As always, this newsletter represents refined versions of my research notes. That means these notes are plastic. There could be mistakes or better ways to accomplish what I am trying to do. Nothing is perfect, and I always look for ways to improve my techniques.
Great read. Gave us all some things to think about. Always enjoy the stories.