PRESS THE EDGE
Every edge is important and exponentially adds to the one before, but the emotional edge is the one that opens the door to optimal performance and leads to other, softer, expansive edges.
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A Word from the King
I recently talked about the challenges of managing emotions in trading and investing, which prompted one of The Mad King's subscribers, John Burns, to reach out for a deeper conversation on the topic.
John, an experienced trader who also provides consultancy and coaching to professional athletes, C-suite executives, and risk-takers, brought valuable insights to our discussion.
I invited John to contribute a guest article for our January edition. He did, and I found it quite intriguing.
If you also find it engaging and wish to explore the topic even further, John's contact details can be found below.
Author’s Bio
John Burns spent 17+ years trading feeder cattle options on the floor of the Chicago Mercantile Exchange, then spent another 10 years involved with various technical, mechanical, and algorithmic trading systems. He still trades stocks and ETFs and the occasional option.
John has been a consultant and coach with the ReThink Group since 2016. He considers it a sacred honour to work with clients. Clients have included risk-takers (in all areas of trading and investing), C-Suite executives, professional athletes, and many others in a multitude of careers. John continues to learn and hone his craft by working towards a master’s degree in modern psychoanalysis via a remote program affiliated with the Boston Graduate School of Psychoanalysis.
Follow him on LinkedIn and Twitter.
Press The Edge - By John Burns
“What!?!?!” I yell at one of the three brokers in my pit asking for markets.
“August 80 puts,” he repeats.
“70-90,” I yell back, while moving on to the next broker.
“Sep 100 calls; what’s here?”
After a quick check of the futures price, I respond “110-125”.
Now I focus on the next broker – “Jan 70 puts”.
I start with “40” but am interrupted when I hear broker 1 yelling “August 80 puts at 70 – hey knucklehead, I bid 70; buy em!”
“What’s your deal? You know I was 70 bid; why would you offer 70!?!”
He responds with derision that he asked and got a 60 bid back.
Well, the ‘with’ guys get a little out of line when the real market makers aren’t paying attention. Turning to the other locals: “What the f***, you knew I was 70 bid! Are you guys slow, or what? Trying to steal a trade while I’m looking somewhere else!” “SOLD Sep 100 Calls at 115!”
Shoot, the futures are diving and I need to hedge these options. I look at where the futures are now – down 100 on the day, I have another 20 shorts in August due to gamma, and I’m long 6 Sep for the same reason.
“Hey, YO, PAY ATTENTION!” I yell and use hand signals to get my clerk to buy 30 August futures and sell 2 Sep to hedge both my trades and my position gamma.
“Filled?” I signal and yell to my clerk in the futures pit – “AM I FILLED OR WHAT!?!?!”
He signals back that I am filled. “HERE, HERE!” I get his attention to take my option cards that are full of trades to run me an update to see where my position is.
At this point, the fire alarm goes off. I am still making markets and lifting resting orders as the futures plunge. I look around and think there is no way I am leaving this floor right now; it is way too busy.
I notice nobody else seems to be making their way to the exits. However, after about 5 minutes of hearing the fire alarm beep, we all start looking toward the doors to see if security is going to rush in to force us off the floor. I remember yelling, “The only way I’m leaving is if you come and get me” to some laughs and smirks from the rest of the pit.
Even at that moment, I thought, “Well, this is a bit extreme”.
The good old days
One of the many glorious, amazing things about trading on the floor was the ability to yell and scream whenever needed. It was one of the only places where yelling was encouraged and aggression was rewarded. I was able to feel any feeling and vent it by yelling at someone or to the universe as soon as it was felt. By the way, in that chaotic environment, no one batted an eye or thought this behaviour was out of line or crazy. Thinking that an emotional outburst was strange was like seeing someone throw a paper away in a trash can. For those who don’t know, on Chicago trading floors, paper was simply dropped on the floor to be cleaned up later. I know it sounds strange, but it made perfect sense at the time.
As my market started to change due to changes in pricing and having different players come into the market, I made a move to trade some products off the floor. YIKES, what a difference! One of my edges on the floor was aggression and feeling the fear, greed, and angst coming up inside myself but also oozing off the people around me in the pit. Off the floor it felt like an abyss. Not only was there a lack of feeling, it was also QUIET! I sat next to a couple of guys who couldn’t control the urge to yell, and when they did it felt much different to similar situations on the floor. Off the floor, in the office, my reaction was “Dude, chill out.” The aggression – mine and others’ – went from feeling like home to a feeling of exile and scorn.
This was a difficult transition, during which I traded mechanical and discretionary systems, trading 25 or so futures markets. Trading went from an all-in fun, exciting game to a placid, boring waiting game. During this stretch in my career, I learned that I can follow a system and learn to take all the trades the system presents. Said another way, when faced with a string of losing trades that the backtest predicted, I could continue to stick with the system. I remember sitting with my risk manager explaining that this was to be expected, but it certainly wasn’t fun.
He told me that if it didn’t turn around in the next few weeks, we were going to have to discuss what to do. Fortunately, as predicted, the system delivered a period of outperformance.
It was during this time that I started to work with a few technical and mental coaches to try to help me figure out what my trading style was. The notion that there are an infinite number of ways to make money kept coming back to me, haunting me, since besides the mechanical system I was having trouble getting traction with my trading.
During my trading career, I would often turn back to the idea of stackable edges. My first edge was my market-making speed, followed by my ability to set up black swan positions before that idea was popularised. I then looked at my fitness and hired a trainer to make sure my body could handle the stress and physicality of trading on the floor. The next edge I looked to stack was my diet. Each edge up the stack was working on a more nuanced component of my trading system, since I feel that the whole being is a part of the trading system.
Stackable edges build on the ones before. With the first few being foundational and focused on the mechanical and technical aspects of the craft. Without a system or framework for trading that has a positive expectancy and is repeatable, the emotional edge adds little value to trading. Without robust risk management, the interpersonal edge is less valuable. Another aspect of this framework is that it starts with the intellectual part of trading and then progresses to a more nuanced emotional side of things. The focus goes from the brain to the mind. From the realm of the intellectual to the expansive vastness of the emotional. When we embrace and use our emotions, it opens up access to so much information from the past, as well as information contained in the subconscious.
As we stack these edges, our growth can be exponential, like we experienced when we found a framework for our trading that worked. When the emotional edge is added, we open the door to optimal performance. I think of optimal performance as the ability to incrementally and sustainably improve all outcomes, raising both poor and already great performances.
Edge – an advantage, or opportunity.
Here are some edges, with a quick discussion and questions to think about.
Trading edge – Having a framework or system that has a clear process for organising market information. An understanding of when a trade is entered, the checkpoints in the lifecycle of the trade, and exit and stop criteria. Being able to repeat the process consistently over time.
What is your trading edge? Can it be stated in a couple of sentences?
Risk management edge – Understanding risk on a trade-by-trade basis as well as on a portfolio basis. Being aware of return structure, how many losers in a row can be expected, average gain vs. average loss, and account impact if/when correlations go to one.
What is your risk management edge? Are there hard stops, idea stops, or mental stops? What % of the total account value is the initial risk? How much of your risk threshold is allotted to each idea? Is risk standardised or does it float based on conviction?
Physical edge – In addition to offering the benefits of helping us feel and look good, movement can help alleviate stress as well as create a reserve to tolerate stress. Physical challenges also open the door to understanding our internal selves. What is the story that comes up when movement becomes difficult? At times, this can be a bridge to the emotional edge.
Is there enough movement in your life? Is there a physical activity where time fades away?
Emotional edge – The ability to be in touch with the feelings that flow through us. Emotions are valuable decision-making tools. Our emotions are information, and when they are used as such, they flow through us like a breeze. Problems come when we try to ignore or change the emotional information being presented. Emotions have a kind of energy that dissipates when we take the information; but if the information isn’t taken, energy builds up and eventually comes out – the proverbial straw that breaks the camel's back.
We become incensed about something that wasn’t that big of a deal. Or, more problematic for our P/L, we try to use the market to vent the unwanted emotion. The good news is that once we start to embrace the information that emotions give, we become more able to understand our emotional patterns. Understanding our emotional patterns allows the discovery of moments when those patterns present themselves alongside patterns in the market, enabling the use of our emotions to improve our trading. An important point to remember is that emotions don’t have to equal action. We can feel angry without having to act out or fearful without having to freeze. Emotions are simply information our brain is trying to tell us for our benefit.
What are your go-to emotions? How many emotions/feelings can be named? What emotions are helpful in trading? Are there any patterns in your emotions? Are there emotions that consistently come up when entering or at a decision point in an open trade, or when exiting a trade?
Intuitive edge – Once there has been some progress understanding what emotions are coming up, it creates the opportunity to engage the intuitive edge. That is the ability to use our unconscious pattern recognition or internalised, felt knowledge to enhance our trading. The distant whisper that “says” it’s time to get out of this trade or add to an existing trade. Intuition comes, and if it isn’t validated immediately it moves on. It’s like a dream that we can feel but are unable to reconstruct, even though we just had it. It can come when we are doing things that occupy our minds but that don’t take up a lot of brain power – the idea or solution that comes while we’re taking a shower, for example. When developed, it is often associated with a consistent body sensation. This is a very nuanced process and very interesting, since traders with less experience grab onto this idea like a shiny new toy while experienced traders seem to be a little dubious about this edge. BE CAREFUL WITH YOUR PERCEPTION AND USE OF THIS EDGE!
Are there market moments that bring up a “feeling” of understanding? Is the feeling associated with any feeling in your body? When speaking to management, are there times when something doesn’t sound or feel right that then plays out in the market? Great keep track of those before trying to use them.
Interpersonal edge – This is the use of patterns of decision-making when interacting with another person. Every time the risk manager comes to ask about a position, I know it is about ending the pain. Or, the proverbial mush at the horse track who is sure to lose: If you hear him cheering for your horse, you know the horse has no chance.
Is there an interaction that is consistent enough to observe over time? Patterns emerge over time, and the only way to know which are signals and which are noise is to track them.
Experience edge – This is about having someone who has travelled a little further down the career and life path to help us make the most of our mistakes.
Is there someone who is helping create a vision of the future in your life?
Outside the bottle edge – A person outside the bottle of our experience can help us read the label. It’s a trusted source who can help us discover blind spots in both our craft and our interpersonal relationships. This person can join with and understand our point of view. They can ask outstanding questions since they understand our craft but also understand how to get the most from us. A coach can help us develop the edge that opens the door to optimal performance and the emotional edge, and then hone all the edges that come after and build from the emotional edge.
Is there a person in your life who understands your craft and can help work through challenges in both craft and life?
These are some examples of edges that I have thought about and used over time.
The further along the list of edges above, the more nuanced and involved they become. I think that each one stacks on top of the previous ones to ensure our progression up the optimal performance curve. There are two levels of foundational edges in the above structure. The first is a repeatable framework and risk structure, and then there is another foundation at the emotional edge level. The first gets us in the game at the science level, while the second moves us into the art realm. I am not a big Star Wars guy, but this seems an appropriate analogy. As we move up the edge structure, we go from being a young Luke Skywalker to the sage Yoda. Who doesn’t love Yoda?
I have experienced, and seen in myself as well as with my clients, that as we stack edges the total edge increases exponentially, supercharging performance. These are by no means the only or the “right” edges for everyone; and after the foundation of trading and risk edges and the foundation of the emotional edge are established, they may stack up in a different order from person to person. Edges are interconnected, and once they are developed they create reinforcing positive feedback loops.
It’s the feedback loops that include information from both the brain and the mind that bring in data points that always, without question, improve performance.
Back to our opening story
In retrospect, an interesting thing happened as I continued trading off the floor. With the social mores against screaming like a lunatic when the emotional pressure becomes too much, my world shrank from my whole being to just my brain. Without the ability to vent the emotional energy that is inherent in trading, my experience of trading drastically changed. It went from something that flowed through me and used all of my brain, mind, body, and emotions to an intellectual puzzle contained in my brain.
It went from feeling expansive to very small. The chatter in my mind went WAY up. The brain craves certainty; so when trading becomes intellectual, our brains begin to demand certainty on an almost constant basis – constantly questioning, begging for answers, totally unsure, and completely dependent on the direction of the last tick. It was mentally draining and I felt exhausted at the end of these days. I also put much more time and effort into this intellectual approach in an attempt to find some control in what felt like a chaotic environment. I felt like I lost any edge.
Fascinatingly, as I started to be able to recognize and name my emotions, I was able to vent those feelings without having to yell or act out. What a freeing feeling! But more importantly, it gave me the clarity to use emotions effectively; and since it was a stackable edge, there was an increase in P/L since there was less acting out in the market to vent uncomfortable feelings. As I continued to develop my emotional edge, the chatter in my mind went way down.
Since I was recognizing my emotions more quickly and fully, the energy was vented naturally and there was no need to store up and expand feelings. This edge opened the door to using all of myself again. I was able to feel what was going on in a mental, physical, and emotional way, which engaged all aspects of myself again. It was no longer solely an intellectual pursuit. The emotional edge was the answer I was looking for when intense emotions came up during the uncertainty of trading. This is true for me and for anyone looking to reach optimal performance in high-pressure, high-consequence professions.
Every edge is important and exponentially adds to the one before, but the emotional edge is the one that opens the door to optimal performance and leads to other, softer, expansive edges.
The emotional edge and edges that open due to it are THE competitive advantage. To paraphrase Charlie Munger, if you want the same results as everyone else, do what they are doing; if you want optimal performance, it takes doing something different.
The emotional edge is the linchpin for long-term optimal performance. Now, as a performance coach for traders, PMs, analysts, C-suite executives, and professional athletes, I have seen firsthand how focused, dedicated work in this space can make a tangible difference. It requires an “OPT-IN” mentality, since hearing what is on the label of our bottle from the outside can be difficult and cause some growing pains. But, by keeping on the path, I have seen growth in confidence, quality of decision-making, movement up the optimal performance curve, and increased enjoyment of both craft and life.
It’s in understanding the edges that need to be stacked for you, that everything becomes right-sized, especially in regards to emotions.
What was once a one-dimensional struggle has the potential to become a multidimensional endeavour that rewards the process and the outcome alike. Isn’t that something we all long for in both craft and life?
a quick anecdote, when I was trading FX options back in the mid-80's as the market was just beginning, I distinctly remember times when I felt completely in tune with the market. I used to joke I would sit down in the morning, plug myself in and start trading. during those periods, profits flowed as the market movement was almost visceral to me. alas, that was not always the case and the key to any success I had was to recognize I had lost the flow and stop trading. all of those edges faded. the sooner I stopped, the better things turned out, but it was a very touchy-feely idea.