April 25, 2021


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Below is an interview I had with Darren Pallatina from Decision of Power. Darren picked my brain on trading, markets, and trading psychology.

I hope you find it insightful.

Transcript

What was your life like before you started trading and psychology?

I don’t have a glorious background pre-trading. Grew up very poor with a single mother. She had four of us at the time. She didn’t work, so we lived on welfare, food stamps, and all of that.

And since I didn’t do well at school because of a learning difficulty and the constant family dramas at home, I didn’t amount to much later in my professional life. I just took little jobs here and there.

I also have a congenital stutter and was chronically unemployed most of the time.

That’s my background in a nutshell. Again, it’s not a glorious background, but I wouldn’t change it because it made me who I am today.

You have been a trader since 2006, what was it that most attracted you to trading?

I began trading full-time in 06, but my first experience with the market was in high school years earlier—97-98 I believe.

One day, during the recess, I went to the library like I always did, not because I loved reading but because the library was a place where I could be away from the schoolyard bullying—my speech impediment made me an easy target.

One day, while looking through the library shelves, I stumbled upon a book that, looking back, had a major influence on me.

The book was Nicolas Darvas’s classic How I Made 2 million dollars in the Stock Market.

I don’t know how it made its way to the school library. It was in such poor condition, and I don’t know why I grabbed it, but I did. Feels like a fantastical story right out of a movie…. I know…

Long story short, I began reading the book, one or two pages every day, and I became fascinated by Darvas’ life and the success he had achieved in the market. I wanted to replicate it. That’s how I got interested in trading, initially.

Fortunately, I’m no longer poor. I say this with utmost humility. As a trader, I’ve done very well for myself especially given my background. And that’s exactly what attracted me to the market—right from the start, I understood that if I mastered trading, I would be able to lift myself out of poverty.

One of the most critical issues facing the world today is the wealth gap. But thanks to the internet and the democratization of things like trading and investing, the disparity between the haves and the have-nots can be reduced in a way that has never been possible before.

I find that very appealing.

Trading mindset is perhaps one of the most overlooked aspects to successful trading. When did you realize the importance of it? What was it that made you realize?

My failures made me realize it. In 06, I was able to save about 100k from various little jobs I took over the years. That same year, I took that amount, put it in a trading account, and began trading full time.

Like most traders, I started trading using my full discretion. But I quickly found out that this wasn’t working out and began understanding the importance of having a system. So, I went through a period of ‘system chasing’ and ‘system hopping’, until I eventually developed my own.

Initially, I did make money here and there, but I almost always ended up giving back those profits to the market—and more.

I was just too emotionally invested in my trades. Every trade was an emotional rollercoaster: Winning trades would give me a buzz, losing trades would make me depressed. I could never summon enough patience to wait for my trades, or to let them work without compulsively tweaking them. That was my ultimate predicament.

Market success seemed so elusive… so esoteric…so close, yet so out of reach.

I was desperately looking for external solutions when my issues were really internal. And for the longest time, I wasn’t even aware of that. But eventually, it became more and became apparent to me, and that’s when my whole journey towards self-discovery started.

When did you decide to study trading psychology and what made you want to pursue it as a career?

After my struggles in trading, I took a long break and went on a self-discovery journey. I had the chance to study meditation with quite a few renowned meditation teachers, in different traditions, both in the East and the West.

This experience had a profound impact on me. It changed the way I think about myself, my life, and its circumstances.

On this journey, I also had plenty of time to think about the market and reflect on my failures as a trader.

Later, I came back to my “normal life” and began trading again. With the self-knowledge I had gained, and the newfound maturity in how I deal with my emotions, trading was now a completely different experience—like night and day different.

At some point along the way, I decided to get certified as a meditation instructor. As my trading performance kept improving, I decided I wanted to share my thoughts online. And that’s how my work at Trading Composure started. All in all, it was an organic process of wanting to share what I learned.

In your experience working with traders, what are the 3 most common issues a trader faces that impact their trading psychology?

1. They Have Trouble Accepting Losses.

That’s a big one. And fair enough… taking losses is never easy, no matter who you are. I’ve been trading for well over 14 years now and I still feel uncomfortable when I take a loss. But I’ve learned to understand that it’s part of the process.

2. Ego.

I’ve experienced moments in my trading career when I made 50-100k in one sitting. Immediately when that happens, you start to think that you’re on top of the world, you start to think that you’re the chosen one. From that point, the ego starts to take the driver’s seat and you do stupid things.

But eventually, you get humbled. To paraphrase Mike Tyson, life visits humbleness upon you. In this case, it’s the market.

3. They Have Trouble with Discipline.

Discipline means adopting a kind of behavioral consistency that is independent of the kind of day you had yesterday and the kind of day you expect today. Most people have trouble with that.

And because of that, they have trouble sticking to a diet, working out, reading, or meditating … it’s the story of humankind. Our short-term oriented thinking—the so-called lizard brain, or old brain—is very compelling since it’s all about immediacy and getting away from discomfort now, no matter the cost.

What would you say is the least important aspect of becoming a successful trader?

It’s the analysis. But paradoxically that’s where most people spend the most amount of time.

You could make money in the market with a simple moving average, an asymmetric risk-reward profile, and behavioral consistency.

But most people don’t want to hear that. It sounds too simple to be true. And it’s quite frankly boring as well. People don’t like boring. They want action. They want to feel like they’re accomplishing something significant, so they spend countless hours doing analysis, weighing the pros and cons, building a case for this or that…

Of course, there’s nothing wrong with that and you can certainly be very successful doing that. But again, you can as well be very successful with a simple moving average.

At the end of that day, people have an idea of how things are supposed to be, and they pursue that. And that’s fine. I always say do what makes you happy.

I use meditation as part of my daily process. It’s helped me a lot to lower the feeling of anxiety in my trading.

As a meditation coach, do you have any tools that you use to “prepare”/”calm” the mind before trading, or after, to wind down?

I’ve created a Youtube channel specifically dedicated to that. There, traders can find short trading psychology lessons and different meditations for different situations and circumstances.

My mission is to help traders develop an awareness of their inner lives by introducing them to the practice without the fluff and any religious connotations—so, no collision with one’s own religious beliefs.

I don’t pretend meditation is the be-all, end-all solution to everything. And of course, there are other ways to develop an awareness of one’s inner life. For instance, writing is a great alternative. Long solo walks as well.

But it just so happens that I like meditation more because it’s greatly impacted my own life. You’re actually practicing qualities like patience and equanimity on purpose. I find that very powerful.

That aside, I’m very happy to hear that meditation has helped you as well.

Tell us about your pre-trading routine. Do you have a weekly process as well as a daily one?

My pre-trading routine has varied a lot over the years. It never stays the same; it changes depending on the circumstances in my life.

But one thing that has rarely changed is my first-hour routine.

Here’s what I’ve been doing for the past 6-7 years, with only minor changes here and there.

1. I Wake Up Early.

I’m a morning person. I like to go to bed early and wake up early. The reason is that I value my sleep, and I also find that I’m more relaxed and productive in the morning.

2. Right After I Wake Up, I Think Positive Thoughts.

What typically gets us out of bed are our thoughts about what we need to do, worries, anxiety, and so on. It’s rarely positive, empowering thoughts. So when I wake up and my mind slowly gathers, I do exactly that: I immediately think of how a privilege it is to be alive, to be in good health, and to be doing what I love.

I do this to sort of disrupt my automatic life patterns and tendencies.

Although I don’t always succeed at doing this (sometimes the worries and anxieties sneak up on me), the next exercise usually helps to calm and center my mind.

3. I Do A 20-30-Minute Meditation.

When I get out of bed, immediately I’ll have a glass of water, I’ll turn on the coffee machine, and then, I’ll go meditate for 20-30 minutes as the lovely smell of coffee spreads throughout the house and tickles my senses.

4. I Write in My Journal.

When I’m done with my meditation, I’ll put some soothing coffee shop tunes from Spotify in the background, I’ll grab my coffee, turn on my computers, and while everything is loading, I’ll scribble in my journal 3 things that I feel grateful for in this moment.

Then, I’ll glance over the news briefly and I’ll proceed to write down my thoughts and feelings about certain trades I have on (or that I’m looking to initiate); I’ll also write about what the market does that surprised me, and what this tells me.

This act of writing down my thoughts about my trades, my behavior, and the market, takes me less than 10 minutes, but it helps me gather insight while continuously shepherding my behavior in the right direction.

5. I Review My Action Plan For The Day.

I look at my plan; I’ll look at my levels… pretty straightforward.

So this is my lovely first-hour morning routine. After that first hour, I’m then free to check emails, Twitter, and get on with the rest of my day.

I have to say, I derive a lot of pleasure from doing things this way. Nobody bothers me during that hour. I’m with myself and I cherish that moment a lot.

Can you give us a brief overview about your own trading system. Do you have rules? What method do you use to analyse the markets? (Patterns, fibs, indicators, trendlines?)

Sure. First, I think it’s important to explain my views on the nature of financial markets because this greatly informs the way I choose to approach them and strategize within them.

People are free to agree or disagree, but this is how I view things: I believe that long-term trends and cycles are broadly predictable. But I also believe that as you zoom in on the lower time frames—like the intraday and even the daily—the more noise there is, which makes predicting the outcome of your next trade very difficult, essentially a random proposition, or very close to one.

A good metaphor is the difference between the weather and the seasons. The weather is hardly predictable, but seasons are. In my view markets are just like that. The short-term action is like the weather. And the larger trends and long-term cycles are like seasons. 

You might not know with certainty what the weather will be this afternoon or tomorrow, or next week, but you know when the seasons start and end and what they bring broadly.

That’s exactly how I view this.

Again, not everyone will agree with this view. Some people believe that the market is predictable in the short term and that their analysis tells them with a high probability if this or that trade will be a winner. They’ll point to the order flow and volume analysis, and this or that technical chart pattern…

I mean… if that’s their belief and method and it’s working for them, then that’s all that matters. I appreciate diversity of thought and methods. But that has not been my experience. It’s not what I’ve observed in my own trading. What I’ve observed is that short-term forecasting is very difficult and short-term outcomes are typically randomly distributed.

And it’s not something that I woke up one day and decided upon. I’ve really thought carefully about it. I’ve literally been in thousands of trades in the 14+ years I’ve been in this business, and this is the conclusion I’ve arrived at.

Now, given those views, I have found that a combined approach to trading—wherein I assess the long-term trend and cycle using discretionary means while keeping my trade entry and exit systematic—works for me. So, that’s what I use.

I look at charts and use my knowledge of fundamental analysis, of the global macro-economic forces that shape markets, and of human psychology to determine the overall direction of my trades. And then, I use hard rules to execute those trades systematically.

I trade three strategies, one based on the weekly chart, one based on the 30-minute chart, and the last one is sort of a value investing approach where I scoop up things when they’ve dropped in price, in a bear market, for instance. All of these strategies are based on the macro trend, even the 30-minute one. And they all have an asymmetric risk-reward bent.

How do you control your emotions (fear, greed and excitement) during your trading period?

I don’t seek to control anything. That’s the thing. Amid a strong emotion, I just connect to the awareness function of my mind. I let the thoughts and emotion free flow and I simply observe it all from a spectator’s point of view.

And overall, I cultivate a friendly attitude towards whatever it is that I’m feeling. This has become almost second nature for me at this point.

Now, that doesn’t mean that I don’t experience any emotions, it’s just that I now have an easier time dealing with them.

If someone was new to trading, what 3 goals would you recommend they focus on in the beginning of their journey?

I’ll give one, but an important one, and I’ll keep it short: Focus on survival. Survival is key in this game. You create your own luck by taking your chances time and again, and by making sure you stay in the game long-term.

What advice would you give to a trader who already has a reliable trading system in place, but can’t stick to their plan?

Here’s what I would recommend: For some time, trade super small, even if all you’re doing is just generating enough profits to pay commissions.

Just see how you do at the level of your state of mind, but also in terms of your performance over, say, 20-30 trades.

Just don’t focus on making money yet. Learn to handle yourself first. And increase your size incrementally as you get better at that.

With my students, I like to use a gym analogy to drive this home. If you’ve never set a foot in a gym before, you don’t immediately start bench-pressing 4 45 lbs. plates on each side of the bar. If you do, you’re bound to hurt yourself.

Instead, what you do is that you start small, and slowly over the days, weeks, and months, you keep a journal, you monitor your progress and you add more weight as you get better.

Slowly but surely. That’s how it’s done. You can’t skip steps when lifting weights. Your body will not allow you to do so.

But in trading, you can, and that’s what gets people into trouble. They trade big sizes right from the get-go, they make trading this emotional roller coaster which in turn generates (and reinforces) this negative feedback — impulsive trading –> losing –> feeling bad –> more impulsive trading…

The best way to ruin yourself and build a negative experience with the market is to try to get there via short-cuts. It doesn’t work.

So, trade small and learn to handle yourself. The money will follow.

 

—-

Memorable Lines From This Post

[With] the democratization of things like trading and investing, the disparity between the haves and the have-nots can be reduced in a way that has never been possible before.

Click to Tweet

Taking losses is never easy ... I’ve been trading for well over 14 years now and I still feel uncomfortable when I take a loss. But I’ve learned to understand that it’s part of the process.

Click to Tweet

Discipline means adopting a kind of behavioral consistency that is independent of the kind of day you had yesterday and the kind of day you expect today.

Click to Tweet

You could make money in the market with a simple moving average, an asymmetric risk-reward profile, and behavioral consistency. But most people don’t want to hear that. It sounds too simple to be true.

Click to Tweet

The weather is hardly predictable, but seasons are. In my view markets are just like that. The short-term action is like the weather. And the larger trends and long-term cycles are like seasons. 

Click to Tweet

Focus on survival. Survival is key in this game. You create your own luck by taking your chances time and again, and by making sure you stay in the game long-term. 

Click to Tweet

Just don’t focus on making money yet. Learn to handle yourself first. And increase your size incrementally as you get better at that. 

Click to Tweet

Hope you enjoyed this preview of the Trading Composure Newsletter.

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