Gremlin Development During Chop

In the What Books Should I Read post I list the book The Chimp Paradox by Steve Peters which isn’t about trading specifically but can certainly be utilized by traders.

In chapter 4 of this book Peters introduces the concept of “The Computer” in the human brain which has two functions:

  1. It can think and act automatically for you using programmed thoughts and behaviors.
  2. It is a reference source for information, beliefs, and values.

He also outlines what is in the computer as follows:

  1. The Autopilot:  a helpful or constructive belief or behavior
  2. The Gremlin:  an unhelpful or destructive belief or behavior that is removable.
  3. The Goblin:  an unhelpful or destructive belief of behavior that is firmly fixed and extremely difficult to remove.
  4. The Stone of Life:  contains the values and beliefs by which you live your life.

The action in the grain markets last week (wheat and corn in particular) had me thinking about this book and some of my past struggles as a trader with regard to gremlins that I would develop under certain regimes that come back to bite me when the markets change.  Here’s a little more detail on gremlins from the book:

Gremlins usually occur after the age of eight…they are soft wired so when you find them you can remove them…..one example of two very common Gremlins that most people have in their Computers and experience from time to time:  the twins of unrealistic expectation and unhelpful expectation….other examples include things like overreacting to situations, beating yourself up, worrying about decisions and not making them, getting angry when you don’t want to

Corn and Wheat have been trading in a very small daily ranges within the context of a larger trading range since early mid March.  When I say “large”….for those of you that don’t follow a market like corn it’s generally been bouncing back and forth in a 10-12 cent range for a few months moving 4-6 cents up or down over each 24 hour period.  Dull, quiet, uneventful, and so on.  While we’ve had a rew realatively violent swings within this range (in particular after the great not so great Spring Blizzard of late April) for the most part the days have been small range and slow and over several sessions we drift slowly from the top of the larger trading range to the bottom and then back again.  Here’s a visual:

gremlin timeThis is the perfect environment for a Gremlin to develop for the non-automated trader.  While any number of Gremlins can get placed into the Computer during periods like this I know one I have struggled with in the past under similar circumstances is the development of the expectation that “price will come back to me”.  This gets cemented as a habit or autopilot when these sort of tight range mean-reversion regimes persist because you can, for example, short the bottom of the range and then add to the position as it goes against you for several sessions not following any plan other than “I’m going to win on this trade” only to eventually see price drift back down again and reward you with a chance to scratch or in this environment you are probably able to get out with some sort of profit.  You also start getting confident you can do “a ton of size” because “look how tight the ranges are” both of which reinforce the original belief that “price always comes back to me”.  Maybe you do this once early on during the range which is already a problem and then it gets reinforced several times again during the period the tight range trade lasts.   This is an absolute disaster in the making for a trader because eventually a week like last week comes along where price gets directional and starts gapping one way in consecutive sessions and you are still running on the autopilot that was developed under a different regime and you are executing with the gremlin that says “price will come back to me”.  By the end of a week like last week not only are you probably in a world of hurt in terms of capital and mindset, you might even be out of business.

If you are struggling with this like I have in the past your job now is to work on replacing the Gremlin with an Autopilot/new habit loop.  How is this done?  Here are some ideas on how to start addressing this issue.

First, you want to identify and label the Gremlin.  So for this example that might look like this:

In range bound markets I hold on to and add to losing trades. 

This is broad, so the book suggests asking some questions.  In this example questions could be:

  • What do you believe holding on to losing trades and adding to your position will imply about you?
  • What are the consequences of you holding on to losing trades and adding to losers?

Answers to these sort of questions are going to be different from person to person and from trading gremlin to trading gremlin but it could be things such as:

  • I want to be right about every trade
  • I’m constantly focused on outcomes instead of following a process

The book then suggests replacing these Gremlins with some truths so that might look like this:

  • Traders that are successful accept that they will not be right on every trade
  • Successful traders keep a laser focus on the execution of their specific process rather than the outcome of the very next trade

From the book

Gremlins can take several efforts, and some time to remove them, but with persistence they will go.  The number of “truths” or Autopilots, to help with this problem is significant.  In order for it to work you have to find these truths and then continually reinforce them until they are firmly fixed in the Computer and become second nature.

Breaking the cycle early is also important.  A way to do this as a trader in this situation is to give yourself an automatic process to go through when you are in a range trade environment and find a trade moving against by asking questions

  1. I need to review whether or not I’m following my trade plan and obeying my risk parameters for this trade.
  2. I need to think if it is appropriate for me to add to a position that is against me within the trading range.  Was this part of my trading plan?

Stopping any more Gremlins from going into the Computer

The book also contains a section about how to avoid this issue.  Consider from a trading perspective:

Putting Autopilots or Gremlins into the computer is done by experience, including discussions and education.  So when you experience anything in life you will interpret this.  If you interpret it in a negative and unhelpful way, then Gremlins will appear in the Computer for future reference.  If you interpret the event or experience in a positive or constructive way, then Autopilots get put into the Computer.  Therefore, it is important when inputting into the Computer that you think carefully through the experience that you have had an interpret it correctly.

I’m going to end here.  My hope is if anyone reading is struggling with the recent action in grains over the last week or any market going through similar moves currently or in the past they have found some value in the basic ideas presented here on how to remove some of the autopilots that are resulting in problems with your trading.

  • FF
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About Fat F1nger

Full time futures trader.
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