Tag Archives | Mike Bellafiore

Cognitive Flexibility

This post belongs in the series that I refer to as: What Other Bloggers are Saying.

Thanks to Derek for the following (somewhat edited) post on the #1 trait of winning traders.  He begins with an appropriate quote:

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” Charles Darwin

Cognitive rigidity: the tendency to lock into one’s opinion at the exclusion of all new information…Read When Genius Failed: The Rise and Fall of Long-Term Capital Management to get the painful details on how cognitive rigidity brought down those brilliant folks at Long-Term Capital Management.

What separates the [successful] traders, and why they so consistently make money, is the ability to maintain flexibility.. As Joe Donohue said a couple weeks back, successful trading is about changing one’s mind ALL DAY LONG.  

I think the best lesson followers can take from these great traders is not mimicking every pick, but watching someone execute with cognitive flexibility (the topic of a Phil Perlman post).  It is the most valuable of all trading skills; exposing oneself to repeated instances of it can only help to sharpen one’s own development of it.

It's difficult for many of us to recognize the difference between rigidity and the confidence that our methods work very well.  We know that being flexible is likely to bring better results, and that stubbornness is a no-no.  However, it is less trouble to avoid learning new things – and that is not the mindset of a winning trader.


On the other hand, you can be too flexible:

Mike Bellafiore suggests that traders Find the Setups that Fit Your Personality [Again, the words below are edited for brevity.]  Mike offers some examples:

In One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley Trading)  I wrote about Mad Max craved momentum stocks.  Aggressive individuals may enjoy trading momentum set ups.  They should find more of them and must learn which set ups offer excellent risk/reward opportunities and which offer too much risk.

One senior trader loves to measure his trades.  He doesn’t believe in a trade unless he can understand its probability of success.  So this trader should crush the trades he can measure but accept that things don’t always make sense, and adapt in these unique markets.

Another senior trader is ultra laid back.  He likes his plays to develop.  He trades size but prefers the slow movers.  Forcing him to trade momentum makes no sense.  He should focus on his best set ups that match his personality, trade more of them, and work to trade them in size.

One former trader was always the smartest guy in the room.  He loved fading stocks. He was smarter than most in the market thus, faded out-sized moves.  The problem was he faded everything, and was unable to pass on the super strong and weak stocks.  He was unable to understand that his personality was causing him to over fade.

We had traders move to hedge funds because intraday trading was not intellectual enough for them.  This was the right move for their personality.

I like order.  I tend to be able to trade just about any set up but I can struggle with taking on too little risk. 

Also I most enjoy helping others.  And thus, it is best for me to use my talents as a trading teacher than as a trader. [MDW: That's something I can understand]

We are all different.  We must understand our natural disposition and consider how our personality impacts our trading.  We should find plays that match our personality and focus on trading more of them.  We should understand the limitations our natural disposition imposes on our trading and find solutions to improve.

One last note for developing traders.  You must first build a solid foundation.   Learn and experiment with many different set ups. Then you can gravitate towards the plays that fit your personality.

For us, as option traders, there are always situations that make for a more comfortable entry point.  Perhaps our trades do better in volatile or dull markets.  Or we may achieve better results in bullish, rather than bearish markets.  Perhaps high risk plays in small size work better fro some traders than low risk plays in greater size.

Those who maintain accurate trade journals would have such data at their fingertips.  Regardless of how well (or poorly) any of us perform as a trader, if we dig deeply we can probably discover which set ups work best.  That would present a choice:  Sit it out, waiting for better opportunities, or be flexible enough to find an alternative methodology.

So which is it for you?  Can you combine cognitive flexibility with trading the best set ups?


 All options, all the time.



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