In an earlier post, we asked the question What is Stoicism? That post was intended to give you a small insight into the Stoic philosophy. That is all well and good, but how can you use Stoicism to improve your investing and trading?
Our first post on Stoicism focused on controlling the controllables and the importance of self-control. This post will focus on two new tools we can utilise, journalling and negative visualisation.
What is the most important aspect of both trading and investing? Is it the price you buy or sell at? Or is it the indicators you use on your charts? The answer is it is none of these things. It is you. You are the single greatest point of failure in your trading plan, but you can also be the greatest point of success. By ensuring you have control over yourself, you can take greater control over your trading success.
As such, the tools outlined here are not specifically aimed at investing and trading. Rather, they are Stoic tools that can be applied to your trading.
Journalling may not necessarily be specifically a Stoic exercise, but it is one that has been used extensively by Stoic philosophers. Seneca, Epictetus and Marcus Aurelius were all proponents of journaling. Without the journaling practices of these men, Stoicism may never have become the philosophy it is today. If Marcus Aurelius didn’t write down his daily observations, Meditations (one of the foundational Stoic texts) would never have existed. It was never even meant to form a book, it was meant as a personal reflection.
Journaling allows us to reflect on our past experiences and learn from them, a practice that can be massively beneficial in the financial world. It can be used to record both your investments and trades, but in my view, a trader can potentially benefit more from the practice. Journaling a trade allows you to record exactly why you entered a trade, what your feelings on the trade are, and the desired outcome of the trade. Assuming you have a trading plan, these are all things you should know anyway, but when you write them down at the time of the trade, it will document your thoughts exactly at that time.
Journaling is particularly effective for noting your thoughts and feelings when taking a trade. You won’t benefit much if all you write down is the mechanics of why you entered the trade. In the long run, which of the below journal entries will provide more insight to the trader?
Trade 1: Entered as price tested support at 105.50. Stop loss at 105.30, target 105.90.
Trade 1: Entered as price tested support at 105.50. Stop loss at 105.30, target 105.90. Support has held on the last 3 tests, smaller volume on this test along with poorer fundamentals may mean a break is likely. Unsure of the target due to potential resistance at 105.75.
The first example outlines the mechanics of why the trade was entered. The second offers some insight into the traders’ mindset at the time of entering the trade. When it comes time to review the days’ trades, the second example will be much more beneficial. If a trader notices that their misgivings about trades turn out to be right more often than not, they can adapt their strategy accordingly. It also works in reverse, a trader can record their thoughts on trades they don’t enter and see how they play out.
Journaling can also be effective for investors, but as the timeframes tend to be longer trends in their investment decisions can be more difficult to spot.
We all experience negative thoughts at one time or another. It’s human nature. These thoughts don’t necessarily need to be seen as negative, we can use them to our advantage. As we mentioned above, you are central to your success or failure. Central to you is your mind, and how it reacts to different trading and investment situations can determine your success or failure. Negative visualisation will allow us to train our mind to react in ways that are more conducive to successful trading and investing.
In Stoic terms, negative visualisation involves thinking about losing things that are important to you. How would you feel if your car was stolen? Stoicism would have us contemplate this in order to lessen the blow if it ever does happen. We can use this visualisation to our advantage. Let’s use the example of the trade above.
We have entered the trade with defined points of exit, both above and below our entry price. As the price hovers around our entry price we watch in anticipation, but the price moves against us 15 points leaving us only 5 points above our stop loss. We close the position to save ourselves 5 points and soon after the price turns around to hit our profit target. Anyone who has traded in the past will know this feeling, it happens more often than most of us would care to admit.
Rewind to when we entered the trade. What if, while we were waiting for the price to move, we thought about what we would do if the price fell? What if we contemplated the 15 point drop and decided to let our stop loss take care of the exit. Would we be more or less likely to manually close the trade when the price fell? We would be much less likely because we have already thought about it and decided what we would do in the event that it happens. Negative visualisation allows us to preempt what may happen, so if it does we have already experienced it in some form.
Negative visualisation can also help us in the world of investing. Most investors fail due to their reaction to price movements. In a bear market, investors sell because they have lost money. On the surface, this seems like sound logic but assuming your reasons for investing in the first place have not changed, the best course of action is actually to buy more. You are getting a price discount on the shares you have already bought! The opposite is also true of bull markets. Investors see that prices have risen so they decide to buy when the most prudent thing they can do is either hold or sell.
If we had visualised the bear market before it hit, we could have decided to buy if it ever did occur. Rather than reacting to the event as we see it for the first time, we can act as if this has happened before.
Taking a Bird’s Eye View
Marcus Aurelius was a big fan of taking a bird’s eye view. His inspiration for this was the great philosopher Plato.
“How beautifully Plato put it. Whenever you want to talk about people, it’s best to take a bird’s- eye view and see everything all at once” – Marcus Aurelius.
The benefits of this should be easy to explain. When we trade or invest, we can get caught up in minuscule price movements or insignificant pieces of news. Every now and then it makes sense to take a step back and take in the market as a whole. When trading we can apply this concept quite easily.
Let’s say a trader has gone long and lost three trades in a row on the same stock. All the trades look sensible and fall within his trading plan and he can’t understand why all of them have failed. The trend is up on his 5-minute chart and all his indicators are indicating a buy. He may benefit from taking a bird’s eye view and looking at the trade from a higher timeframe. He may discover that both the 15 and 30-minute charts are showing a strong downtrend. He is trading against the trend and being stopped out.
This exercise can also be used when investing. Before buying or selling a stock, an investor should take a bird’s eye view of the entire market. Is your stock performing poorly because the company is in trouble, or has it simply been caught up in a bear market where everything is falling? This isn’t to say that you should never sell n a bear market or buy in a bull market, it is just highlighting the fact that it is important to take the market into consideration when deciding on an investment.
While these three tools can help you, they are no guarantee of success. There is no such thing as guaranteed success in the markets, anyone who tells you there is should be avoided. As with all investments and trades, take the time to do your research before deciding to buy or sell.
The Stoic Trader