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What Is In Your Trading Psychology Playbook?

One of the core ideas among the traders on the New York floor at SMB is that of "the playbook".  Derived from Mike Bellafiore's book of the same title, the notion of a playbook for traders is similar to that for football or basketball teams.  Before each engagement, you assess yourself, assess the competition, and identify the plays that you will run that:  a) take advantage of your strengths; and b) exploit the other team's weaknesses.  The selection of plays from a playbook then guides drilling and practicing before the competition, preparing the team for optimal performance.

For active traders, each day can be a new competition.  Recently, we've seen not only volatility and volume in the stock market, but a reasonable degree of volatility of volatility and volume.  Thus, for example, roughly a week ago, we were trading well over 100 million shares a day in SPY, with wide daily ranges.  Most recently, we've traded around 50 million shares, with relatively narrow ranges.  Each day, we play a new game and face a new team.  Without a playbook to guide us in what to look for and exploit in each environment, we cannot take advantage of our strengths and ground ourselves in the opportunity set of each set of market conditions.

For longer time frame traders who are more fundamentally grounded, each day will not bring a new strategy, but it is likely that each week and month will deliver a fresh set of risks and rewards.  The notion of a playbook to select strategies to adapt to the changed environment is equally valid.  For example, one manager I met with recently identified the environment for his market as trending, but with a declining Sharpe (increasingly choppy).  To exploit the trend without having to worry about the back and forth, he drew from his playbook and found an options structure that he could hold and that limited his risk.

The trader who trades one way in all markets is like the dancer who dances the same way regardless of the music that is playing.  It doesn't help to sanctimoniously proclaim that break dancing "fits my personality" if the band is playing a slow love ballad.

Interestingly, very few traders develop psychology playbooks.  Different market environments may pose different "triggers" for traders:  boredom, frustration, over-eagerness, overconfidence, etc.  Having a playbook of techniques for grounding ourselves in these different conditions can help keep us in the zone and help us make our best decisions.  Can we really make the most of our trading plays if our mindsets are reactive to what markets are doing?  A well-rounded trading psychology playbook would include various methods of self-talk, various exercises to increase focus, various techniques to shift mood, etc.  Over time, we can recognize the techniques we're most likely to need to perform at our best in the particular trading environment.

What's in your trading psychology playbook?

Further Reading:

Trading Psychology Techniques

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