By Ken Long

The style of trading that works best for me is a combination of discretion and rules based systems. Sometimes I start with a framework of rules and then apply some discretion in the gray area between the rules. I see this as mostly systematic trading with some discipline and discretion. In other circumstances I start with a discretionary reason to trade, such as a favorable reward to risk ratio in either direction and then add structured rules to govern risk timing position sizing and exits. I think of this style as being artistic with the addition of structured discipline. In both cases I believe that both forms of trading are a type of craft knowledge.

By craft knowledge I mean a body of knowledge that is informed by both theory and practice, requiring both domains to add value to the final mix. For me the theory of trading has to do with an understanding of statistics that describe the price action and the psychological interpretation of common technical indicators and the consensus interpretation found in trading literature. This combination of descriptive statistics and the mass psychology of the herd for interpreting indicators establishes a framework within which I can make disciplined routine professional judgments about reward to risk ratios. This creates a standard set of patterns for effective decision-making in all time frames that minimizes the emotional cost of making decisions under stress.

Making decisions under stress carries an emotional cost as we consider the consequences of the outcomes over which we have no control. We know that trading effectively requires us to take positions in moments of great uncertainty, because it is in these conditions of uncertainty that the greatest potential rewards exist. If we can manage our risks such that they are less than the average payoff on the winning trades we can develop reliable positive expectancy systems. The deeply ingrained aversion to losses however presents a continuous challenge to our emotional well-being and learning how to deal with that routine and expected level of stress is a critical success factor in developing the emotional resilience required to stay in the affective trading zone as a professional.

I’m fond of the use of animal metaphors in trading and one of my favorites is the Dragon which is blessed with an incredibly thick skin that protects him from all of the natural annoyances that bother other animals like flies and whether in the sharp teeth of small carnivores while his horn and his great size and strength ward off all but the most impetuous of meat eaters. The Dragons’s combination of thick skin power and gentle nature allows him to operate quite successfully in his environment, untroubled by the stresses that plague other creatures without his unusual qualities. I use that metaphor when I am considering how I can improve my emotional resilience when it comes to dealing with the normal stresses associated with trading.

Techniques like guided visualizations and meditation, biofeedback devices and monitored regulated breathing and techniques to identify and manage oncoming stressors before the wreak havoc on my mental state and the use of statistics to look at performance over a large data set as opposed to dwelling on individual losses all contribute to maintaining an even keel with respect to trading. These techniques fall into the realm of the craftwork of trading, just like other routine tasks like reviewing individual trades, performing and recording the 10 tasks of trading, maintaining a trading journal, analyzing performance statistics from different systems , documenting my trading psychology and sharing results and reflections with trusted others to help triangulate multiple perspectives into my trading performance.

All of these routine tasks help build up the emotional bank account so that I have resources available when the stress events naturally occur and I can stay within the normal boundaries of psychological comfort even when trading short-term high volatility instruments when stress can be at its highest in the moment.

Interestingly I find the shorter-term trading less stressful than longer-term trading because I make many more trades intraday then I do longer-term in the time in each trade is less and each trade is a smaller proportion of my overall results and so the stress per trade event is less. I get the feedback results much quicker and I can determine much more rapidly when my choice of systems and decision-making are well in tune with the current rhythm of the market and when I am out of sync and need to reduce my position size or frequency. These in stride adjustments and adaptations are also part of the craftwork of trading.

Craftwork in other words includes not just the theories of our systems and indicators and top-down view of the world that we apply to individual trades but also the bottom up inductive lessons we learn that come from putting beliefs into action and then committing to the study of our results so that we can learn by doing. Everyone used to know this back in the Middle Ages when craftwork dominated economic activity and it was normal to go through a process of novice, apprentice, journeyman, master and finally artist in all of the productive trades. When we worked with our hands as a species we knew that there was learning in the doing under the watchful eye of an experience guide. The workshop was the school and the work itself was the best teacher if one could learn to develop the watchful eye and the reflective mind that could record and integrate the lessons as we thought about the day’s work. The artisans' pure art could be found in that moment when the active seeing, doing, observing, reflecting and adapting all coexisted in the pure moment of creation at once and the artist could be one with the art and the boundaries between self and the world disappeared. Experiencing this flow state is deeply satisfying and can be found in all of the crafts and trading is no exception. I’ve found that when my goal is to trade well so that I can experience the moments of flow my results are better as a consequence.

In our trading course we explore the components of the craft of trading and practice the techniques of stocking and framing and sensing and managing and exiting trades in a way that the organic craftwork can unfold under our hands and watchful eyes. We learn how to set up and execute good trading techniques as parts of robust systems and how to perform the disciplined reflection that allow us to turn positive behaviors into stable habits. This kind of craft knowledge can only come from disciplined practice, accompanied by a healthy respect for the craft so that our excellence comes from the high quality steps we make along the journey towards our ultimate destination. We have the opportunity to continue our lessons learned after the workshop by participating in our supportive chat room and our growing community of practice as we learn to refine and extend these techniques once we return home.

Keep your risk measured and your powder dry so that you’re ready when opportunity knocks. Good trading!