Do more and less

Trader's Mindset

May 03

Recently, Dr. Steenbarger shared that he had an experience of trading in flow. His experience reminds me of experiences when I have traded at my best. On the other hand, if there is too much that is discretionary then it will be more difficult to perform in higher stress situations. A key question a trader needs to ask is what should be variant and invariant?  Variants are variables that are open to discretion. Invariants do not change. I have described great trading as “chaos within limits” or “disciplined recklessness”. This is simply another way of saying that great trading is often the product of taking risk without stress while still being disciplined. One of the reasons that this is the case is that trading is a “risk seeking activity”.  The difficulty is that it is very easy to move from solid trading into reckless trading.

One of the keys toward trading without fear is to know that you have a support or safety framework. This is where invariants come into play such as daily loss limit, stop loss, time of day, and other controls. For example, one of the changes I am making in the simulator is working on moving toward using fully algorithmic stop losses for all discretionary trades.  The next time I go live then I will know that my stops are completely managed for me and importantly managed in the exact same way.  This is an example of decision reduction and is one reason why having quantitative or tested edges can improve performance because it (1) clarifies precisely what you are trying to do, (2) reduces the number of decisions that need to be made under stress, and (3) promotes confidence. By demonstrating I can trade within an invariant framework, I feel that my probability of success will be much higher. Of course, the most invariant framework and easiest to execute is simply to trade a system: but that doesn’t allow for me to use my full capabilities; although, I do think, having multiple “profit centers” will eventually be essential.

Another part of simplifying is I am working on multiple strategies and techniques that will provide to me the most predictive information for my discretionary trading. I feel that the combination of working from more predictive data combine with my tape read and minimizing or eliminating data that is unclear will also give me an additional advantage.

So far, I have shared how automating and simplifying is the less part. But, what is the more part? The more part is to go deeper into whatever it is you are doing with your discretionary work. Go all the way. Something that I have found has helped me is to describe what I am seeing and my rationale for trades to others who do not know anything about trading. The Socratic method, a recursive questioning method to go deeper into whatever you are doing, has been suggested as a technique for increasing creativity. I have recently started to apply this technique toward my analysis. At the same time, there must be a cognizance that even the best analysis is just a map of possibilities and not certainties.


About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at