In this episode I interview Adam Grimes.
Adam is a fellow podcaster, seasoned trader, systems developer, author of The Art and Science of Technical Analysis, and the CIO of Waverly Advisor.
That’s a mouthful but beyond all that what I respect most about Adam is the amount of work he contributes to the trading community.
In this interview with Adam the conversation goes deep and wide!
But here are some of the big ideas –
- Why it’s not enough to learn how to trade, it’s learning about how to become a trader
- Adam shares some realistic expectations for new traders
- Why it’s important to understand the distinction that you’re not trading the market, you’re trading against other traders
- The importance of carry the right trading mindset – you can actually address some psychological issues by addressing some methodological issues but on the other hand you can have a system with an edge but without the right psychological disposition you will not able to implement it
- How even purely quantitative traders are not exempt from trading psychology
- Adam shares his views on the positives and negatives effects of meditation and what it can do for traders
- Adam shares his own meditation practice and a gives us a great practice to improve focus (pay attention intraday traders)
- The importance of living through various market cycles
- What are we really seeing when we look at a chart.
When a trader looks at a chart and he sees the market move and has an emotional reaction, that’s not a defect in the trader that actually says something very profound about what the market is, about what that trader is, and about what that trader’s relationship is with the market.
[03:34]Houston: Hi Adam thanks for joining the show today.
[03:35]Adam: Thank you, great to be here with you.
[03:37]Houston: Absolutely, it’s a real pleasure to have you on the show; I’ve been really excited today to get a chance to talk to you as you are one of the authors of one of my go to books around technical analysis.
[03:43]Adam: Thank you.
[03:49]Houston: And for folks who don’t know of Adam’s work, one of his, I guess one of his, your most recent books is a book called The Art and Science of Technical Analysis. Okay, so let’s start there, why did you call it The Art and Science of Technical Analysis? Why not just The Science of Technical Analysis?
[04:06]Adam: Well I went through a lot; when writing a book, selecting a title is one of those gruelling aspects, so I went back and forth on a lot of titles and I realised that one of my editors liked the idea of signal and noise. Because he said what the book was really digging into was to sort through all the noise in the market and pull out something that was tradable. And I said yeah that idea that’s true but that implies a little bit more of a quantitative approach than I was advocating in the book; and that sort of launched me into thinking there is sort of an art to this and we talked about that. There is an art to trading but the art has to be based in reality and disciplined with a statistical rigour of what happens in the market; but as a discretionary trader, and certainly we can have that discussion about the spectrum of the different ways that people can trade. But as a discretionary trader, there is a certain aspect of art so that was what really intrigued me about half way through writing the book, the first draft was done in months I wrote like a crazy fiend. I really started focusing on that idea and thinking about that idea. And so I guess I just realised that that was kind of my, had been my approach to the market for many, many years I just never articulated it in a phrase quite that clearly.
[05:33]Houston: yeah, and we are going to unpack that idea further, because as we start talking a little bit more about trading, I think the misconception especially by new traders – you can kinda learn trading by rote where you can just pick up the setups and apply them mechanically and eventually become successful after a given number of trades. But I think I have heard you speak in the past, you have various opinions of the journey of traders, and we will explore that in a few moments.
[05:58]Houston: Well, let’s take a step back and let’s talk about your background. I just introduced you as an author but Adam’s a lot more than just an author; why don’t you just quickly give us a little snapshot of your back ground and what you are up to nowadays? I know you have a blog and a podcast, but what else?
[06:10]Adam: I think my path to trading was a little bit interesting. My formal education, I was a musician, classical composer and keyboard artist, pianist, harpsichord, pipe organ, clavichord. And so I was very heavily into music and I started trading almost by mistake, and had no clue what I was doing I just thought it maybe something fun to try. And something about the process and the patterns and my own psychological responses, really, really grabbed me and I said this is where I need to focus a lot of my time and energy. So I went through the process of figuring out how to trade and that was a journey in itself and I don’t think anybody ever finishes. It’s like a constant process of refining and learning the kinds of mistakes you’re susceptible to; and I think by this point, I have a lot of those kinks ironed out, but it’s an ongoing process and so as you said I’ve written a couple of books, The Art and Science of Technical Analysis is the big one. And that’s kind of- it’s a big book that takes a very specific approach, I hear people talk about it being an encyclopaedia of technical analysis. I don’t think that’s true, I think, what I advocate is a rather simple approach to markets which is the idea of two forces- momentum and mean reversion and we are trying to tease out somehow, patterns that point out when one of those forces is more likely to prevail in the future. So should I be approaching this market looking for mean reversion, looking for it to snap back? Or should I be looking for continuation? Other projects – I write a blog, I also have a podcast where you can listen to me ramble on various topics related to financial marketing and some not. I’ve done some topics that are kind of interesting in the aspects of human performance, meditation, how to improve memory how to improve learning. I’m the CIO of Waverly Advisors, I write and produce research everyday; we look at all the liquid markets. I am involved in markets and in the process and communicating about markets in many different ways and it’s very exciting to me.
[08:33]Houston: Adam I think you are being very humble, I know you are super productive so obviously, you are putting out a great band with the works ([08:45]Adam: Thank you) and so I just wanna first off appreciate you showing some gratefulness of the quality of work that you are about to serve the trading community. But you mentioned some interesting points there about the forces of momentum and mean reversion. So talk to us more about your trading background, I know in past interviews you have talked about your journey from basically knowing nothing to losing a bit of money to losing a bunch of money and kind of figuring things out along the way. So what’s the realistic expectation for a trader when they are first getting started? Because I speak to a number of new traders like you do and I think sometimes there is a bit of disservice from the financial community; and they see a lot of advertisements of guys sitting on beaches drinking martinis or sipping mojitos, I mean. But they think it’s gonna be that easy from the get go. So what are your opinions on that?
[09:40]Adam: Well I think the sitting on the beach sipping martinis you know for instance I just got back a month or so from a multi-week trip in France where I was basically eating my way through a big part of France; however, you are never really on vacation if you’re involved in markets and I wrote my research every day, I did my work every day, there were times where I was checking market prices cause there were some things happening, so I was just checking market prices multiple times a day. So I think if you are going to do this and if you are going to be successful, I think it has to become a part of who you are. And I say that to a lot of people and I describe my “vacation” like that, and they’re like “oh man, you need to get away, you need to be able to turn off” and you know I don’t think – “okay for instance, let’s say you are an artist, and I’m not making some high minded comparison with financial and being an artist. But you know if you are an artist, if you are a painter you are always looking at things with a painter’s eye, if you are a musician you’re always turning pieces of music in your head, you’re always thinking about how to fit things together. And so I think if you are involved in financial markets it is a part of who you are and a part of how you think and it’s kind of always there with you, so I think the idea of getting into the markets to find some system that’s gonna make you a lot of money. But that’s just not really realistic; it’s gonna be a process of you figuring out how to extract money from the market. And by the way, for purposes of this interview – actually everything – I will kind of mix the word trading and investing and I know a lot of people, there is a lot of prejudice on both sides. A lot of traders will say “oh investors don’t know anything” as they just buy and magically have a lot of money thirty years later. And investors say “traders are stupid, as they spend a lot on commission and they don’t make much money. But to me it’s that process of trading which means you are going to make a decision to take some risk in the financial market and you are going to take that risk off at some point in the future, it maybe when you retire it maybe later today. But it’s still that, and just so you know, I’ll speak about trading and investing as being the same thing, I think as you work on becoming a trader as you work on being able to manage the risk and understand the risk; this is going to be a journey that is going to take a minimum of three years and it’s not a get rich quick scheme, it’s not learning how to trade, it’s becoming a trader ([11:23]Houston: Right) It’s learning how you will become a trader, three to five years is probably realistic and this means that you are losing money and at some point your stage for success is you stop losing money so you’re breaking even. And that’s breaking even, but you’re still paying data charges, you’re probably losing money on commissions, you’re probably losing money on maybe some education, maybe some research so you’re net negative. And I know lots of people, I’ve seen lots of people trying to do this over the years and one of the big mistakes you see people make is that they save up a decent chunk of money- and it’s hard to talk about that because; what’s a decent chunk of money? Anyways let’s say someone saves up a year’s salary and puts it into a trading account and they are going to pay their bills, their insurance, their health insurance, insurance for their house, their car, all the utilities and they are going to eat out of the trading account and they are going to trade. That’s not the way this is going to work and you know one of the problems is: yes, there is somebody, somewhere in the world that has been successful that way and it’s always possible to point to the outlier but I really think what we need to do and if we are going to teach people about trading and teach people how to trade, it’s what do you need to do to give yourself the best chance of success. And that doesn’t mean you’re not going to plan to be the outlier, way, way out alone on the tail of the distribution – so you’re literally the one in ten thousand and if you want to play that game go buy a lottery ticket. ([13:51]Houston: Exactly) It’s a lot simpler and your risk reward is probably a lot better but what you need to do, is think what I can do to get the best chance of becoming a successful trader in three to five years, and it means losing quite a bit of money and it means doubting yourself. And I’ve talked to a lot of people, I talked to somebody earlier this week and they said man “I’m so discouraged I think I want to quit this I’m just not cut out to doing it.”
“Well, what’s being going on?
“Oh I’ve been trading for a year and three months and I just can’t make money all I can do is just cover my commissions” And I say you know, you are ahead of the game there, you are doing great, yeah congratulations that’s success. And I think that’s why, it’s not that I want to dump a giant bucket of cold water on anybody’s expectations and say learning to trade sucks it’s going to be really, really hard. I want you to know what success looks like and the first stage of success which may take years is when you stop losing money. And if you go into it with that then I think you are in a very different place mentally and you are just more prepared.
[15:08]Houston: Yeah, absolutely and that’s a great answer. And there are so many layers to what you said there, you know when you’re saying that I’m just thinking, there are just so many traditional learning, for I guess the curriculum of education for a trader, how ever you want to describe it; and even then I know you have written stuff around super learning and it has to be an element of fun and unfortunately it can’t all be fun but in the beginning it has to be a little bit of fun. And that the problem with people they come in and have the wrong expectations and they don’t give themselves enough time to really find their groove, whether they are undercapitalized or they just put the wrong types of pressure on themselves to get to where they need to go and they can’t really find their groove and like you said they end up unfortunately being one of those casualties so…
[15:54]Adam: Well that aspect of fun, well I think that is important because I think one of the things that I have talked about and written about a lot is the right mind state, it matters a lot. Whatever you, there is an old saying I think it comes from Napoleon Hill something like – I don’t want to get this it wrong but “a man becomes what he thinks about all day.” So the ideas, whatever is in your head all the time that’s what you are going to move towards. And I think what really happens is, your brain is almost able to optimize itself for some kinds of learning; and if I tell you kind of an interesting thing; when I was a musician I would take all these standardized tests and for some reason, I always had the skill of taking standardised tests which some people don’t; but I would consistently score much higher on the Linguistics side than the Math side. And theoretically, if you look at a lot of learning theory stuff people are in one camp or the other and you can’t change. And so because I had none of these quantitative tools I went through the process of teaching myself all of the math I needed to know to do trading. I spent many, many hours on the sofa with a book learning Calculus and Statistics while I watched episodes of 24, I don’t even remember what I was doing probably some poor multi-tasking. But one thing that I saw then when I would take standardized tests was that my brain had changed so that my optimization was mathematical. ([17:28]Houston: That’s interesting). And that’s supposed to not be possible but I saw it as a musician and I saw it with a teacher of musicians that the students who learned really, really well and everybody thinks “oh kids are sponges they soak things up.” There is some truth to that but I think maybe more than anything kids play and, a kid will approach something with a sense of playing, with this open wonder. And I think if we can replicate some of that as adults – this can’t be drudgery- this can’t be something you hate, it has to be something you’re excited and you have a very positive attitude toward. And then, if you take this a step further and think about what you were just saying there are a lot of traders who get in a very bad place mentally; they lose some money, they think they are failures, and there is a lot of personal worth, impressions of their personal worth tied up and maybe there are conflicts with family and they are worried what their friends are going to think.? And so you get all of this emotional garbage and junk that just makes it very difficult to learn and you have to kind of work to achieve this state of clarity and this state of play and on the other hand it is hard work and it takes some time, you just have to be tough, you have to be resilient. But it’s having that right mind set that’s very important.
[18:55]”]Houston: Absolutely and you just said it so well there. I’ve always looked at trading as kind of wanting to, if you’re going to, if you are willing to do it. And I think trading is, trading can be one of the most powerful self-development tools, because if you’re actually willing to take the feedback the market is giving you and that your account is giving you, and you are really actually willing to just do the inner work that’s needed and just take that and make the changes inside yourself. Then like you said, then you can build the right mind-set, the right types of beliefs, the right types of decision making practices to help you become a better trader, it’s not going to make you a good trader- but at least you’ll be conducive to good trading.
[19:36]”]Adam: Right. You know I have sort of a, I think there are a lot of stuff that is told to people psychologically. That’s a very poor sentence that I just built, but you know what I mean. Imagine this, imagine the situation, imagine that I sell you a system and it doesn’t work. And then it doesn’t work and you struggle with it and I just say “well, you just need to get your psychology right. So go work on yourself, you’re the problem.” I can’t tell you how many times I’ve heard when I tested some tools statistically and found no edge. Well the response is: you just have to figure out how to make it work for you; well, should I say that about tarot cards or the magic eight ball, or flipping a coin – you just have to figure out how to make it work for you. ([19:30]Houston: Right) And if I give it to one hundred people that work for somebody and they say see there, that person figured out how to use the random coin. So I think we do a little bit of a disservice I think it’s very, very important and if there is one thing that separates my work from a lot of the other thinking, I think it’s that emphasis on you – you really have to have an edge. And I think a lot of psychological problems come from trading without an edge and it’s kind of like you get this feedback loop, if you’re doing something that doesn’t work in the market you should not feel good about it psychologically. So, you can actually address some psychological issues by addressing some methodological issues but on the other hand, you can have a system that works very, very well; somebody can tell you exactly how to trade but you’re completely not able to implement it because of your psychological issue. And so it’s a little bit of a chicken and an egg thing but I think there is another- I’m not big on a lot of these markets I don’t even know why I’m bringing this out here. But there is another that says, if you don’t know who you are then the market is going to be a very expensive place to find out. And I do think that one of the things that I did and I think a lot of traders should do is, you need to do some hard work on yourself and I don’t know what that looks like. Maybe it’s you go on a walk about somewhere for a few months out in the wilderness- if you can afford to. Maybe you spend time in some spiritual practice, maybe you see a therapist, and maybe you do journaling so you’re kind of your own therapist, but I think that we really do need to be very comfortable with who we are in terms of risk, work ethic, attitude toward money, what sets you off- we all have triggers. Then we need to work towards developing this awareness of your state so you can just, for instance, like a day trader who maybe freaked out when he gets stopped out to the tick. And so then that day trader is vulnerable to making other stupid revenge trades to try and get the money back- and he learns this. So what does he do, he somehow tries to break the pattern, it can be something silly like putting a rubber band on your wrist and snapping the rubber band. Or it can be something as simple as getting up, take a walk, making a phone call. So you learn to kind of interrupt your own destructive patterns. But it is, I think that’s a really fascinating aspect, and I don’t think anybody has a firm answer to – where is that sweet spot? Where is that intersection between psychology and methodology? And even if you are a purely quantitative trader you’ll still have some psychological issues because you would have to turn the system on, you turn it off, you decide when to back test, and you decide when it’s ready to go on the risk. You are still making a lot of decisions, and I think a lot of people want to become quant traders because there is the idea of that (inaudible[23:33]). And in a human equation let’s not kid ourselves, you are still a human you’re still going to have some inputs, so it’s like how do you figure all of that out.
[23:42]Houston: And there are so many ways we can unpack what we just talked about there; I guess the one place that I would ask you a question first is: so you know I’ve spoken to a few new traders and a lot of them have these exact same questions. And they are like “where do I start, it sounds like I don’t need to start with the psychology first because I’m brand new to trading, I don’t think I have that much baggage yet. So where do I go and get a proven system with a real edge?” Do you have any advice for people that say – I’m interested in – let’s call it say trading – not investing but trading on a swing trading basis, or on an intraday basis? Where would you actually recommend someone go off and find a system; would you advise they build it themselves or where would they find one that’s reputable or at least proven or something like that?
[23:25]Adam: Well I, let me give shameless plug for a couple things that I have done here. First of all I have put out an extensive trading course and you can find it at adamhgrimes.com/taas. You can also find it on my blog, that might be a much easier way to find it and that trading course is completely free and it addresses this question that you just asked and I make an effort to – I’ll tell you something very exciting and timely with the trading course – I make an effort to give people all of the tools they need, it’s like you have to be shown: okay, here’s how the market works, here are the things that moves, here are the things that happen in the market – a lot of times, these are the patterns, but now how are you going to execute them? And this course walks you through that, it walks you through developing your own system and back testing that system, verifying that system, and how do you build intuition around the patterns; at the same time., you’re really understanding the numbers and the quantitative tendencies, so I think that is a great resource and frankly, the research that I publish with Waverly Advisors I have many clients who are developing traders and I think that this is – with everything I do think I just try to create what I wish that I had when I was learning and I put so much out for free and the research is paid But that is an applied thing where you have all these theoretical concepts but you see – it’s not theoretical when you’re short crude oil and it rallies against you five standard deviations in one day. That is not a theoretical situation so how do you deal with that situation and that’s what the research gives you a chance to see – every day, me talking about the markets, me looking at markets and seeing how the risk evolves and talking about everything in context of the systems and the exciting things about the trading course, you know this is project that I’ve been doing for quite some time and there are – I don’t even know – something like thirty hours of video and hundreds of pages of exercises and I will tell you I’m bringing in some outside voices – some people who are experts on quantitative trading options, psychology so very soon there’s going to be a lot of new material there that takes what I have done and really drills down deeper into some of those concepts and I will be announcing within a day or two the first piece of that – the quantitative module that’s gonna be launching. So that’s very, very exciting and we have some people who are luminaries in their fields talking about specific areas so I think that’s a great resource and there’s certainly are other resources but it’s really, as far as something that will show you how to do the work yourself while also giving you an edge. It’s a little bit difficult to find, there’s not a lot out there – there are no magical systems, there are a lot of systems that are too simplistic and they just frankly don’t work. They are a lot of candlestick newsletters, (inaudible[27:39]) newsletters and I don’t think those things – I can’t find an edge in those things and they tend to go away after a few years – it’s kind of the cycle of things. You know, that’s one advantage we have after being involved in the market for a few decades, you get to see a lot of things come and go and for the person coming in without that perspective and figuring out – there’s so many noisy voices – who do I listen to, where do I focus; you only have so much bandwidth, you can’t do everything – where do you focus, it’s hard to know and I’ve certainly tried to do what I can to maybe point some people in the right direction.
[28:17]Houston: Well, I think you’ve done an amazing contribution and thanks for sharing with the audience early just kind of a sneak peek into what’s coming out and I think it’s a great course; I haven’t spent a lot of time going through the course but I’ve signed up for it and it looks like a great course so I’ll have to find some time to set myself through that. But at the same time, what I get from you Adam is that – you talked about going on vacation and still having your fingers in the markets so I just think you have a real passion for trading; you know you seem so diverse and balanced at the same time around all elements of investing and trading. It sounds like you are vested heavily in not just the technical analysis stuff, not just the quantitative analysis ; I know you have a good understanding of the fundamentals as well but you’ve also gone beyond that and challenged yourself to some of that inner work that we talked about already, right. I know in the past you talked about stuff like meditation, you’ve brought up hypnosis and self therapy and going to a therapist; what do you think it is that captures you so much with the markets that enabled you to have such a fire for trading?
[29:25]Adam: Well, I think my interest in hypnosis and meditation goes back to when I was in college – I was looking for ways to learn music more efficiently and so I wanted to, I wanted to see if there’s this really – and people who played sports experienced the same thing – it’s certainly not unique to music. There would be times where, you would have something that was a problem – like a place where I would consistently play a wrong note – and you kind of hear this inner dialogue coming up. It’s like “ok, well here’s comes that passage, be careful you always get the fifth finger tied up there and you make your (inaudible[30:06]) be careful and sure enough you make the mistake and people do that in tennis and golf; it’s just that, I was wondering if there is some way that I can turn off that inner dialogue. I knew that the times that I performed my best were times when I almost wasn’t there and it was like I transcended in some way which is kind of a scary word to use I guess but it’s like I was so much in the flow of the experience that I have no recollection of the details of what I was doing but it happened. And so I was looking at feedback tools in different ways to try to be able to capture that more reliably and so I guess it’s just my interest. I also – one of my degrees is in Comparative Religion so a lot of the practices that a lot of people – you build a perspective on the range of human experience over a few thousand years of recorded history all around the globe and you start to see some common ground and you start to see that people are having these similar experiences and what does this say – we can have a sense of discussion – but what it says about reality but what does it, more practically say about us as animals, as processing machines; what is it that’s in our cognitive machinery that’s makes us see, feel, experience the same things and be vulnerable to the same kind of mistakes and obviously, the markets are a great place explore some of that ([31:46]:Houston: Yeah) and so I think I brought that interest with me from my past and it’s something that used to serve me very well.
[31:54]Houston: Yeah, interesting. I think I have the same sort of interest because as you’re saying that you know, we talk a lot about set ups and that kind of stuff but at the same time – this is my tenth year in trading now – and what interest me now is still the human behaviour side of it more than talking about set ups and triggers and risk management and stop management and that’s all important but just as a sense of what you’re talking about, yeah – that’s kinda neat. I think that’s the driving, you know when you feel that kinda social fabric and kinda what drives human nature, I think that’s a very, very powerful element and its seems like that’s always, always interesting
[32:30]Adam: What’s interesting I think, you know one thing that’s important to do for somebody who’s trying to wrap their head around the market is to talk to people who have interest or no involvement or no experience with markets. It’s very interesting to have those conversations because they have this idea that what we do is very numerical, very dry and very boring and when I find somebody who is interested enough to listen to me talk about markets and my experience, invariably what I hear is “I didn’t realise it was so creative and I didn’t realise that there is so much psychology and creativity that goes into it ; and it almost seems to – so I tell you, you need to have a disciplined approach with how you will get into trades, how you get out of trades , how you will manage the risk , how much you will trade. You need to be very disciplined in behaviour so all of this stuff seems to be very regimented and very prescribed but there still is this element of creativity and I think ultimately we’re trading – one of the aspects of technical analysis is that I think it has kind of faded away. A few years ago there were a lot of books giving the idea that if you’re not trading set ups, nd I think that’s true: im a little confused why so much of that kinda fell flat and isn’t a message that people are thinking about more but you’re playing a game against a lot of smart people and you’re playing a game – it’s like one of the questions people ask is “why do I?” I remember laying awake at night, practically hitting myself in the head, asking the same question – “how can I be so stupid, how can I make the same mistake, I know when this happened I do this but yet I make the same mistake over and over; how can I even remember to breath as dumb as I am?” And we get into this cycle and so the reason is because the market is the sum of a lot of human behaviour and humans make decisions and so whether you look, you say I’m gonna push the buttons right now or whether you write a program that does it, you’re still – even the program is still human behaviour by proxy and so humans make decisions based on some combination of emotion and reason and I think there is a lot of emotions encoded in market prices and price movements and I think the movements of financial markets are almost designed to cause emotional reactions in us. So when the trader looks on a chart and he see the market move and has an emotional reaction and that’s not a defect in the trader that actually says something very profound about what the market is and about what that trader is and about what that traders relationship is with the market. I think when we understand that then it’s possible to – only through, at least for me, only through that understanding was I able to step back from a lot of the emotional noises in the market.
[35:53]Houston: That’s such a deep and beautifully laid out there; it just reminds me of a book called Riveted by Jim Davies where he talks about sort of the same ideas and in terms of why human beings are so riveted by the social elements and as you described it the markets being kind of that living embodiment of a bunch of human beings – we’re just kinda drawn into it, if we see a certain type of price action it’s gonna cause us to represent things as lots of human behaviour or some sort of human output and that causes me to react in a certain way ([39:24]Adam: Right) and so that just makes a lot of sense to me; so thank you for sharing that. That’s great.
[36:28]Adam: Thank you.
[36:29]Houston: So, let’s just go back for a second and talk about the inner works so I know you’ve written a lot about meditation and you have a great guided meditation course on your website; I’ve heard you talked it in others interviews and you talked about how you got into meditation but why do you think meditation can be effective to traders; what is about the practice and I know you’ve talked about how there are positive traits and negative traits to meditation but let’s just start with the positive stuff, why do you think that’s effective for traders; what does it do for human beings?
[37:00 ]Adam: Well, I think it is – let’s talk about the positive and negative together. I think it helps us access a state of mind that to touch a state of mind that we are not normally that in touch with. And for those of your listeners who don’t know the idea behind most types of meditation is you’re basically looking for a state of mind where your active thoughts turns off and if we can do an exercise like: just try to sit and not think for ten to fifteen seconds and you can’t do it; you’re thinking about what you have to do tonight, you’re thinking about a project you have, you’re thinking about some bill you have to pay and it is very, very difficult to achieve a state of no thought, but what people and you might say, “why Adam that’s kind of stupid, why would I want to do that, why would I want to turn my brain off?” And I guess what I would say in response to that is that, there are experiences in this area of consciousness that for thousands of years people have had very similar experiences in realization and if you think it is dumb and think it is a waste of time, I would at least encourage you to think that maybe it might say something about what we are and who we are and there might be some wisdom there. So I think a lot of people talk about meditation for stress relief, meditation for clarity and I think it is little bit of the wrong idea to go into meditation expecting something out of it and that’s one of the challenges and frankly, it’s one of the big divergences between traditional thought and maybe it is the thought of the East and the thought of the West you know, like today you are going to take an executive meditation course to get boom, boom, boom – these results and you are going to do it in this structured you know, you are going to go through this. Whereas, if you went to a master and you say how do I meditate, he would say just sit and most people we can’t do that, what will I get out of it? Just sit, whatever comes is right. Well how long do I sit? Just sit you know, that’s the answer to everything and it is a very different way of thinking and if you are a person who thinks there is value in different perspective, then at least I would offer that is the perspective you should consider and you mentioned, I have a little, I think it is what 21, 22 day meditation course that is actually one of the projects out of all the things I have done in recent year, it is one of the things I think has come out the best. The format I am just delighted and I am delighted at the feedback that I have gotten; the format is and you probably can tell from talking to me for half an hour here, I talk a lot and often I will talk in sentence of nested parentheses qualifying everything; so I made a very conscious effort to not talk a lot, so what you get in each of these is a little mini, not even a lesson, but I talk for a minute and a half maybe two minutes and then there is an audio track for I am asking you to sit a few minutes, 5 minutes maybe 10 minutes as we go further into the course to just experience different kinds of meditation and there are a lot of different ways that people meditate and what I’ve tried to do in that course, is to show you a lot of different ways and to lead you towards the experience, it’s not knowledge it’s experience and I heard from people, one of the things that is most flattering: a monk contacted me – a Buddhist monk – who said, you know what I sit in meditation everyday for four hours every day and I have for 20 years and I have done multiple meditation retreats where I have sat for 20 hours a day ([41:11]Houston: for weeks) yes for weeks, and he said your course is the best introduction I have ever seen for somebody ([41:17]Houston: high praise) and to hear things and to get feedback like that has just been overwhelming. So if you are interested, in fact even if you aren’t interested I still think you should do it you know, it is right there you know, check it out and give it a shot.
[41:36]Houston: And you know, you said a few things that are funny to me that you were saying that, I was just thinking yeah, in the West we’re so accustomed to that kind of risk reward, not risk reward, but I guess you know a ROI model where I’m gonna invest thirty minutes in meditation so that is going to give me how much to my bottom line; how much is that gonna add to my trading account; but like you said it s an experiential thing and people don’t know what meditation is rationally, they don’t understand that you’re supposed to be quiet but until you actually do it, you cannot explain to someone how it works.
[42:11]Adam: Yeah and you know, everybody has a difference experience and you know I haven’t and I won’t really talk about some of the kind of more far out there experiences, but I certainly have had a few experiences that really point toward an entirely different level of experience and we may live a lot of our lives blind too and this is a way and I guess another thing that I should say is that this is a completely nonreligious practice like people are afraid you know, if I am Christian why am I doing something that is Buddhist; well, it’s not you know, it’s a technology and actually I draw from a lot of traditions and my meditation work so I can offend everybody equally with other practices. But really, what we are doing with that is looking at the, basically the mental technology that people have evolved – the tools that people have evolved – and just you know, it is something that is difficult to talk about because it transcends rational thought, it is another way of knowing, it is another way of experiencing and by the way you know, I said we should touch on the negatives. I think the one big negative is to realize that this is not a cure all. There is actually some evidence that meditation and been in a meditative state can impair certain types of learning, there are certain types of learning that the holistic inductive learning where you’re recognizing patterns and you know you can’t even quantify those patterns, meditation appears in many of the studies to help that kind of learning and I would argue that kind of learning is very relevant to market tuition. However, if it comes to learning something very structured like certain types of math, certain type of engineering practices, being in a meditative state of mind actually could work against that; so there are some other kind of weird things that can happen as you struggle with some personal issues through meditation, it is not a cure all. It’s just a powerful technology that has the ability to make positive change you know and of course with that any medicine can have a negative effect if it’s applied wrong so it is just something that deserves some respect.
[44:40]Houston: Yeah, so can you share your meditation practice? Do you have one today, do you still mediate on a regular basis?
[44:49]Adam: I do. I do two types of meditation and I don’t force it I use to set a timer- my practice is between half an hour to an hour and half – sometimes in two sessions and I do a lot of mantra meditation, I do a lot of just kind of empty mind meditation focusing on the breath until the mind quiets and there are couple of visualization meditations and I share all of these things in the course that have been very helpful to me, but the mantra meditation in particular I find is maybe is the quickest way to snap me into the state – transcendental meditation is a term that a lot of people know and talk about and that is you don’t need to take a TM course, because it’s mantra meditation which you can learn a lot of different ways and maybe I think that is why that has been so successful, because it is very powerful and giving the mind a sound to focus on or a set of sounds can really help to focus the mind and tune out a lot of that noise. So I said I do think that it is pretty important to (inaudible[42:42]) your matters, because one that you find when you sit in meditation is that you have all these weird aches or why does the middle of my chest hurts the way I am putting my arms, you have to figure out exactly how to sit, how to find the right posture, but once you do that and you again people figured all of this out a long time ago and there are meditation cushions – I use one that is filled with Buckwheat husk – which is a traditional Zen cushion, it works very well mechanically I think, so in a way it is not exciting to talk about because you sit and don’t do really anything but I think it is an important practice and don’t be intimidated by the time, somebody who is not meditating, if that person could sit for 15 minutes a day and work up to it initially 5 minutes feels like an eternity, but you can get significant benefits from sitting 10 to 15 minutes a day.
[47:22]Houston: Absolutely. A previous guest on the show Brad Jelinek he shared a really good book on meditation called The Untethered Soul by Michael Singer; it is a great book for the folks out there who want to dig down, it’s not too steeped in science, but it is a really great story and very thought provoking on what meditation does and kind of where that voice comes from, that voice is always in the background that monkey brain; but yeah meditation for myself and just going back to trading and how that leads to me you know, it is what you said, you can’t really draw one to one comparison between meditation and what you are going to see in your trading, but it extends to your life like you said it is a powerful drug that’s gonna have an affect well beyond just your trading or just you know, whatever you are trying to apply to. I just find for me the biggest impact just been that feeling of more spaciousness, so it is having the ability to create those little moments of space before I am going to make a decision for instance with trading or you know if I’m gonna explode at my kids or my son because he is on my last nerve- just having that little bit of space before I go off the deep end I recognize that’s from meditation, so for me that is where I think it is powerful.
[48:11]Adam: Well the perception of time is very interesting; I do think there is something to that and one of the very interesting things and I think it probably comes from day trading for many years and watching (inaudible[48:48]) more often than not, I know what time it is to the minute, like we can be standing in a line some place and my wife says what time is it and I say it is probably [4:17] and it is [4:17], but you also have a short moment can seem like an eternity or you can have an entire day that goes by, so that is something that interest me very much is this perception of time and how to manipulate this perception of time, because I think that a lot of the pressure that we fell comes when this perception of time is a little bit out of whack and if you think about been under pressure, you think about some of the bad decisions you have made, this constant feeling that you don’t really have enough time. Whereas, if you kind of center yourself and it literally can be as simple as closing your eyes and taking a deep breath and letting it out and you control your, it is a connection between body and mind is very interesting, because when your mind gets crazy your body gets crazy right, your body shakes your breathing gets crazy, but what we find is if you can control the body, you can control the mind, so if you can slow down the breathing, if you can calm the body, it will calm the mind and so just sometimes taking that breath can put you in a completely different mental state.
[50.11]Houston: And I just took a deep breath there, it feels better now.
[50:15]Adam: It works.
[50:16]Houston: It does work. So you mentioned about feedback before; what have you tried around bio feedback – I was a big fan of HRV and trying to use heart rate variability to play around that and to see if I could incorporate that into the mindfulness, but have you ever tried any (in audible[50:35]) feedback like HRV or anything else?
[50:37]Adam: I have done a number, I actually don’t even remember. When I got interested in all of this stuff, I offered myself as a guinea pig for a lot of psychology experiments, I did a lot of bio feedback stuff, a lot of you know, skin resistant, breathing, heart rate. I did also some work on my own a little bit more recently with some brain wave machines, you know, you begin to see that all of that is not quite as simple as people talk about. The brain goes into data waves, well actually there is a lot going on in the brain electrically it is a lot more complicated, but is very interesting people talk about like alpha wave state, well I can tell you how to achieve an alpha wave – you close your eyes and your brain and so you see that with the machine – it is interesting to me, it was a little bit difficult to carry those lessons to apply the tools of bio feedback outside of the bio feedback thing, I think in the meditation course I talk about some things, like some of the hand positions – the mudras – in meditation where you know for instance you might just very lightly touch your thumb to your middle finger when you sit, that is a bio feedback method in itself and what you will find is if you lose focus, your fingers will start pressing together or they will come apart and you can also use something like that to kind of monitor your state. For an intraday trader who’s exposed to stress, something like that can be a very simple tool; so short answer is I have experimented with it, I think it is interesting, I think it works for some people, I know that there are some good work been done in sports performance with bio feedback, it’s probably not something I have not done enough work with just to be honest.
[52:38]Houston: Yeah, that’s fair and what a great little tip, I want to remember that one, the thumb to the index fingers alright…
[52:45]Adam: Any finger – the idea is that when you and if you read a lot of the old text you know, it is like they think that there are things that go on energetically in the body and you know, we can have a debate about that, I don’t know if it is true are not, I can’t prove it, it doesn’t matter, but what does matter, if you do, if you imagine basically lightly holding a sheet of tissue paper between your fingers and if you maintain that spot, that focus can be a spot of focus for meditation and when your mind wonders your fingers will start to do strange things, so it is a kind of cool tool.
[53:11]Houston: Yeah absolutely, it definitely draws a little more of consciousness to what you are doing, so that is a good one, a very good one. So we really have covered a lot of stuff already, but I have a ton more questions to ask you, but I want to be respectful of your time. It sounds like you have a deep background in starting off in day trading, but you took it upon yourself to learn Math and to get into the world of Quantitative Analysis. What drew you in that direction, why not just stay with the principles of day trading, what was working with your day trading?
[53:56]Adam: Well, I really wanted to understand my edge; I wanted to understand how stable it was and I knew that there were all these people who were doing all of these quantitative things that I did not understand and I thought that there might be, I basically did not want to be at a disadvantage and that was back in the day when the Nero net was still that was going to solve everything ([54:19]Houston: take over the world) and now we know that’s not – it is a great way to curve it if you want, but it is not so practical going forward. I just knew that there was a way to understand the market, that I did not have the tools, I had to get the tools and I saw no reason why, yeah I could not come up with a convincing reason why I would not do it and it was also little bit of cynicism, because I saw people talking about things and there was a time when I was heavily into, I did all of the Gantt stuff, I did all of the Elliot wave stuff and at some point, I thought how much of the stuff really works and you would hear about all of these people making- you always hear about people in chat rooms making money off of whatever and the price always bounces from the 20 period moving average. And I thought, does it really? And then I went back and kind of did a little, my first back testing was by hand and I saw, you know- sometimes, sometimes not – you have to have the statistical tools to look at data and I think it is not just like taking a class because you have to go to the next level where you have some intuition and it is one thing there are a lot of people who can tell you the formulas for a PDF and how you understand something. It’s another thing to know what does it mean that I am working within this probability distribution and how likely am I to have a good result or a bad result, how likely is it that my good result is just due to chance and you start to realize how many errors people make just due to like little cognitive quirks, like people are so determine that these lines means something on chart and well you know, we can test that, if a line means something then you should be able to tease it out of the data quantitatively and all of these people who talk about these secret levels and even the Fibonacci ratios you know, I am not aware of and maybe I am just not aware – it’s certainly possible – I am not aware of any test that shows the statistical significance to Fibonacci level, but yet all these people say you can’t argue with math you know, it is like here it is top of the 161.8 blah, blah, blah retracement level. Well you just draw any line on the chart and because of the way we process patterns it will look significant to you, that’s one of the – as I have gone through and I really don’t want to be in that position of debunking a lot of things, but that’s the position I have accidentally found myself in as I have gone through. I remember there was this technical indicator that a lot of people were, you would hear people banking so much money with it and it did not work when I tried to use and I knew the developer who was also not able to make it work yet there were all of these people who were supposed to be using it making money and supposedly somebody had done an extensive back test and when I finally track down the person who had done “the quantitative” and I will say quote to make sure you hear the word (inaudible[57:55]) all he had done was wrote a study that plotted it on a chart so you could see here is what happen, here’s where it happen and I say yes but what happen – and he said well can’t you just see that it works. No you cannot you know, I can certainly find examples where it works, but you know what happens over the course of thousands of trials – literally the question is – does it work more often than it doesn’t or does the distribution of returns after it occur, is that some way favorable to a trade? Does it look somehow different than a coin flip? That is the question and it is a simple question, but it turns out that you need a fairly good working understanding of statistics to be able to ask those questions and understand the answers and I did not have the tools so I had to get them and you know really I think there is so much good material out there for free, there is so many University courses from topnotch schools you can buy a text book and teach yourself any of this stuff with a little bit of dedication and I think that so many people spend time learning the magic indicator crossing the moving average system when they probably should be learning probability, they should be probably learning statistics, rather than figuring out what to do when the RSI goes below 34.
[59:22]Houston: Right, and so how is that role of intuition and you kind of brought it up, so where does the role of intuition kind of fit into that? So is there a way to intuition layers into trading with that quantitative approach and without it?
[59:36]Adam: Yeah, I think it is very important, I think the thing about intuition – intuition is difficult because my theory at least – I think intuition, here is why it is so hard for beginning traders. Intuition communicates to you along emotional channels, you know people talk about feeling something in their gut or having a feeling in their body, people experience intuition in different ways, well that’s also the same channel that your nerves speak to you on, you know and when you have so much other stuff going on in your body, you can’t listen to that still small voice of intuition, so part of it I think is the beginning trader is not very well positioned to use intuition, because first of all he has no reason to have intuition. Intuition is the result of seeing a lot of data, seeing a lot of market situations and beginning to kind of get some sense of what usually happens, that is really what intuition tells us, so this idea that somebody is going to have no experience with markets and just have some magical market genius, maybe that happens I don’t think it happens you know, you have to be careful to say never. I think really intuition is somebody who has seen a lot of stuff and is able to process on some level that goes beyond rational thought; but also that beginning trader, not only does he not have that level of experience to draw from, but he is also very noisy emotionally and he has all of the stuff going in his emotional state that makes it even more difficult, so like all of that has to be dealt with before intuition can be valuable.
[61:15]Houston: And my thoughts around that are really kind of tied to you know Daniel Kahneman’s work in his great book Thinking Fast and Slow.
[61:23]Adam: It’s a good book.
[61:25]Houston: Yeah, until traders can develop that as you said that depth of experience you know, you don’t want to be using those (inaudible[57:58]) that are based on small sample sizes, you can’t really trust those until you have a great deal of experience that is positive and that’s important to a system that you can trust, so leave all your intuitions until you’ve had a lot of experience; so that’s a very good point, so a couple more questions before we wrap up, I wanna be respectful of your time. We talked about performance before; what do you do to get the best out of yourself, because you are very, very productive, I know you spend hours a day – I know you have a very good process reviewing charts and staying on top of the markets and blogging and writing and sharing, so how do you stay so productive? What has been your key to being such a high performer?
[62:26]Adam: Well I think part of the, I don’t remember where I read this; it is easy to think that you have writers bloc and to say I really can’t write. I think I was reading – and I should find out where this is from – and somebody said that his father was a truck driver and he never had the luxury of having truck driver’s bloc, so if your job is to write, if your job is to produce content, then you write that is what you do and you know, I certainly know when I go back and look at what I have written that some days are better than others and some days what I write is mostly garbage and that is the way I wrote the book, I wrote the manuscript in less than three months, it was a 950 page book which we only get to publish half of and I just basically made myself do it. I think it is also important you know, you find some time to recharge, you take some walks outside you know for me cooking is kind of therapy like the you know, the hands are busy, the mind kind of shuts off, so I do little things like that, it is kind of matter of understanding what you need and I don’t think that there is anything that I can tell you that anybody else can apply, but basically I make myself work and then take appropriate time away every now and then, I don’t need a lot of sleep so that is one thing that also helps, you kind of just try to listen yourself and respect your needs I guess.
[01:04:10]Houston: So Adam, you have a very storied journey with trading, so a question that I like to ask all my guests is around: if you had a chance to go back to your younger self and give that 20 year old version of you a piece of advice, what would you tell that person, would you change anything?
[01:04:28]Adam: I probably would, I mean you go back into a time machine and step on an insect in prehistoric times and we all evolve into tentacle who knows, so I probably wouldn’t really change anything, I mean my journey was not a straight path; there was probably times when I wish that I had a little bit more of a formal finance education sooner, but really I think my journey led me through some kind of interesting paths and I am probably better off for it, so I don’t think I would change anything.
[01:05:08]Houston: But any advice you would tell that person, something to pay attention to or do less of?
[01:05:14]Adam: I would just tell him, he will figure it out.
[01:05:18]Houston: Great answer, so one last question before we wrap things up. So you know, right now we are in a pretty volatile market you know, and the folks that are listening, it Thursday and on Monday we had a pretty steep sell off, it’s Thursday the 27th today of August, if you are talking to a struggling trader out there who is you know having a real difficulty with these markets or you know, with these conditions. What kind of advice would you tell that person?
[01:05:46]Adam: Well, I mean you have seen some market action here that is in the 99th percentile historically, so you are seeing so extreme markets, in some sense though extreme markets are normal; here is a quantitative lesson that is a very practical applications you know, people talk about fat tails and most people know what that means, that you have more extreme things both good and bad that happens in markets, but people don’t realize the other lesson of the fat tails, which is where does the weight comes from and it comes from the shoulders of the distribution, if you don’t know what I am talking about, most people do, you can just Google and see. So what this means is that the markets are more boring, there is more stuff in the middle of the distribution, meaning there is more quiet boring days, minutes, hours, trading results and there is also more extreme things than we would have expect and that normal curve, the bell curve that would you know, maybe a good touchdown for intuition; so you are going to have a lot more crazy times and a lot more boring times than you might have expect. So in some sense these extreme market conditions while they are by definition rare are a core feature of markets and you need to experience those. I think until you live through experiencing, I don’t know what the answer is maybe about a decade of market data and I don’t mean going back and doing research, I mean living through it you know, it is a very different thing and I don’t think you get a level of understanding that can’t really come any other way you know and somebody introduces a senior trader who has been trading for two or three years, like I don’t know how valid that can be, because you need to see all of these market environments and market environment that you have not seen before – well some market environment that nobody has seen before – but it also you know, it’s kind of the paradox that every moment in the market is unique and it never has quite been like this, but within that kind of crazy frothy, you know whatever there is also regularity and that uniqueness is the regularity and the rhythm of the market and I realize I just said something it sounds like a fortune cookie, but I think there is actually some truth to that and so you just don’t expect to be able to handle it, don’t kick yourself for losing money, next time something like this comes along, you will be better equip to handle it.
[01:07:30]Houston: What a great answer; until you’ve gone through a few of these market cycles, you really don’t know how you are going to react, so you can have a very defined trade plan, but the reality is that when the crack hits the fan you really don’t know how you are going to react until you live through a number of them, so like you said, experience is sometimes the only teacher.
[01:08:51]Adam: When you reduce position size you know, I think that is part of the answer and again you know, let us just put numbers to it. Let’s say you are trading S&P futures and you have a $5,000 account and I think is a pretty good recipe for failure, right, but there are a lot of people that are in that situation and you can’t trade this kind of market, because if you are normally using- again I’m just making up numbers – using 2 or 3 points stops and then you need to widen those stops to 10 to 15 points; well you can’t do that, so maybe you need to step aside, if you can reduce position and of course different instruments get position size, different instruments give different possibilities; but as the market become more volatile, you can reduce your position size, so your P&L doesn’t become volatile and if you are that beginning trader and your goal is to make and I don’t know how valuable it is to have goals, I think it is a questionable thing. Let’s say you want to make a $100 a day, you don’t look at days like we have and go man those were crazy days I should have made $2,000, no what you should have done is reduce your position size so you made $100, so you are keeping everything proportional and the reality is, if you are at the more beginning stages of that developing trader road map, you are probably going to lose money on a day like that, but let’s lose $100 instead of losing your whole account
[01:10:25]Houston: Right and that is great advice and I would love to get your opinion more about goals, because that sounds like a very interesting topic, but I am going to have to leave it for another day.
[01:10:31]Adam: Okay, sure
[01:10:22]Houston: But again Adam, thank you so much for you level of engagement and all your contributions to the trading community. What is the best place to stay connected with you? So where people can follow you, get engage with you and so on?
[01:10:45]Adam: Thank you. Sure, so start at my blog which is adamhgrimes.com and the blog links out to my trading course there you know, I gave you the URL for that, but it is easiest to find from the blog, follow me on Twitter at adamhgrimes and if you are interested in seeing my research, I would love to let you take a look at it, my firm is Waverly Advisors and you can also find that conveniently from my blog, so you know, check me out and I try to be very responsive to messages, so feel free to hit me on Twitter, drop me an email. A lot of the ideas that I have oh, and also check out the podcast, guess what, which you can find from the blog, so go to adamhgrimes.com. A lot of the blogs that I have written, a lot of the podcast episodes have been generated by the reader questions and reader ideas, so I don’t care if you have been doing this for a month and you think your questions are stupid; your questions are not stupid, your questions maybe basic, your question may actually be quite advanced, but your questions are certainly questions that other people want have and they are valid questions, so you know, I love interactions with my readers, so please feel free to reach out.
[01:11:55]Houston: Cool, well thank you again Adam; it was a real pleasure to get a chance to talk to you, I really appreciate the time today.
[01:12:00]Adam: You’re welcome and thank you.
[01:11:02] Houston: Alright, take care.
- The Art and Science of Technical Analysis – Adam’s Book
- MarketLife – Adam’s Podcast
- The Art and Science of Trading Course – Adam’s free trading course; just released – new module on Quantitative Analysis
- The Meditation Experience – Adam’s meditation course
- Finally here’s a great interview with Adam going deeper on the topic of meditation and trading:
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