I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Sunday Planning, I plan for the week ahead.
This week, I’m working on my mindset, around trading, and around life in general.
On Thursday I’m having surgery on my left eye to address the macular pucker that seems to have resulted from hitting my face hard, on the snow, in a ski accident last November.
I feel scared about the surgery. I will be awake but sedated, I suppose kind of like what you get with a colonoscopy. Gemini tells me that actually, surgery on your eye requires lighter anesthesia than a colonoscopy so that you can follow commands like “look straight ahead” and so that you don’t move around.
I feel fear about trading as well. I haven’t blown up my account, and there’s no way I could, with the level of risk I take on. But I’m also not yet seeing the results I’m confident I can get. Plus my emotional reactions are hindering me from making good decisions.
In his book Best Loser Wins: Why Normal Thinking Never Wins the Trading Game, trader Tom Hougaard suggests that it’s fear that keeps traders from succeeding. He writes:
There is an ideal way to think as a trader. There is an ideal mindset – one that is flexible to the extreme. It does not care about winning. It does not care about losing. It is a carefree state of mind, but it still acts in your best interest.
The ideal trading mindset has no fear. If you are alarmed by this statement, then pause for a second. The ideal mindset may have no fear, but the ideal mindset is still acting in your best interest. The ideal mindset might be fearless, but it is not reckless.
He has found that unsuccessful traders let negative emotions drive them towards two dysfunctional patterns:
- Adding to or holding onto losing positions in the hope the position will come back, out of a fear of experiencing the pain of booking an actual loss.
- Taking profits when a position is winning, out of fear that those profits may disappear.
I have shown those patterns again and again. I did it most recently with oil and precious metal positions. I held onto them as prices deteriorated, thinking, “they will come back,” relying on my knowledge of the macroeconomy to guide me. Thursday I sold them and vowed going forward I would cut my losers quickly. I’m also letting go of the notion I can figure out what to invest in based on analysis and prediction. I’m taking a probabilistic approach instead, but leaning towards tickers with strong charts.
Updated short put trading plan
After sitting with the ideas I read in Hougaard’s book, and thinking about who I’m becoming as a trader, I decided to update the trading rules I outlined on Friday. I’m still planning to focus for the time being on selling puts, but I’m not going to follow the standard wheel approach of taking assignment. Instead, I’m going to cut losing positions quickly, following Hougaard’s advice.
My goal is to keep my capital working to earn profits. If you sell a put and the underlying stock or ETF struggles, you are holding a position that’s not making you money (and may end up losing a lot). So I’m going to give a short put four days to be in the green. If, on the fourth day after I bought it, the put is in the red at one hour before the market closes, I’m going to sell it, and replace with another from my planning and prioritized list of new positions.
Then, on each day after the fourth day, if a short put is in the red, it gets closed, no questions asked. No thinking about what might happen tomorrow or in a week. No need to take assignment.
Meanwhile, I’m going to watch all of my open short puts and, if they have delta less than .20, roll them up (replacing them with a new put with a higher strike price, and possibly an expiry further out in time) to both capture profits and keep myself in a winning position. A delta less than .20 means that they are doing well; the underlying is going up. This is a form of committing more to a winning position, overcoming fear.
I have adapted my other rules to focus on keeping my capital moving towards more profitable trades all the time, such as decreasing the days-to-expiration I’m opening at to around 20 to 30 instead of 30 to 45, making rules around rolling or closing at 7 DTE instead of 21 (capturing more theta decay and more possibility of explosive action), and relaxing rules around diversification (because diversification is a way of addressing fear whereas concentration is a way of expressing optimism and adding to winners).
I question myself a little about continuing to iterate on my trading rules so rapidly, but I really have learned a lot in the past two months, and also, I’ve learned a lot in the past few years of letting fear instead of optimism and skill guide me.
I learned in my initial experimentation with selling puts that some puts show profit very quickly. Some drag along and eventually bring in some adequate returns. And some, of course, just lose money. I’ve been trading in a serious bull market, so that’s an important aspect of the quick wins some puts showed. However, I think there’s an opportunity to focus my capital on the puts that are showing quick profits rather than letting it languish. Many people selling puts rely on theta decay over time to make money, and that’s part of what I want to do. But I’m hoping to find more explosive moves for quick profits.
Preparing the mind
Hougaard writes:
Your mind will drift. This is unfortunate but perfectly natural. The solution is trivial and it is powerful. You have to constantly reaffirm your purpose. Whether you meditate or talk to yourself while you brush your teeth in the morning, there needs to be some period in your day when you remember your purpose. There must be a time to remind yourself where you want to go, what you want to do.
He also suggests visualizing various situations in the morning before starting to trade, to imagine what you will do if things don’t go your way, or if they do.
I’m going to add a period of visualizing and affirming purpose to my daily trading routine, following this advice.
As well, each morning this week I’m going to visualize my surgery, and visualize various outcomes, imagining myself reacting with equanimity to whatever happens. I know I will feel some fear but by preparing my mind ahead of time, it shouldn’t be unmanageable.
And a few other activities
Also on this week’s schedule:
- Father’s Day brunch with my dad at his senior living place today.
- Delivering one of my paintings for an art show
- Get an oil change
- Caring for the critters
- Keep up with home and garden tasks – probably need to focus on getting a bunch done before surgery day, like mowing the lawn and vacuuming/mopping floors
I’ll wrap up with Hougaard’s life mantra that he shares in every presentation he gives:
Control your mind – control your future.