Think Like a Trader: Strategies to Make Better Decisions

1. Welcome : decisions shape our ability to lead way, embrace the unknown and begin something new. As a trader, I learned to reduce stress by making less decisions, focus on managing process and engaging with an audience. In this class, you will learn how to think in terms of process instead of results. This is an important skill for entrepreneurial thinkers and fellow traders. Short lessons will help us building total decision portfolio things. Free work is especially useful for the self directed in terms of career guidance, interviews and personal ventures. Really excited about this one? Let's get started. 2. Focus on Process: So now we're in a position to judge decisions based on the process rather than the results . The results can be good or bad, but what we really care about is those Siris of decisions that led us to that outcome. Um, and and how best can we replicate that right down the line to where the odds are in our favor? A good quote to summarize. This is from David Ricardo, who stated, Cut short your losses and let your profits run on. It's basically narrowing your focus on what works and getting rid of things that don't work . And it's a basis of friends dropped trend following strategy approach that I use and many other traders use in terms of getting on things that are working in our favor. And once you're in that position, how do you mitigate the losses toe where the rewards are constantly in your favor and when they're not, you get rid of them. You move on your focus on things that could work or have a positive outcome down the line. A good example of this in terms of our of ah, real world example, was from Annie Duke, and she is a poker player and now a decision strategists. And she wrote a book called Thinking and Bets, which is out in stores now. And she highlighted argument around the Patriots. And I think this was a great example. And 2015 the Super Bowl. Pete Carroll was the head coach of the Seattle Seahawks. There's no 26 seconds left on the clock. They were at the one yard line and the Pats, or about four points behind the Seahawks. I'm sorry about four points behind. This is the one chance that one final game to make a good decision. And everyone expected Carol to do unexpected run plate toe where Wilson would hand the ball back to Lynch, who was considered the best running back in the NFL. And they would reach the goal line and went. However, Pete Carroll went against the green and instead called a pass the ball on, which was intercepted in the end zone, and the Patriots won. The Seattle Seahawks lost, and days after everyone called Carol an idiot, there was saying, you know, how could he make this terrible decision based on the outcome? You know, they lost. They lost everything based on this one risky call that he made, however, everyone else was a victim of resulting or the outcome bias. We're looking at this decision and they're making a sum total of the outcome of being negative. So all the other processes that made that decision that one call had to be negative. That's not the case. When we look at the numbers and the probabilities around this, it really shows that the process that was building on this decision was really all positive . However, you know they lost out on the big one because the result was negative. But, you know, they had a better chance of making this call rather than the alternative. And I think that's very important. Um, what's important here is time and time gets lost in the essence because once we're out of time, it becomes your relevant to the to the observer, right? But once you're in that moment, time is so precious, especially when you're about, you know, 26 like it, seconds left on the clock, which really needed was a time out, and fivethirtyeight, which is a block that runs to statistics, and you talk about a range of topics but I think they really drilled on the probabilities here. It shows that the time out was highly in favor of letting the bull run and what you're really needed here in terms of this key decision was you needed to provide her team with time, freeing up this option preserved there, there your chance of reaching into the end zone. So when you free up the options and you let all things on the table, But we're really looking at things that can sort of mitigate the downside risk with this greater scope of decisions. And I think that's what Pete Carroll did as opposed to, you know, letting the ball run which you know would not afford them that time out, which would not afford them the next time you come back into the game. And it was really a winner loss situation at that point, as opposed to freeing up this option of mitigating any type of downside risk within 26 seconds. So I think you got handed off to him for that good decision with a negative outcome, and I think that's a good example of thinking about that when we move on to mapping out this process when you're looking at results versus a process and judging your decision when you're focusing on results, you either have a loss or went right. It's 50 50. How do you judge this decision? Well, if I lost, it's a bad decision. If I want. It's a good decision, and that's not a good way of looking at it because you're sort of polarizing your view and your angering yourself. You're anchoring herself to the outcome rather than the process. And what this does is it feeds our ego and it it really, You know, the people who tend to think in terms of results are impulsive. They tend to do decisions on the whim because they're either expecting, you know, I'm gonna win out really big, so I'm gonna make this position pick without any thinking it through. And that could result any sum total of bad decisions with an impulsive, results driven bias and that feeds the ego. So when you tend to see people that are really flaunting and and you know they think that, you know, I make great decisions and look at all the things that I want, the sum total of what they got was really negative. And when they're thinking in that way the probability of them being, you know, non scalable down the line is really, really high, as opposed to someone who's Maybe, you know, less Ponti but makes good processes and you know they make good decisions that are not really overshadowed by the results. And I think that's important thinking and returns. Resulting is also less consistent because you're really forgetting what got you there in that process, because it's really polarized that 50 50 loss or went when you're narrowing, narrowing in on process, which is what we prefer. You're really focusing on execution. What makes a good decision, what makes a decision to begin with? And how do I approach this in a way? And how do I purchase in the best way that could be replicated down the line instead of looking at a loss? For it is a win you're looking at following the rules versus breaking the rules of a process that got you to this higher level decision making. They're also looking at things in terms of risk adjusted right. You're looking at the negatives as well as the positives But how can the positives outweigh the negatives in the series of decisions that lead us to this outcome? Um, you're also held more accountable because this process that you're following or if you're breaking that process, you know that whether or not you're winds or whether or not you're outcome is is wins or losses. You being held accountable to the process, this disciplined approach to making decisions as opposed to making impulsive moves that result in either a positive or negative. So that accountability factor is strengthen. Based on this series of processes, we're also generating feedback whether you like it or not. Feedback from the process is telling you whether or not the systematic decisions are in your favor are out in your favor. And once you're following that process down the line, you're getting a real time feedback of what's working, what's not working. And that's what makes your process of decision making dynamic right, because you're able to adapt in and out of decisions or circumstances as they change, based on the feedback that you're getting from that process, as opposed to being impulsive, ego driven and really focusing on that losses that wins which is really polarizing or thought process. It's really disruptive to higher level decision making, and you don't want to do that. You want narrowing on a process driven approach to making higher level decisions. Now the process advantage for the more again you're less focus on the piano. So from a treatise, perceptive, you know, when you're trading in and out of positions, I have a lot of friends who, you know, ask me. You know, uh, I'm getting in this position. I don't like it is everyday. I check my monitor and I'm in red or it goes up one day or goes down one day. And this is you know, a lot of people deal in crypto currencies and things like that. They can't stomach that volatility because they're focusing on their piano, their outcome bias rather than sitting down and going to the decision making process. That's what one allow them or build that trust in making this decision or managing that decision down the line. So as a trader and myself, when I enter this position of higher level decision making, I'm less concerned with my piano a day today basis, that win or loss and I'm more concerned of my process, how many managing this position and what were the series of steps that I've taken and building that trust without confidence in myself to follow this process. That's more important to me, and I'm thinking in terms of parameters, so that winning that loss is on my mind. But it's also building this parameter the space of time, to where I can work out things dynamically and adjust to the situations as they come the next step in in terms of a process advantage is taking advantage of the experience, right? This is not gonna come overnight. Decision making heirs or good decision makers are not impulsive, and they're also not, um, they're also not fingers and await right. It takes experience, and this could take years of knowing what works and what doesn't work. And that, and that's really building out this coherent process, this robust strategy. It's providing us with a wider range to trust a process, right. You're gonna build more trust in yourselves as you're seeing this workout down the line, and it's really a bigger picture. Focus. A trader when I look at is multiple timeframe, so if I'm short term focused. I'm going to narrow in on that short term while also thinking in terms off longer term pictures and what's building out of different chart patterns and such, um, lastly, you can't control a process. No one's going to tell you. You know what, when or how to trade or what, when or how to make a decision that's up to you. And that's what you can control. You can't control the outcome, and that's avoids. Right on this, in terms of trading is price, prices noise and you can't control price. It's always gonna be there when you're like it or not. It's all about the process of how you're going to mitigate any type price fluctuations. We also can't control the macros in our life, right? The things that are sort of given to us where we land ourselves in. That's a lot all subject to interpretation and interpretation is highly subjective, and we'll get into that a little bit more. We're gonna focus on less of interpretation, more of observation, and how can we best sort of building process of control 3. Reduce Stress: So now we talk about outcome biased and resulting in terms of making decisions. Wanna talk about reducing stress? And the best way that I found of reducing stress is by simply making less decisions. Right. Decisions are all around us there a lot of things to decide about. But we have total control over whether or not we're going to approach something or let it go. And this goes back to the David apart. A quote of letting our winners run and cutting our losses short immediately. And that's in the process of making blessed decisions. People who make less decisions are pundits. They create the noise around us and, you know, they're really focused on not doing but a lot of talking. And you know, pundits are good in certain respects because they sort of created system of checks and balances around decision makers that are, you know, sort of a utility function rather than something that's more subjective. And they do. You have a place in time, however, pundits create a lot of noise, and they don't they I I see it as a was a lonely field, right? They have all this pumped up, entered, picked up energy and this ability to lead and make decisions and going that executive route . However, there's this big fear that these decision makers make a lot of decisions and could be so stressful that I'm not gonna use my law degree or my polit political science degree, and I'm just gonna talk about it. And I think that's a big disadvantage to society because on the people you know who make the best decisions are rarely thought oriented. They build a process that takes a long time to make, and they assemble a team of decision makers around them to make things positive for the long, whole right and they make mistakes. But they learn from it, and it constantly build this process that's able to scale. And I think that pundits are very short term focus. They focus on whether or not things were good or bad immediately and intend to, you know, turn that that process of talk and I think that's that's very disruptive and we don't want to put it place ourselves in a position of abundant, but we do want to place that results in a position of a leader and pundits. I think are very lonely. They think that you know, being a decision maker or in the field of decisions. There's not a lot of us out there and they do have a fear of doing, which creates the masses of people who don't do who judge the people that do. And I think that there's a really big disconnect in terms of how we think about noise and how to best utilize the signal out of the noise to make ourselves as best leaders rather than the best pundits out there. I think that's a good framework to start with in terms of talking about the illusion of why a lot of times when we focus on decisions or when we focus on markets, we tend to think you know what's causing this. What's the wife, actor? And I think that's a little bit misguided Onley trying to search for the fundamental basis of a decision rather than the execution of that decision. We're surrounding ourselves in universe of noise bias, which we tend to build comfort around, and I think that's really stalling this decision making process or there's goodness is making process. When you find yourself on this quest for predictive value versus execution strategy. Your sort of you know you're in this trap. Instead, you want to focus on and and on changing the factors of why into how can I do it and when can I do it? And I think creating that flow map is very important, right? Figuring out, um, the why is sometimes important because you have to have a fundamental basis. But figuring out how you're gonna do something and when you're going to do something is really that that path of moving yourself out of that pundit to that execution decision makers status right? Or this leadership status when we're removing the signal from the noise, that's when we really are in the position to make a decision, right? There's a lot of noise out there, but one we're condensing that noise into something of, you know, where can I act on this? And this is again going back to the full map of removing yourself from the why and focusing on the how when you got that, how defined There's a signal, and when you're focusing on when that's the execution point where you're going to start that decision and here's a good flow map of thinking about that. You're taking the macro story, the bigger picture, The fundamental reasons of why you're gonna do something and then we're gonna do is gonna size your entry of focusing on. Okay. How can I best mitigate the circumstances in size? My points into in terms of how can I make the process easily Siris of judgments into the process. And then you're gonna establish a set of rules, right? What am I going to follow that's going to lead myself down the path of a positive outcome, right, Which which is what we all want, But we're not gonna be outcome biased, But we're gonna set us in terms of rules. We're gonna base ourselves on those rules, that of decisions. And it's really all about managing that approach to leading to whatever outcome we desire 4. Build a Decision Portfolio: so he made it to the end. And I think now we're all set to sort of build or start building our decision portfolio, which is the sum total off all the decisions that we make that are where the reward is greater than the wrists and a ratio. Maybe, like I said earlier, 2 to 131 you get excess returns over mitigating lower and lower risk. Um, a good format to think about this is take in all of your life decisions and and think about those processes or this series of steps that you take in to make that decision. The biggest drawback of thinking about decision in terms of life rather than trading, is that you don't get the full advantage of instant feedback, right. People are not gonna tell you whether or not you're on the right track. We're on the wrong track. It's really up to you to sort of assess that, and we don't get to fully assess it based on these, you know, outcomes of very small decisions until maybe it's too late. And I think that's a really biggest drawback of not thinking in terms off. You know, a trader rather than a a life decision maker. That makes sense. But thinking in terms of a trader really gives you the sort of quest for instant feedback. When I'm trading, there's my piano on the screen, even though I don't look at it as frequently as maybe I should. I'm really, you know, Doc down on the process rather than the results. But I'm getting feedback as I'm keeping going, and I'm building a long of all my decisions because my money is on the line. So I'm really forcing this instant feedback in my life and as well as my treating plan. And I think all that together gives us this greater focus of building a total decision portfolio based on assessing this instant feedback in all of our decisions that we make Now , this is a chart or a slide that I borrowed from my advanced charting schools for treating earlier. But I think it's a great way of framing ourselves not only as traders but as higher level decision makers in life is thinking about quantifying this process in terms of reward to risk. And I always like to stay. You know, I'm gonna limit your loss increase your chance of profitability by building a favorable to 21 or three to run, reward to risk per trade or per decision that we make. And we're gonna just that strategy depending on the trade environment, by keeping within that threshold or that free mort of to the one of 3 to 1 or two risk, we're gonna build these parameters for entries and exit in terms of our trading plan. But then, in terms of our life plan, you know, you really can't think in terms of 2 to 12321 But as you're building out your map decision making and you know the series of steps without rules that you're gonna make you really want to make sure that your positive outcomes you know, your probability of a positive outcome it's gonna outweigh any type of negative negative outcome. This could be subjective, but you're gonna want to quantify it in some way. And, you know, this takes time to sort of build, um, in a good way of thinking about a decision portfolio. If you think about a trading portfolio gotta some of trade that are totaling out, you know all these losses that you've taken Maybe on trade one trade three Trade five were all limited. But the amount of gains that you've won have l offset this on a 31 basis, right? And when we take the total sum of this, your winds a run out way or loss three times that amount. And this is a good 321 risk reward to risk portrayed in a 3 to 1 rewards risk portfolio. So the sum total of all those decisions that that portfolio made or in excess of the amount of loss that he or she was willing to take. I think when we translate this into everyday life, we're gonna make sure that the decisions that we make or not the decision that we don't make at all, um or really structured in a way to where the odds were in our favor. And I think this always goes back to that Ricardo quote, forgave Ricardo, have cut your losses short. Let your winners run the winners. In this case, we're the ones that had a 31 risk reward to risk ratio, and we're what work and we're working. However, the ones that were not working. We cut it off when the reward to risk was not in our favor. So you consistently limited your losses down line, and you consistently compound in your winners down the line to create this total reward to risk profile that's consistently in our favor. This is how you gain total control over your life, and the series of decisions that you make a good, systematic control process is leading the decisions of what, When, how versus the why and we've talked about this earlier. We're also gonna build an option profile in terms of giving herself that space of time to think in that space of time, to build this process toe where the reward to risks consistently in our favor and what this does. Is it bosses? Airbus strategy that's able to be scalable, right? You can replicate this down the line. It's the sum of appropriate decisions. Given the circumstance, the appropriate decision is giving us that rewards of risk profile that's always in our favor. And when we're thinking of trading or life in general, we look for the value right. Those opportunities are scarce that can provide us with that good reward to risk We're also gonna look at momentum, right things that are moving in our fever to begin with. And that gives us that now factor, that decision to lead or that decision to make a choice, whether to go or not to go, and that's gonna force us to act right when we follow in that equation. This sort of structures are life in a way that's more favorable rather than something that's, you know, not worth our time. To begin with. A good personal example or fun example is, if you're ever in Austin, Texas, there's this place called Jacob's. Well, it's this huge, like, sort of well, in a way, and you've got a jump. I think I'm not too sure in the distance, but it's really, really high, and it just looks scary. And so you're taking leap out of this into this, this massive hole and you've got a sort crawl your way out of it. I'm not a good swimmer to begin with, and I remember walking up to this. My decision to go here was, you know, the thrill of it all is it's sort of a a, um, the right time and right place I wanted to do it right, so I made all those calculated decision to get there to that point. So it was either here or nowhere and walking up to this ledge. You know, I was telling myself, you know, even though it looks daunting, it looks scary. I want to jump And I couldn't My legs would not move and it's or your body and not agreeing with your mind. And when you've got into that state, your end this day of discomfort and talking to the to the staff members at this reserve, they were saying, you know, lock both a sort of, um, you know, through this half jumping away where you're jumping. But you know, you're at risk of hitting rocks or anything like that. You're not jumping freely. Making that free, late free leap is based on the comforting yourself to make this decision. So I made sure that I was able to sort of by myself that time and not jump sort of half ass in a way and maybe hit a rock and drown or do the unthinkable. So this is sort of a good way of framing yourself in this position off you know, risk adjusted winds. So placing myself in this road map, you know, my decision to jump was a decision of no turning back. I was there. I wanted to jump. Had to find a way to make that goal a reality. And I had three processes Were three alternatives, right? I can either pace myself toe where there was a high reward risk. And if I paced myself, I had I have a Ford myself this time to build comfort in my own decision of jumping. Right? And or I could build an exit plan, right? I'm not a great swimmer, but I can swim if my life depended on it. So this meat, sure that I had an exit plan once I was down in that Well, so I said, You know what? I can't jump in there when there's no one in the water to be gonna win, because he's gonna help me if I drown and you need an exit plan. I needed a friend to be in that well or somewhere near that. Well, so where if I was jumped, if I made that jump and I couldn't get myself back up or was in this massive hole. Um, I had a hand to sort of lean on and that that provided me with that safety. So I was up on that ledge, my legs were able to move and I was able to jump because I paced myself. I bought myself some time to think it through and say, You know, the reward of jumping in, surviving and having fun and having something to look back on was greater than you know the risk. At that point in time, the decision to jump and drown is a one off, right? It's a negative outcome. And you were thinking in that in totality, you're going to judge any type of decision, were gonna make ahead of time on drowning, and that was not in my favor. Or, you know, there was a little baby cliff at the bottom toe where it wasn't as high as the massive cliff that most people jump off of. And you know me doing that could result in less excitement and also less experience, right? Sometimes you just got to make that jump in the high reward. The Hyatt and and low risk was piecing myself, provided to all tornadoes rather than one alternative. So we want a structure ourselves in a high rewards risk zone rather than a lower or tourists film. So it takes taking that risk to begin with toe, have a high reward that's gonna offset any type of, you know, downfall down the line. So pacing ourselves and our thoughts, mapping up your plan of action and not drowning, it's sort of the take away. And, you know, this is the basic step of to begin thinking like a trader down the line, so I hope you enjoyed it.