Measuring What Matters
Those new to trading are looking for a way to become consistently profitable traders. Veteran traders at all levels are interested in increasing trading profits and decreasing trading losses.
Measuring the things that matter to your trading bottom line and using that information to make steady, incremental changes can mean the difference between a long fulfilling career or side gig trading the markets with grace and confidence, or slowly bleeding out or even flaming out yet another margin account - and perhaps quitting for good.
If we are going to Measure what Matters, it is critical to know what matters to you.
What matters to us at Mind Muscles isn’t as important. What your friends and community care about isn’t as important. Let's take a look at what issues matter to many independent traders and which of these problems negatively impact your profits or stop you from achieving the success you want.
Which of these trading experiences are negatively impacting your trading the most?
Now, let’s look at the other side of the ledger. If you recognize any of these goals or desired outcomes, which matter the most to you?
The question now is, how do we get from there to here?
We have discovered a great deal from decades of research on the impact of metrics and measuring what matters.
To start this conversation, I want to tell you my own story about measuring what matters.
A tall, skinny philosophy major walked out onto the trading floor of the Chicago Mercantile Exchange for the very first time. He looked around, saw the energy, the millions of dollars whizzing back and forth with just hand signals, and knew he had found his home. His job was to trade S&P futures to hedge option delta risk for a privately held options trading firm.
That’s right, me, Rich Friesen, the very first time I walked on to a trading floor was not as a clerk learning to trade, but as a trader, trading real money. I had no real experience as a trader, and I had just been hired by CRT - Chicago Research and Trading, founded by my college buddy Joe Ritchie. No pressure! (You can read about Joe the “New Market Wizards” book).
But for me, it wasn’t a quick trip to the bank.
My first trainer in the S&P options pit said these words…” Rich, you are the worst trainee I have ever had.” As I tell this story about myself, I can still hear his voice as clear as though it happened a few minutes ago. Here I was, in the heart of billions of dollars of money flowing back and forth…so close...so close…and to hear those words crushed my hopes and dreams.
That feeling may be familiar to some of you, also.
I managed to survive that withering criticism and opened a trading operation for CRT on the options floor of the Pacific Exchange.
When I started trading on the options floor of the PSE, I was lost.
There were so many things to learn and it was difficult to know what mattered. It seemed at first that EVERYTHING mattered and I would never learn it all.
However, I understood that as long as I was trying to solve really big complex problems with many variables operating in an ever-changing environment, I would continue to be frustrated and lose confidence, which would shatter my dream of trading success.
But, I thought, what if I could break down the problems into workable sized chunks? Maybe I could handle each issue and make measurable progress.
That is exactly what I did.
Please note the trading cards in my jacket pocket. These cards were given to us by the exchange to help us write down our trades to keep track of our positions.
However, I did something very different.
I kept metrics on everything I did. Every trade I made, every mistake I made, everything I learned to do or not do from observing other traders on the floor. I measured it all.
I ended up with a six inch stack of cards with tiny print on both sides. This stack evolved into an options trading manual that was the Bible for my growing options and equity trading firm, and for training my new traders.
However, we were the outlier.
Many other independent market makers would make or lose money, often in parallel with each other. But some of the time they didn’t have a clear idea where their P&L was coming from, given the many complexities of options trading and large positions.
Many imagined it was their directional calls to satisfy their own egos, but I believe, after decades of observation, most did not know what really mattered, and for sure did not measure it.
In engineering, types of data are called signal (useful information.) and noise (unhelpful carrier information).
The markets are complex adaptive systems with multiple feedback loops that impact millions of participants who in turn impact the market activity. This continually adapting system creates a lot of information, almost all of it irrelevant to active traders.
In trading, real patterns come with a lot of noise also!
These can come from thousands of sources such as unexpected news, margin calls, central government interventions, emotional reactions, a shift of player intentions and just random patterns that are created without the underlying drivers and follow-through.
We can’t control the information, but we can stabilize our brain to filter out the noise
We can then listen to the signals that our powerful pattern-recognizing brain has to offer. When we have clarity about what is signal, then we are able to measure what matters vs. the madness of the markets.
I learned to break down my trades into buckets so I could measure what mattered in each one. As a floor options trading firm, we made and lost money from a number of activities and positions.
For example, although we were option and equity traders, what we were REALLY trading was option implied volatility. As such, we made or lost money on the following:
- Underlying stock directional movement
- Hedging execution costs/errors
- Implied volatility differentials among different strike prices and time to expiration
- Bid / offer spread – buying on the bid, selling on the offer. At that time, believe it or not, we priced options at 3 dollar bid, 3 ¼ offer. For you younger traders, this may seem outrageous, and it was.
- Rise or fall of option implied volatility
- Option decay
- Stock volatility (capturing or losing deltas from stock movement)
- Interest rate changes on the tens of millions we had loaned or borrowed
- Dividend and earnings plays
You don’t have to understand these categories to understand what we were doing. I just want you to be clear, that as managing partner at my firm, I knew as much as can be known about where our profits and losses were coming from on a daily basis. This was a major factor that contributed to ours being one of the most consistently profitable firms on the options floor.
The more precise the metrics we create for ourselves as traders, the our window to reality is.
If we have multiple variable inputs that are all in the same feedback bucket, then our picture of reality becomes muddled. The pattern recognition part of our brain is very powerful when it receives accurate and relevant information to feed and improve our intuition.
Without a clear feedback loop, we will tend to repeat the same trading errors over and over again.
The financial markets provide us an almost infinite number of metrics. It is tempting to organize those metrics in infinite ways. These metrics are very enticing because we can pretend that we are moving towards precision and perfection. But like the siren song in Greek mythology, they lure us away from the metrics that really matter.
This is why we developed the concept of Mind Metrics, which measure what really matters for the independent trader.
The critical questions is, what are the most important metrics that matter?
With decades of experience building a trading firm, training floor traders, personally coaching independent traders, investors, hedge fund managers and entrepreneurs, and reviewing thousands of trader surveys and assessments, we have created a list of the critical metrics that matter for independent traders.
Today we are going to discuss three of the critical metrics.
- The first metric is the foundation of everything else, our mindset or state of mind.
- The next metric is rating our execution consistency.
- The third metric is measuring the progress of our trading behaviors with our behavioral change model.
Once traders create these metrics and bring them into awareness, they become ingrained and incorporated into their trading process and their trading results can change significantly.
Although everyone agrees that successful trading is at least 50%, or even up to 90% psychology, if you say the word “psychology” to many traders it feels like some dark mysterious function. It's treated like the monster in the closet that occasionally rears its ugly head - most of us deal with it by ignoring it and hoping it goes away! For those of you who experience persistent trading mistakes, you know what I'm talking about.
Measuring mindset takes the mystery out of psychology.
How do we do this? We break trading behavior into measurable processes. For example, in order measure our Mindset, we break it out into three categories. Sensations, emotions and thoughts.
I can hear it now. "...but you can’t measure the mind! It is not a computer program! All the measurements self-referential and are so subjective that they can’t be relied on!"
All these objections recognize the challenge of measuring our state of mind. But we manage these challenges because the very act of taking these measurements hones our self-awareness and produces better trading behaviors.
To make this as effective as possible, we break down the mental components into three areas, making it easier for our brains to comprehend and produce consistent results.
Sensations, Emotions and Thoughts
“If You Are Not Measuring Your Mind, You Are Missing the Major Metric.”
Let me repeat, “If You're Not Measuring Your Mind, You Are Missing the Major Metric.” I don't just say this because it sounds good , I say it because it is true. If you take a moment to think about it, this will start to make sense.
When you're trading, you are never trading what you see. You are always trading your interpretation of what you see.
If you want to be able to trust that interpretation, then you need to be able to trust your instrument for interpreting it - your trading mindset. If you are constantly switching frames of mind when trading, then you will always be introducing unknown variables into your performance that create frustrating results.
For example, can you imagine what it would be like to be a carpenter, and the length of the inches or millimeters changed during your working day? You would measure the length of a board that was needed, transfer that measurement to the board to cut it, but in the meantime, the tape itself grew a little bit longer. What would it be like to build a house under those circumstances?
As traders, our platform and tape measure is our mindset.
If our mindset shifts during our trading day, or between days, it is easy to imagine how difficult it is to create consistent profits. One day we are excited about a previously profitable day, and the next day we are depressed about a losing day. With each event, our neural chemicals shift in our brain creating a very different trading platform.
Shifts in our trading platform, our mindset, can be affected by our physiology, our emotional state, and the types of thoughts and stories that we believe.
Since Mindset is a significant component of our trading success, we need to bring it out of the closet and into the open. Once in the open, then we can improve our mindset stability.
Here is an exercise you can do to start measuring your SET scores.
The easiest way to become aware of our mindset is to start with our our physical sensations. This is a great first step, even for people who are not used to self-awareness. For many of us, our physical sensations are out of our awareness most of the time.
A simple exercise is to close your eyes right now, and focus your awareness on your stomach and abdomen.
Just notice the sensations that are coming from there. Notice any tightness, any muscular tension, butterflies in the stomach etc. Don’t change anything, just notice. Do you see how you have signals coming from your body all the time, but we are usually focused elsewhere and simply don’t notice them?
The next phase of growing awareness is to add our emotions. With practice, we can measure our emotional state in real time. As we increase our emotional intelligence and awareness, we can then correlate our emotional state to our trading results.
How are you feeling right now?
Close your eyes for a moment and just notice your emotional state….bored, impatient, eager, depressed, sad, angry, disappointed, hopeful, peaceful, at ease? Some of you may notice very little….others may have a full pallet of emotions they can hear talking in real time.
NOTE: We will go into depth and detail of our model of behavioral change in another article. For now, however, the next important step after becoming aware of your sensations, emotions and thoughts is acceptance without judgement.
No matter what we notice, we accept what we discover with interest and curiosity.
The final fascinating metric is our thoughts. Many of us move through life under the impression that we ARE our thoughts. This belief makes it difficult to be aware of our thoughts as an observer. But again, with practice, it is possible to be an observer of our own thoughts. Once observed, the quality of the thoughts can be measured.
As we monitor and track our S.E.T. scores, we can not only begin to transform the impulses behind our trading mistakes, we also can use the monitoring of our S.E.T. to stop those costly trading mistakes dead in their tracks even if the impulse is triggered.
So, how do we measure our sensations, emotions and thoughts?
We use Mind Muscles S.E.T. Scoring. The score range is from -5 to 0 to +5. The -5 and +5 represents the extremes of energy states.
When we apply this to our sensations, it means:
-5 is a state of low energy.
It is associated with difficulty to initiate movement, slumping, or exhaustion. If you are deathly sick, have a migraine headache and burned the soles of your feet fire walking the previous weekend, feel like you never ever want to get off the couch, haven’t eaten well, are out of shape, are dehydrated, then give yourself a -5.
+5 is a state of hyper energy.
It is associated with jitters, erratic movement, hyper activity, leg bouncing, rapid breathing, jumpiness and quick sudden movements. It is difficult to sit still, eye movement is rapid and you have a need to physically to something.
0 or Zero is the state of physical power and energy reserves.
It represents a healthy body that is well nourished and exercised. It is associated with slow deep breathing, steady movements, energetic responses, stamina, reserve energy, good muscle tone, slow heart rate and low adrenaline reactions.
Applied to the emotional state it means:
-5 indicates a depression, feelings of foreboding.
It is hard to get motivated, and life seems to have run down into a gray nothingness. There is little or no zest for life.
A +5 means you very excited and agitated.
You feel cocky and that you can do anything you set your mind to. Nothing will stop a master of the universe like yourself. You know where the market is going and will be its master. You may be quick to anger
0 or Zero means you are in a state of quiet confidence and peace.
You have no need to trade or not trade. You feel no pressure from inside or outside. You are easily able to focus and be in the flow of the market. You may notice emotions coming and going, and they have no hooks to trigger a reactive response.
When applied to your thoughts it means:
Were you lost in the flow of work? Were you telling yourself a story? Were you listening to an internal critical voice or having a fantasy? Remember, no judgments, just observation. Also, we aren’t trying to change anything at this point.
A -5 means you have critical voices that are questioning
your right to exist, and stories that trigger the worst feelings you can possible have and your nightmares are as dark and they can be. These types of thoughts produce consistently negative experiences, both physically and emotionally.
A +5 means your thoughts are belligerent and righteous.
You have illusions of grandeur and fantasies of your wildest dreams. You are going to show the market who is boss.
A 0 or Zero means your thoughts or stories are neutral and making no demands on you.
There are no stories being generated that trigger positive or negative emotions. You are aware of the quality of your thoughts, and you can let them come and go as they please.
So, let’s put this all together with our SET Scores.
Now imagine how powerful it would be for you to have this information in real time while you were trading. Do you think if you had a rule that stopped you from trading whenever you were outside of your most productive range, it would stop you from making mistakes? Do you think that if you learned to use your S.E.T. score to identify emotional triggers before they take over, that it could improve your profitability?
Well I can tell you as a fact, that is exactly what we see happen, time after time in our Boot Camp and private coaching.
Here is an example from a real trader in one of our Boot Camps. Do you see the correlation between the state of mind and the P&L? The top line is the combined S.E.T. score using our algorithm, the bottom line is the net P&L and the one up from the bottom is the percentage of trades adhering to your plan.
Do you see how green SET scores produce more profits than the yellow SET scores? Do you see how green set scores result in traders doing a better job following their plan?
Measuring our Mindset Matters. It matters a lot. And this is just the start.
The next measurement of what matters is our execution. At Mind Muscles, our traders can experience 100% of their trades as lucrative. How do they do this?
We will be covering this concept in our next installment. Stay tuned!
In the meantime, if you'd like to establish your current state, please do the Trader Assessment that we include in all our core Mind Muscles trading courses. It's free, and you can use it as many times as you like to track your progress.
Can't wait for the next installment? Go here to get access to the full S.E.T exercise on our education portal. Use code LEELOOSET to get access at no charge.
Stop Fighting Your Brain!
Repeating the same unprofitable behaviors over and over will continue to give you the same unprofitable results.
We can help you change the relationship you have with your trading, and the results you're getting as a consequence.
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