Profitable ETF Trading Strategies: Experiencing the Zero-State

For me, achieving the zero-state is a necessary precondition for trading at my peak. In other essays I have described it as a place where adjective pairs of mental states cancel each other out, leaving only a moment of pure being.

It is the space between the words that we know, a moment and a place of freedom, where all notes may be struck, the moment precisely before the next action occurs.

For a horn player, it is the moment where he has gathered his breath and is prepared to initiate the note, the pure balance point between inhale and exhale.

For a diver it is the moment of motionless serenity between ascent and descent.

Imagine a Cartesian coordinate semantic grid system with adjective pairs arrayed about the origin, with each word having its precisely paired antonym and where the midpoint of the ray that connects them is bisected at the origin. That spot in the semantic meaning gris is where I seek to trade from in order to have my trading takes its purest expression in both action and no-action.

When I trade from this moment, this place, my results generate neither joy nor sadness, and simply are what they are. This allows me to enter the next trade with no emotional charge.

It is also keenly important to my style of trading where I am looking for the hesitation point in a channel trade or in a breakout, where price remains poised between fear and greed, where bulls and bears are in timeless balance and the next leg of the move will begin just as the last leg ends.

When I am able to stalk the price to that moment of harmony, that zero-state where momentum transitions I am able to refine my entry to very tight level levels and find initial capital preservation stops that are absurdly close, which enable me to minimize open risk and move to “no lose” trade conditions very quickly.

 When I know that barring an interruption of connectivity or market discontinuity I will never do worse than break even,  this is an immensely freeing psychological state to be in as a professional trader and yet it’s value for me is in the spiritual nourishment and satisfaction I experience having a brush with Truth and Perfection in a small way for a fleeting moment in my life.

In judo we speak of a moment in a throw where you and your partner are equally sure that the other judo player is throwing you with exactly the same force and skill as you are throwing them. In that moment the throws stop, time slows, and you are suspended in a moment of pure being.

What I like about trading is that as I approach the zero state my equity curve smoothes and my trading practice is rewarded

Profitable ETF Trading Strategies: Trading From the Zero-State

One of the most important qualities of the professional trader is the ability to manage your psychological state.

Psychology is such an important component of shorter term trading that it can make all the difference between success and failure.

In my own trading, the essential state of mind I must be in to trade at an optimal level is what I call the “zero-state”.

For me, it represents an emotionally neutral state that is neither happy nor sad, neither overconfident nor fearful. The adjective “calm” starts to come close to what I mean but there is an important difference. “

Calm” is part of an adjective pair, whose partner has precisely the opposite meaning. “Stormy” is usually given as the antonym. For me, this moment is one that may not be contained in a conventional adjective that describes a state, because I associate adjectives as being part of a word pair, with its opposite on the other side of the continuum whose exact center I think of as “zero”, as on the number line.

Conceptually, the Japanese term “mu” comes fairly close to this idea, having been variously described as neither yes nor no, but a state in-between that does not acknowledge the question being asked as one that may be answered by wither yes or now, with the answer existing in a different plane of reality.

Serenity is a word that describes a state that comes even closer than calm, because it suggests for me something more like a timeless eternity of “no-emotion”, where I am not connected to the outcome in a personal meaningful way.

For me the pure form of the act of trading is to achieve a timeless correctness, to take actions or to refrain from actions in perfect balance with the needs of the market t that moment, to be nothing more or less than that which is required ideally.

In Cartesian coordinates the point (0,0), is called the origin and is central to all subsequent mathematical operations. It is the point from which all action begins and where excursions are grounded for reference. It is the ultimate reference point that links together individual cases .

Profitable ETF Trading Strategies: How science can improve your trading

Trading by its very nature is filled with uncertainty. Any human endeavor that has such a strong psychological component must be uncertain, until such time as human nature itself undergoes a fundamental change. 

It is uncertainty which helps make a market for assets. It’s what helps drive the discovery process to uncover the relative value different parties place on an asset. It encourages risk-taking behavior in real time to anticipate the short term future direction of prices. 

Uncertainty and psychology don’t necessarily make it easy on the trader to act with confidence and commitment. On the contrary it provides opportunities for self-doubt indecision, and will often keep you on the sidelines when your rational mind and trading system may signal you to act. 

Traders that set aside the uncertainty of the moment and act with conviction based on sound trading principles and thoroughly vetted trading strategies have a definite edge over those who are coming from a weak place. 

One of the mental disciplines that I have found to be very helpful has been to adopt a trading approach that relies on a scientific metaphor to focus my mind and free me to act in a sound manner. Here is the technique’s basic approach. 

Once yo have a reason to believe in the soundness of a basic strategy, define the boundaries of the idea and circumstances in which you have an edge. 

It may be in a price level, in a chart pattern, in a combination of indicators that have yielded statistically sound returns in certain market conditions that are now in play. 

Find the specific price levels that give you clear evidence that:

1. the idea is beginning to work

2. the idea is failing

3. the idea has fully manifested itself and the profit target is realized 

These specific price levels allow you to define your initial risk, set the triggers for entry, initial capital preservation stop, and profit target to harvest your reward for action. 

By clearly defining the terms of your trading idea you have established a hypothesis that can be tested based on the pure evidence of price and eliminate some of the counterproductive self talk that leads to inaction. It allows you to let the trade decide its own results, and gives you a case study that can add to your knowledge of the system’s performance. 

By trading it at a risk level that allows you to dispassionately separate yourself from the results you allow the trading idea to stand on its own merits and remove the variable of your own discretion from the mix. 

This approach is not a natural way to think about the market, but it can do wonders for your discipline and your bottom line if you have reasonably robust trading strategies.

Profitable ETF Trading Strategies: You don’t have to be “right” to make money

What happens when you have placed your trade and you immediately have second thoughts as you watch the market moving against you? 

It is a normal trading experience to have a position that has moved in your favor a certain distance but has begin to stall before it reached the price that you were expecting it to reach, or which you have established as a reasonable price target. 

As soon as you see the price start to reverse and move against you, you are presented with the age old problem of whether or not you should cash the partial win or remain disciplined, and true to your trading plan and let the price go where it will. 

Psychological studies have repeatedly found that we are affected emotionally about three times harder but our losses than our gains. So, to see a profitable position move against you into the red is especially painful because you have experienced the loss of profits (which you will measure from the highest high of the trade) compounded by the triple pain of a loss. 

Unfortunately all traders who have experienced this decision  have also seen what it feels like when they have taken the partial profit and then witnessed the position reverse once more and zoom upwards to new highs immediately after exiting their position.  The emotional response to missed profits hurts just as much as actual dollars lost according to psychologists. 

Because of the way our brains are wired the instances where we chose incorrectly stand out more in our memories than all the times we made the “right” decision. 

After this has happened to you a number of times, you start to second guess yourself, and you can get gun shy about any decision you make, to the point where you cannot rationally approach the subject. It is common for traders in this psychological state to look for a perfect exit rule that allows them to be “right”, to give them an insight into the “correct decision”. 

The truth is that no one has the perfect solution to this dilemma; no one can be “right” all the time. 

The good news is that you don’t have to be “right” to have an effective exit strategy. 

What you need are psychologically acceptable rules for exiting and for re-entering positions. This means they must be acceptable to you! 

By having a good re-entry plan you no longer have to worry about missing the great move that kept you in a position that was moving against you. This gives you the confidence of capturing the profit in hand before it disappears and becomes a tangible loss. 

By being effective in preserving capital and profits, and by being able to re-join a winning position you can stop worrying about being “right” all the time, and simply concentrate on making money. 

Profitable ETF Trading Strategies: being a good Mastermind member

We have seen in a couple of other articles the benefits that accrue to members of a good Mastermind trading group, and some ideas on how to find and join a good Mastermind group. Having joined a Mastermind, how should you behave?

Most of your behavior should be guided by the principles of being a good neighbor. Supporting the community of the Mastermind group  includes the following ideas:

1. Waching out for your neighbors, which means observing their trading style and commentary and offering them thoughtful feedback designed to help them in their trading practice.

2. Integrity: this is an element of good citizenship.  Your advice comes from your best place. You speak the truth as you see it. When you offer research ideas or the results of analysis, you have actually done the research and have taken care with numbers, facts, and references. The principles of good scholarship apply here.

3. Observing and respecting boundaries:  Masterminds are not families, although they have familial moments. They are professional gatherings of like minded individuals who share outlooks on the practice of trading which is intended to improve the way we earn a living. Now there may be some groups somewhere that purport to be Masterminds but are really social networks in disguise, either by intention or through lack of professional focus. If your goal is to be a professional trader you should move on to another group which shares your focus.

4. Pitching in to help those in need.  Sometimes people will ask for help, and sometimes it is up to you to sense the need and respond even if the recipient doesn’t recognize the need yet. Respectful help is called for, perhaps even an intervention. But remember that horses can be led to water but may not want to drink and there is only so much you can do for people. Sometimes all you can do is make a good faith effort to show the way or share an insight.

5. Accepting good faith offers of help. In the same way, there will be times when people offer you advice and help that you may not see a need for, and you may consider this to be a breach of personal space or simply an insult. Give your mastermind members the benefit of the doubt in these cases and presume their intervention is coming from a good place and is intended to help you. Who knows, you just might be wrong and are being shown the way out of a dilemma you may not even recognize.

6. Accepting advice in the spirit it was intended: even if the truth can be hard to hear, or you disagree with the insights or recommendation, be grateful that the members of your Mastermind have your best interest in mind.

It is true that in the end, only you are responsible for all of your trading results. But it is also possible to find a great deal of comfort, insight, support and ideas inside your Mastermind. Cherish  the connection to fellow traders and work hard to improve your own practice and the practice of others. Your diligence, patience and care will be rewarded in many ways. 

The Snapping Turtle trading technique: a case study

Here is a snapshot of one of our bread and butter intraday trading techniques: the “Snapping Turtle” technique which in Coca Cola (symbol: KO) turned in another reliable trade as the market melted up today. Chart 1 reflects the situation at the moment of entry. Our analysis suggested that if price were to move thru support at 45.30, KO would enter the “green zone” and offer a burst of gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart 2 shows in fact that we got the move we were prepared for,and we cashed a nice gain in fairly short order, earning $3.67 for each dollar risked

Reflecting on unbridled competition: a relic from the Pleistocene?

One of my fellow students posed the following question to me after reviewing some comments I made in the chapter we are co-editting re: socialism and unbridled competition:

Ken,

             Your argument on unbridled competition looks solid, but some may disagree that it is THE cause for disharmony and mutual survival.  I not sure if you are getting at the power of monopolies, or if we should rethink Capitalism and the pursuit of happiness?  I know you are a non-supporter of Socialism, so what gives?

 I replied:

well we dont really have unbridled competition i guess, except probably at the national level, between socialist entities (competing protectionism and in currency exchange rates and spheres of influence in the 3d world)

 

my thought was that we are hard wired for competition and zero-sum based on the scarcity model we inherited from survival mode in the EEA (Era of Environmental Adaptation, in the Pleistocene). Our politics are dominated by winners and losers and sound bite persuasion whereas every significant political challenge requires long term thinking, win-win thinking, innovative cooperation, but we are farther from realizing that systemically now than ever before.

 

the concept behind debategraph.org for example is a way that global scholars are trying to improve the quality of the debate on many topics, and actually try to harness reason and heart in support of solving wicked problems, like Gaza.  This is not the kind of analysis and cooperation that briefs well on the news or in press conferences or in primaries, where we are reduced to the most trivial of soundbites

 

Obama’s powerful rhetoric consisted of saying hope and change and i am not bush 3

 

adopting an attitude of abundance, taking the long view, valuing restraint over consumption, systenms thinking: these are all things in opposition to our inherited mental processes, residing in the rat brain of evolution.

 

It’s convenient on talk radio to characterize cooperation and dialogue as “central planning and socialism”, neither of which am i in favor of (the opposite). My sense is that it will take generations of modelling systems thinking, humility, abundance and action research style cooperation and inquiry in the classroom at every level to effect a culture shift, which is why the real radicals have maneuvered their way into the schools to win the long war for the minds of the children.

 

on a societal level, unconstrained consumerism threatens spiritual values and is a driver of the short term over production that leaves the planet in tatters and our society morally bankrupt. and yet i firmly beieve in the pursuit of happiness as one of the highest goods, the liberty to pursue dreams. a real conundrum to value pursuit of happiness, delayed gratification and restraint, and selfless service 

The path to mastery, with emotional intelligence

 The studies in the Cambridge Handbook of Expertise and Expert Performance  describe  the path to mastery as:

(1) Deliberative Practice 

(2) Time spent at Deliberative Practice 

(3) Assistance from a mentor. 

Deliberative practice can be broken down to:

(1) Identifying a long-term outcome 

(2) Breaking down the skills that lead to that outcome into its component parts. 

(3) Engaging in practice sessions that: 

     (a) Have their own predefined goals 

     (b) Have benchmarks to measure progress and 

     (c) Have immediate feedback. 

 

 Discover (November 2008 )  has an excellent interview with Antonio D’Amasio,  a neurologist who asserts that robust decision-making involves our emotions as much as our reasoning capacity. His thesis can be found in the quote from the interview: “It’s not that I am saying the emotions decide things for you. ..It’s that the emotions help you concentrate on the right decision. You (your cortex) still have to do some of the work, but the emotions give you a head start.”

D’Amasio says our reasoning depends on a supply of ’somatic markers’ to make a decision. ‘Somatic markers’ are past emotional experiences that serve as a guide. He believes that his studies of brain-damaged patients demonstrated that:  ”where emotional experiences are not present, then there are no somatic markers i.e. no foundations for the decision-making process. This process includes what shame, stress etc feels like.”

His work contradicts the idea we make our best decisions as emotionless robots. Hethinks not only is emotionless decision-making not possible, it would not even be desirable. Somatics have an essential role to play in the decision-making process.  Emotions warn us long before reason when danger lurks. Sometimes however, they may react to ‘danger’ not present in reality but rather in our imagination. To employ our emotions emotions, the keys are when feeling strong emotion:

(1) to become aware of them. 

(2) to question whether their source is valid i.e. is it a real and present danger or an imaginary one; and 

(3) to act in accordance with (2). 

It may be that the best way to manage our emotions productively is with thorough preparation which includes visualization. Since our mind cannot tell the difference between what is real and imagined, a mental rehearsal will blunt a possible traumatic event so that we can deal with it effectively should it occur.

Finally in the interview,  D’Amasio suggests that because somatics take time to form,  the speed of 21st century life blunts our conscience. And, when that happens, – when our reason is cast adrift from our emotions – we are left free to justify any act.

What makes Buffett great: the ability to take disciplined action at moments of great stress

Trim Tabs reports an extraordinary panic selloff by the masses in September, driven by fear. Banks are collapsing left and right. The public is outraged by their ostrich-like elected leaders in the House and Senate and pressure the Congress into aborting a terribly framed corporate welfare/bailout bill. Market volatility, as measured by Average True range %, is at historically high levels. Buffett himself says he has never seen as much fear in the market in his adult lifetime (which shows how well calibrated is his market sense). Soros is floating white papers for alternate rescue plans to sympathetic members of Congress.

Certainly these are extraordinary times. And yet it is precisely at this time that Buffett’s true genius for decision-making under staress comes to the fore. He carefully weighs and mesures with his unerring eye for risk adjusted value, and makes an excellent play to buy an interest in the Goldman Sachs brand under truly favorable conditions.

Now today he makes a play to add a sizeable chunk of GE, another great brand, to his portfolio.

He was able to do this because of the large cash position he had carefully developed over the past several years when he frankly observed that there werent many, if any, good values out there. He even was venturing into China and emerging markets in search of value. We probably won’t read much about the downside of those poorly timed moves, but this looks like an important policy statement from Uncle Warren about the relative state of the US markets.

Rothschild made his fortune by buying when there is blood in the streets, and everywhere you look on Wall Street, and in many places in mainstreet, the blood is on full display.

As the great Dr Steenbarger observes at Trader’s Feed:

This distinction between the “gambler” and the “entrepreneur” helps explain why the capacity for risk-taking is associated both with great blowups and with great career success among traders and portfolio managers. Depression is negatively associated with risk-taking, because depressed individuals can neither muster the drive to gamble nor the optimism to generate and back one’s own ideas. Discipline and risk management are important components of trading success, but if the entrepreneurial hypothesis is correct, the ultimate source of success among market participants is the ability to see what others don’t and act decisively upon those perceptions.

Military officers: superstitious?

A new blog friend, Konrad Talmont-Kaminski, a naturalist philosopher in Poland, shares an interest in bounded rationality. He is thinking hard about superstition and the question was posed to me:

Given the connection between stress and superstition the army must be a good place to run tests. Do you think the military are among the more superstitious groups of people?

my first thoughts, without trying for a formal definition of superstition, or pretending to know any of the literature, are these: 

i think we are very “superstitious” in the sense that we have invested a lot of belief in “rules of thumbs” and the received wisdom of very successful leaders in the past. We take up their advice with religous fervor.

What I find interesting is that this is also a culture that places a very high value on rational, analytical control to achieve certainty. Yet, when the stress levels go high and you must choose in the absence of certainty, military officers revert even more quickly and stubbornly to the chestnuts of the past.

An example: we revere Clauswitz and Jomini, studying them carefully. In what other profession that idealizes certainty and modernity do you see the leading philosophers living in the 19th century? Is their content really that timeless or has our culture placed them on such a high pedestal and invested such emotion in being right that we are locked into this “superstition”?

At the same time, based on my experience in combat, I have seen how soldier latch on to rituals to help keep themselves alive on the next mission, even when the rational mind must be certain that it is not related to reality in any way.  In the same way, we read all the time about professional athletes who repeat all the behaviors they performed before their last win. 

Ken Dryden, the goalie from the Montreal Canadiens, describes that phenomenon well in his terrific book, “Behind the Mask”.  The rule in the clubhouse was “Don’t change the luck!”.  People need explanations for uncertainty and chaos.  The more the uncertainty, the stronger the need for an explanation no matter how ludicrous. And if the ludicrous belief becomes socialized, then it can achieve “Revealed Truth” status , I think.

I am probably not using superstition in the formal sense but this is the paradox I see.