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The Abundant Trading Framework

We're going to need more tequila

We're going to need more tequila

Scarcity vs. Abundance

I've been thinking a lot about trading psychology and developing mental frameworks from which to trade and do business. There are plenty of self help books and seminars where you can shell out cash in exchange for some new age cliches, but it really comes down to two concepts: scarcity and abundance.

A framework of scarcity implies that there is a fixed amount of wealth in this world, and in order for you to get yours, someone else has to take a hit. Scarcity means it's a dog-eat-dog world and you have to look out for yourself.

A framework of abundance means that wealth in the world can grow, through relationships. technology development, or other factors. There is no negative energy towards the accumulation of wealth, as you are helping to create value.

Now financial speculation can seem to be zero sum, but that theory has been debunked by others -- essentially, the skills that you develop in the financial arena will carry over into other aspects of your life.

Stop Getting Screwed

The target of a trader's ire will slowly change over the years. It used to be analysts, then it moved on to be hedge funds, and now it's high frequency trading. Regardless of the threat, you will often hear complaints about how they are cornering the market or running on stops. These are simply excuses for the trader or investor to see drawdowns in their accounts and not accepting responsibility.

The question then is: if these threats are so obvious, why haven't you adjusted your strategies to account for them? For example, if you think the evil hedge funds are going to run stops below a critical support level, only for it to reverse higher, why not add 2b reversals into your trading setups? Another idea-- if the NY Fed's POMO money flood is so obvious, why not just follow the money in?

While these threats are real and need to be addressed when trading, it's damaging to your psyche as it reinforces a concept of scarcity, of a fixed amount of money in the world that you'll never have. That is definitely not the right way to go into your trading.

Developing Your Trading Outlook

So how does someone create a mental framework of abundance? I'm not a psychologist so I don't have any huge insights. But I can tell you what does work for me:

Check Your Inputs: What do you consume during the course of the day? Do you read blogs or news that have a negative outlook on the world? While it is important looking for potential economic headwinds, it is not necessary to constantly dwell on it. Thinking every day about commercial real estate is the "next leg down" will not help you with short term trading.

Check Your Relationships: The concept that misery loves company certainly holds true. How do the people you associate with act? Are they a nation of whiners, or do they foster a positive atmosphere, looking for ways to create wealth?

Meditation and Visualization: There's a saying: act as the person who you want to be-- and this certainly applies as a trader. If you visualize yourself on your platform, do you see yourself constantly cursing at the screen about how you got stopped out by 1 tick and it reversed higher? Or do you see a confidence about you as you execute your trading plans? If you sit and think about how you want to perform under very specific conditions, you will improve. You can see a great example by @ppearlman here.

It's In Your Control

Let's say I found the Holy Grail of trading-- a discretionary system that guaranteed profitability with a 70% win rate and stellar returns. If I gave this system out to 1000 people, I would say about 300 would lose money trading it. That is because there is so much more to making money in the markets other than the system. So while we seek to reduce risk and improve profitability from our external trading systems, perhaps we need to focus more attention to our internal systems.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/