Trading Psychology

Today, I want to speak about mindset. This can help you build a successful trading career that goes beyond merely knowing technical trading details.

One of the most rewarding aspects of trading is the opportunity provided for self-reflection and introspection. This is an “opportunity” because if you seize it, your trading results will GREATLY improve, essentially paying you to do this work.

I’ll make analogies to other aspects of life where introspection and reflection can help you.
I will do this to reinforce these insights.

Lastly, mind you, these are just my opinions.
Others can disagree with me and make sound arguments against my thoughts.
That said, I believe these reflections have been big drivers of my own success and I’d like to share them to help others.

Exceptionalism, by definition, must defy conventional wisdom

A lot in our lives is run by our internal beliefs – our self-imposed limitations and assumptions around reality.
Something extremely important to realize is that a lot of these beliefs are thrust onto us by mainstream thinking, “conventional wisdom” so to speak.
One of the VERY first thought patterns to break is “mainstream” thinking.
By definition, EXCEPTIONALISM cannot be “mainstream”… Exceptionalism can only be found amongst outliers.

Here are a few examples of “mainstream/acceptable” beliefs, to illustrate the point.

Throughout my trading career, as an economics undergrad, the idea of efficient markets and the inability to “beat” markets was consistently pushed onto us.

• Arbitrage opportunities don’t exist
• Statistically, most people fail as traders
• It’s impossible to consistently outperform the markets
• Etc.

Of course, the first thing to remember is that this narrative is promulgated by academics, who may have never even traded a market themselves (although some have).
To them, examples such as Warren Buffet, Ken Griffin, Paul Tudor Jones, etc … are merely statistical certainties due to the law of large numbers. YOU, however, should not bother becoming a trader, because 99% of traders fail.

Let me ask this question then:
What about professional “pop-singers”? What is their success rate?
How about people wanting to become actors? Or restaurant entrepreneurs?
I can’t imagine those success rates being any higher than a trader… A mediocre trader is much more likely to be wealthy than the average singer… Don’t you think?

The difference is that no one argues that “ There’s no such thing as a successful pop-singer”; the same goes for actors. Instead, we realize the road is hard but it isn’t a mystical fantasy.

Yes, being a trader is hard. Hard af. And potentially VERY dangerous. Falls from stardom can easily be followed by financial ruin and demoralization (although, the same patterns are often found in Hollywood).

Lets review the truism, “There is no such thing as arbitrage”.
By definition this argument lives in a paradox. Anyone who’s followed the crypto space has seen the evolution of various arbs appear and then disappear.
There aren’t arbitrages because a subset of traders have invested significant time and resources in order to build a business around exploitable arbitrages. They are the reason “there are no arbitrages” but from their perspectives, there definitely exists an arbitrage.

Like any other business, there is indeed competition in the industry of exploitable arbitrages. This is the reason some traders are very secretive about their strategies. It’s the reason proprietary trading firms have some of the strictest “non-compete” clauses around.

Lastly, the law of large numbers seems to be lightly violated by the consistency of certain traders and investors… Their success isn’t random; instead they succeed over and over again.

PTJ, Ken Griffin and Warren Buffet seem to always win… Why is that?
How about all the other, less well-known traders, who completely crush it, year in and year out?!

Others have indeed fallen from grace and no trader ALWAYS wins… but there’s a subset who consistently makes their way back to the top.

A Framework For Success

Now let’s break into the mental side of things… an intuitive understanding of ourselves, so to speak.

Did you know that 70% of lottery winners spend all their money within 5-years? Even those who have won up to $500 million dollars??

WHY IS THAT?!

Why can’t they stay rich, even if someone handed them $500 million dollars…? Why?

Because they’re not ready for it.
To them, this isn’t reality.

Wealth came crashing down on them and their mindset couldn’t accept it.
Instead, their reality is one of hardship. To them, this is what is real.
No matter what happens externally, internal reality will prevail.

Here’s another example; Imagine you had a goal to make $100k trading. If you made that your internal mental target, I’d argue no matter what price you paid for BTC, you’d likely pull $100k of profits out of the market.

It wouldn’t matter if you bought BTC at $1,000 or 0.30 cents initially.
Once you made $100k ,you’d likely have sold all or nearly all of your position to lock-in profits.

Unless you were able to mentally adjust to your new reality along the way, or got back in for a second trade, your destiny was already determined, regardless of the external reality.

This leads me to another thought… Despite ruining his reputation and being a combination of the world’s worst trader and a fraud, SBF has the mental framework to become (or “re-become”) a billionaire.

The same goes for the 3AC guys (who I have much more respect for than SBF).
The 3AC guys will learn from their blowup and at least avoid the same exact mistake; but should they theoretically launch a fund again, it’s likely going to be successful (at least initially), because being billionaire traders, in their minds, is normal. It’s not that big of a deal.

To them “These things happen”!

Mental Framework #1: Money isn’t magic

Repeat this to yourself until it REALLY lands. Until you believe it to be true, in the very depths of your core being… because guess what… IT IS TRUE!

People become rich every single day.
Every day, someone makes a TON of money, some way, somehow.
The world keeps spinning, the world doesn’t even notice.
It’s so mundane, it just doesn’t even matter.
Having a million dollars, just doesn’t change your life the way you might think it does.
You still get heartaches, you still get bored sometimes, not everyone likes you, you still argue with your friends about dumb stuff, your family is still the same… Your clothes, your car and the way your food is arranged on your plate every meal, might be a little more aesthetic, but that’s it.

What if you give all your money away to help people?

You can do that NOW!
You don’t need to give a million dollars to charity to help the world. In fact, giving money to charity is the EASY part. A lot of people do that already and problems STILL exist.
The hard part about solving problems is the thinking and the doing.
Money isn’t what you think it is… Don’t fetishize it. Money isn’t magic.

You can become a million dollar trader. It happens everyday in some form.
And guess what, your life is basically just the same. That’s the reality.
Accept this truth.

Aim for higher heights than making a ton of money.
Aim to be disciplined, inquisitive and thoughtful around your trading.

You’ll be much happier being a skilled trader making $1m/yr than a reckless lucky trader making $10m/yr.

Mental Framework #2: If you don’t deserve it, you’ll self-sabotage

Here’s another example of a common mental barrier.

Let’s say you meet someone, the love of your life, and they told you they loved you.
They love you the way you are now and you don’t need to change ANYTHING!
Could you let that land?
Could you accept that reality?

Or would you act weird, unsure if this was a joke or questioning what “acting yourself” truly is?

Now imagine there are two versions of yourself:

Version 1: doesn’t workout and weighs 200lbs.
Version 2: Consistently worked out for the past year and now weighs 200lbs.

Version 1: Has the clothing style you have today.
Version 2: Consistently improved their style for the past year and now has the clothing style you have today.

Version 1: Has your career today.
Version 2: Consistently improved your career promotions, and now has the career you have today.

Meaning one version of yourself is you, as today.
Another version of yourself, is you as today, but required a TON of work over the past year.

Although the examples above aren’t truly a recipe for love, if you have put work to be where you are today, you’re going to feel like you deserve your good fortune. It’s going to land and be congruent with your self-image.
You’ll have a conviction in yourself that is conducive to success and good fortune.
This serendipitous love will make sense.

This applies to your trading as well.
If you take the time to devise trading plans, learn your own trading style, review your trading PnL and charts, etc. AKA the real trading work, you’re going to have a conviction behind your trading that you might not otherwise have.

For example, have you ever put on a low conviction trade, got out before your stop was even triggered (because you didn’t truly believe in the trade) and watched the trade be successful once you took the small loss?

Without real conviction, you might get “shaken out” of major winners.
Winners that you’d be able to hold for profit otherwise.

When you deserve to win, you won’t be surprised/superstitious when you hit a string of successes nor will you become reckless, attempting to revenge trade, through loss cycles.

You’ll have a clear mind, control and a belief that you’re likely going to be successful.

The hard work of trading isn’t necessarily about finding the secret magic sauce, it’s about getting your mind straight and knowing success is probable in the long run.
Your job isn’t to tell the future, it’s to be AWARE of what’s going on in order to judge the asymmetry of various scenarios.
Should you hit a string of losses, you will be able to put in the work to fix it.
You won’t feel like a failure who’s better off quitting.

Mental Framework #3: Inspect yourself and trade your own style

Finding your trading style requires you to understand yourself.

Why is this important? What does knowing your style even mean?
I know a trader, actually two traders, they are husband and wife, I used to trade with at DRW.
They are some of the best traders I know of, they have nerves of STEEL. They are able to hold winners forever… 10x, 100x, 1,000x, whatever… They can just hold it.

I CANNOT do that. Period.
I will scale out of winners and cut losses very quickly.

These two styles are VERY different and they each have their own place for successful traders.

Think about the long volatility payoff.
Long vol. payoffs look something like this:

• 9/10 times your premium expires worthless.
• 1/10 times (if you’re good) your premium goes 20x.

Well, if you’re like me, and you’re unable to hold positions for 20x, how on earth can you be successful as a long vol. trader? The nature of long vol. REQUIRES the 20x winner to cancel out the multiple 100% losses and then provide some profit.

On the flip side, if you let everything run, short-vol losses can be catastrophic.
You NEED to get out.
You NEED to cut losses quickly and avoid “vega storms”.

Short-vol. fits my personality much better.
The max profit is already defined, I don’t need to guess about the right profit levels (at least not to the same extent).
And my habit of cutting losses early is a huge benefit, I don’t risk missing the 100x trade, because they aren’t part of my pay-out profile anyways.
Sometimes my theta gains allow me to get out of a trade I don’t like anymore for free.
It just fits my personality much better.

You need to understand yourself.
What is easy for you to do and what is hard to do?
When finding your style, double down on your strengths, start there.

Mental Framework #4: Protect your mind.

As mentioned earlier, traders can be very hard on themselves.

It’s easy to fall into the “never happy” trap for a trader.
You’re either not happy because you lost money on a trade idea, or you’re not happy because you didn’t make enough on a winning trade.

The very dark places come when you lose a devastatingly large amount of money in your trading account. When that happens, you’ll often hate yourself.

What are some mental frameworks to help protect yourself around the random chaos of trading?

These things work for me:

1. Pull money out of the market. Don’t keep compounding your trading account forever. Realize your gains and limit the amount at play. Think of this as a hard-stop.
2. Build replicable habits. Don’t hope to get lucky on a random trade, look for trades you’d be willing to execute 10,000 times over your career. This work will reinforce your “deserving to win” attitude.
3. Develop hard-skills to complement your trading. I am a discretionary trader who relies on “feel for the market”, but coding, working with hard data, establishing insightful analysis, are hard skills that complement my work.
4. Notice when your trading is in “control” versus when you’re feeling “reckless”, that’s your first hint of risk-management. You can feel it.
5. If you want to trade dumb degen trades (I do), then make those small. Use sizing in conjunction with your convictions.
6. Aim for goals beyond PnL: Consistency, knowledge, discipline, introspection, etc. These elements will bring a dimension of personal growth and reward to your being and help feed your soul.
7. Only trade if you are ABSOLUTELY OBSESSED and IN LOVE with the markets. This love will keep you dedicated to your success and making your career work.

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