Superstition

[22/09/26]

Not trading strategy - refraining from adding to risk, as I want to see how the dust settles after yesterday’s US equity rally before adding to USD shorts. Current outstanding risk:
- Long NZDUSD 0.5769 [14/09/26]
- Short USDJPY 157.82 [18/90/26]
- Long 1m 1.23 AUDNZD puts [16/90/26]

Instead, psychology. Also, not a Stevie Wonder reference, for anyone following the Toto reference last week.

From 2019-2022, I would walk home from my office in Canary Wharf (1hr45min instead of a 20min tube ride) whenever I had a bad day at work. I would try to walk a different way each time. Sometimes this was once a month, sometimes it was twice a week.
Define bad… The parameters I set for myself were either a ‘month-ruining’ day in USD terms (call it a 2 standard deviation daily loss, i.e. if your ‘normal’ daily P/L expectation would be within the range of -$50k>X>+$150k and this normal curve is defined by 1 standard deviation (σ) capturing 68% of trading days, your mean P/L or EV(X) would be +$50k, your σ would be $100k therefore a daily print of -$150k, for example, would be -$200k from your EV thus defined as a negative 2 standard deviation day or a Z score of 2) or a less-quantitively ‘bad day’ where I had made an awful trading decision, hedged a client flow terribly or performed poorly on a customer call - ultimately disappointed myself first, then my management.

On the surface, this sounds quite superstitious and negatively reinforcing. Self-flagellation upon unlucky outcome. I don’t think it’s the case. Luck can factor into trading as weekend ‘gap’ risk, black-swan headlines or severe market liquidity breakage when running open positions, when the moves I talk of are entirely unrelated to original trade thesis and plan/risks, but generally speaking, on the assumption I had 90%+ control of my trading outcomes and that the non-monetary parameters were not at all luck related and entirely behavioral, I think of this technique more as a deterrent to encourage prohibitive action intraday as my day deteriorated, or to at the very least provide time for forced reflection and completion of the pain cycle. Part guardrail, part ‘don’t let it get that far, it will mess up your evening’. I don’t know if it was related to gamifying something or to self encouragement, but it is something that I have continued in various forms.

There isn’t a huge difference between this (rather funny, in hindsight) behavior and the event marked in red ink, following the downward yellow slope, in the Drawdown Management article from earlier this year. The end goal was me trying to manage my own psychology and to manage the achievement of my market-making and alpha-generating joint P/L goal, within a corporate structure. This technique worked for me as although it was a fairly extraordinary measure, it made me loss-conscious and loss-averse. I am not a psychology expert, but I would imagine that if someone wanted help stopping smoking and sought professional advice, said advice would correspond to their individual personality, their day-to-day routine and their mental make-up.

The way I see trading - and I think this should already be clear from my other articles - outside of the necessary deep thought and researched required to generate the ideas, it is almost entirely about psychological control and overcoming human biases. Your edge can be simple risk management, which can be achieved by having better control over your entirely human psychological foibles than your competitors or peers do. Stopping succumbing to these biases (adding to losers, cutting trades too slowly, changing plan mid-trade, flipping view too often, anchoring/recency bias) could be viewed as stopping smoking, or abandoning other vices that feel innate and are hard to shift. I think the most important thing in trading is to trade a product, a strategy and a style that suits your personality. This will ensure success and at the bare minimum, enjoyment, if you trade for a long time. If you’re risk averse, selling vol is a no-no. If you’re naturally cynical and contrarian, fading may be for you. If you value instant gratification, more tactical macro trading may be for you, as opposed to event-driven equities or long-term project-based outcomes. If you’re introverted and prefer solo data-driven path, it’s quant research and automated trading.

The takeaway? Figuring out your own psychology and personality can help you self-prescribe unique fixes to the repeat flaws you notice in your trading. In 2019 I took a couple of free online personality tests. My own personal result was that I was personality type INT-J. I also curiously took a test designed to determine what sort of ‘gamer’ I was, and that outcome was ‘easter egg hunter’. This last realisation struck a cord, as I tried to change my daily strategy to intertwine with the results. A pat on the back from a boss after a good day was worth far more to me than a year-end bonus. Recognition for performance was the easter-egg I worked for, whatever the format, and that also manifested into my trading. Buying low-delta options, treasure-hunting as opposed to value-hunting, sticking with a view for too long hoping every strong view was the year-maker and sometimes mistakenly ‘betting the farm’. I needed guardrails and have continued to work on this, however going to greater lengths to manage my downside via long walks home, as opposed to symmetrically pushing for, encouraging or rewarding my P&L ‘up’ days, was the method that worked and continues to work for me.

My realisation after years of trying to fix my own psychological flaws is that the above technique is very inefficient. For me, it took enormous amounts of time out of my evenings when it was warranted, and I eventually didn’t need the entire 1hr45min to ‘stop hurting’ and again have a clear head, ready to go to work. I still adopt the same core approach, but I have shifted it to a more symmetrical, more time efficient and a less negative method now that I trade entirely alone. Instead, I will not allow myself my daily run between 12:00-12:30pm if I have a bad day beforehand. I’ve also tightened the definition of ‘bad’, even in relative $ terms to my new much smaller set-up, to enhance the control. The result is the same - I want to run, so I control my downside. The pat on the back now has to be a self-adminstered one, if the day, month or year goes well!