Monday, August 31, 2020


Most recent blog post - Overnight Vs. Day Performance in Stocks

Most recent Forbes post - Integrating the Light and Dark Sides of Your Personality

Most recent podcast:  Using Cognitive-Behavioral Methods to Become a Better Trader

Trading, like any great performance field, is an arena in which our self-development is an essential part of honing our craft.  Welcome to TraderFeed, a blog site that now also serves as a repository for nearly 5000 original articles on trading psychology, trader performance, and trading methods.  Within the extent of my knowledge, this is the largest single source of trading psychology material in the world.

The links on this page will help you navigate the database of posts to find the information most relevant to your development.

My coaching work is limited to trading and investment firms, so I cannot provide online advice or services to individual traders.  I do, however, welcome questions about the ideas in this blog.  You can email me at the address on my bio and contact page.  I'm also available via Twitter (@steenbab), where I'll continue to link new posts and articles.


I wish you the best of luck in your development as a trader and in your personal evolution.  In the end, those are one and the same:  paths to becoming who we already are when we are at our best.


Friday, March 22, 2019

Overnight Versus Day Performance in SPY: What It Might Mean For Your Trading

Note the blue and red lines in the chart above.  If you were to just look at those, you would conclude that they are totally separate instruments.  Trend is different.  The volatilities of the time series are different.  And yet, they represent a single market:  the SPY ETF of U.S. stocks.  The blue line represents cumulative price changes during the overnight (from each day's close to the next day's open) and the red line represents cumulative price changes during the day session (each day's open to the same day's close).  

What can we infer from these time series?

Much of the overall upward trend in stocks has been expressed during overnight and pre-market hours in response to overseas buying and buying in response to pre-opening data releases.  Day traders have not participated in the general upward drift of stocks over the past 15 months.

Flows from overseas impacted by the returns from international markets are markedly different from flows dominated by U.S. participation.  The series is dominated by the trade during the last quarter of 2018, when U.S. participants bailed out of stocks relative to non-U.S. participants.  Much of the rebound so far in 2019 has been those U.S. participants jumping back into stocks.

Swing trading has been difficult because these time series are independent.  We cannot assume continuity from day periods to overnight periods.  The correlation between price behavior during the day and during the overnight has been -.03.  For this same reason, investors managing risk very tightly can easily get stopped out when trading in one period fails to follow through with the action of the previous period.  

I will hazard yet another perspective:  Recent trading in U.S. stocks has been dominated by the herd behavior of equity and macro funds.  Those funds, spooked by seeming Fed tightening, began selling in 2018 and then accelerated their selling to retain profits for the fiscal year.  When the Fed emphasized "patience" in its rate and balance sheet policies, those funds were underinvested and needed to gross up their exposures to generate performance for the new year.  

Interestingly, we're starting to see divergences in behavior among sectors, with banks, industrials, and small caps underperforming.  That may be an initial indication that the herd might be behaving in less herd-like ways going forward.  At some point, the fundamentals of individual companies and industries will begin to matter once again.


Monday, March 18, 2019

Making Sense of This Stock Market

I've been hearing from many confused traders who have underperformed the overall market during this run from the December lows.  The common refrain is that they are waiting for a pullback to enter the trend--or they are looking for the start of a larger move to the downside.  I heard this late in January, then in February, and now in March.  Aren't we due for a substantial correction?

Let's get a little perspective.  Above I've charted one of my favorite indicators, the cumulative NYSE TICK (red line), versus SPY (blue line).  The cumulative TICK takes the average five minute reading of upticks versus downticks for all NYSE stocks and adds the value for the current five-minute period to the running total.  It thus works similar to an advance-decline line, but is much more sensitive to short-term strength and weakness.

Note how the cumulative TICK line topped out well before the overall market peak last year.  This led me to question the viability of the rising market.   Indeed, the market--and the cumulative measure--fell precipitously during the fourth quarter of 2018.  Then, however, with the dramatic turnaround in Fed policy, we saw a dramatic move higher in stocks--and in the cumulative TICK measure.  As I pointed out earlier this month, this kind of strength is typical of bull market momentum, not a market getting ready to roll over.  Very recently, we've seen some breadth divergences with fewer stocks making fresh one- and three-month highs, but until we see a meaningful expansion of short-term new lows and a sustained turn in the TICK measure, it's difficult to make a case for more than normal pullbacks.

One of the problems that I'm seeing is that traders committed themselves to a bear view late in 2018 and have been fighting the recent rising tide ever since.  That getting locked into a view is a classic case of ego-based trading, where being "right" becomes more important than following the market.  In the recent Forbes article, I summarize fascinating research dealing with dark and light sides of our personalities and their impact on our trading performance.  (Check out the links at the end of the article, which lead you to a free online test that allows you to get feedback on your own light and dark traits!)  An important implication of this perspective is that we need to channel our ego needs in constructive ways so that they don't color our trading.  We don't trade well by making market calls.  We trade well by sensitively following what markets are actually doing.


Thursday, March 14, 2019

From Discipline to Self Discipline

In his book 59 Lessons: Working With the World's Elite Coaches, Athletes, and Special Forces, Fergus Connolly makes a very interesting distinction between discipline and self-discipline.

He points to elite special forces troops.  When they begin their training as soldiers, they are expected to do what they are told.  When their commanding officers give an order, they follow that order.  That is discipline.

When that soldier gets to the point of special forces training, however, the situation is different.  The challenges faced by special forces operators are complex and ever-changing.  They can't possibly rely upon commands from a superior.  They have to think for themselves.  As Connolly observes,

"...especially as conflict has become much more unconventional, a need has arisen to develop independent operators who can think and act with ingenuity in highly unpredictable situations...there is no such thing as external discipline with elite performers, only self-discipline...Discipline is what you do at the behest of someone else, while self-discipline is when you do it on your own initiative." (p. 184).

So how does this relate to trading?

Many traders look for recurring patterns in markets ("setups") to guide their entries.  Examples would include breakouts from ranges, gaps on news or earnings reports, moving average crossovers, etc.  Acting on those setups with fidelity is discipline.  Traders are doing what they've been taught.

What happens, however, once the trade has been placed?  Very quickly the flows of buyers and sellers create a fluid, complex situation not unlike that faced by the special forces operator.  Now there are no mechanical setups to act upon.  The trader has to think independently about whether to add to positions, scale out, hold for targets, stop out, etc.  Responding to those fluctuating conditions requires self-discipline.

I have been impressed in recent years at how many traders generate good ideas and enter positions at good levels.  They simply cannot weather the price path once the positions are on.  Very often, when we review where they stopped out of positions, we find that the trades ultimately worked out and hit planned targets.  The problem was not discipline in finding and entering trades.  The problem was the self-discipline required to navigate the trade.

Not every good, disciplined soldier can function as an elite special forces operator.  The ability to follow instructions is not the same thing as developing principles and guidelines for navigating fluid, complex, uncertain situations.  Discipline is all about "if A, then B".  Self-discipline is more about envisioning multiple what-if scenarios and knowing how to respond to each.  The disciplined trader takes the break out trade.  The elite trader tracks order flow and the flow of buying and selling from the point of breakout and flips the position if those breakout flows are not sustained.

A great deal of trader education emphasizes discipline.  Success in financial markets, however, requires self-discipline.  The training of traders should look more like the training of elite performers who operate in fluid situations and less like the training of grunts in basic training.

Further Reading:


Sunday, March 10, 2019

Trading With a Flexible Bias

In the most recent post, I outlined some of the risks of becoming wedded to trading plans and thus trading with a bias that prevents us from adapting to how the market is actually trading.  By coincidence, Steve Spencer of SMB posted this excellent video that provides a practical example of how he traded his plan in the stock $NIO.  He entered the trading day with a view/bias, was stopped out of most of his position, but quickly identified criteria that would get him back in the trade.  Sure enough, after spiking higher and taking him out, $NIO went back into its range and gave Steve a profitable opportunity to act upon that original plan.

By being very aware of key price levels, Steve was able to determine whether the stock was ready to make the move he anticipated.  When $NIO moved to morning highs, Steve lost the trade, but not the idea behind the trade.  This allowed him to trade flexibly within his bias or plan.  The discipline was not stubborn adherence to the original idea, but knowing the price levels for acting upon the idea.

I notice many successful short-term traders making use of the idea of key price levels.  What they are doing is identifying prices at which other traders act in concert, highlighting levels from which we can potentially expect supply/demand imbalance.  There are many tools available for identifying such price levels, including:

Market Profile - Effective in identifying impulsive moves out of value areas, starting potential trends;

Market Delta - Effective in visualizing volume coming into a market, hitting bids or lifting offers, starting potential impulsive moves;

Bookmap - This is an order flow tool that I'm starting to explore.  It creates a chart of historical order flow, highlighting price levels where large traders lurk.

I also recommend following Steve Spencer.  Over the years, I've come to appreciate his effective trade planning.

As the quote from Eisenhower suggests, the important thing is not the plan, but the planning process.  None of us can predict price paths perfectly.  At any time we can get stopped out of a trade.  The skilled trader has criteria set out for determining when the idea is wrong--and for determining when the idea is still valid to re-enter the trade.  

Great trading is trading with flexible plans.

Further Reading:


Wednesday, March 06, 2019

The Perils of Trading Your Plan

We commonly hear the advice that traders should "stick to their plans" and that planning and remaining true to plans is the epitome of discipline and the key to success.

It ain't necessarily so.

Let's take an analogy:

If I meet with a person for the first time in a counseling session, I don't go into the session with a treatment plan.  That would be crazy.  Rather, I listen to what the person says, look for patterns in the issues they present, and then come up with an idea of what might be going on.  I'll run that by the individual and, together, we'll develop a plan for addressing those problems.  Very often the plan will be grounded in the kind of helping that research has found to be useful for the issues presented.

If I were to start the session with a plan for intervention, the therapy would be doomed from the outset.  I would be imposing my views and understandings on this other person without listening to what is actually going on.

Surprisingly, many traders go into a day or week with their plans firmly cemented.  They don't wait to listen to the market and detect themes.  They decide that the next move will be up or down and they place trades accordingly.  

Folks, that is not trading a plan.  It is trading a bias.  If you don't listen to the market and instead impose your own view of what *should* happen in price action, you are not sticking to a plan.  You're sticking to your bias.

A true plan, whether for medical patients, counseling clients, or markets, outlines different possibilities for different presenting challenges.  It's really a decision tree, which you navigate by collecting information.  A treatment plan comes from a thorough history taking and diagnosis.  A trading plan similarly comes from an examination of history and a "diagnosis" of how buyers and sellers are behaving in the here and now.

The key skill is listening with an open mind.  When we focus on formulating our plan, we're consulting ourselves, not the market.  There's a lot to be said for coming into the trading day or week with hypotheses, not conclusions.

Further Reading:


Sunday, March 03, 2019

New Bull Market: Who Dis?

Yeah, that first ring must have really confused Alexander...!

Meanwhile, we keep ringing up higher highs on rallies and higher price lows on corrections.  We also continue to see the number of stocks registering short-term new highs expand.  This past week, for example, well over 1000 issues made fresh one- and three-month new highs, the strongest figures in quite a while.  New three-month lows have been consistently below 100.  

Even so, wannabe bears continue to talk about how we're overdue for a correction, how global economies are stalling, how trade wars will derail us, etc. etc., all the while missing what has been happening the last two months.

Who dis?

OK, so that's water under the bridge.  What can we typically expect in a year in which January and February start strong?

It turns out that Ryan Worch of Worch Capital has addressed this very issue in a post that pulls together a good amount of analysis.  He finds that early momentum during a year tends to continue over the following ten months.  There are corrections to be sure, but the vast majority of occasions have been higher by year end.

One possible reason that might be relevant to the current market is that the bull move of 2019 has been global.  Worch cites the work of Charlie Bilello, who finds that, out of 48 country-based ETFs, only two are showing negative returns thus far during 2019.  With central banks seemingly on hold globally, investors have been emboldened to own yield, own stocks, etc.  Bearing this out, my cumulative measure of NYSE stocks trading on upticks versus downticks has been relentless in making new highs.

As Bilello points out, however, every time is different.  None of us have seen this movie before, and that calls for a degree of humility.  Could war erupt or vicious trade wars?  Could we see major disruptions in a messy Brexit?  Of course.  Just as the Fed's turnaround at the end of the year turned equity markets around, surprise events could put us in reverse.

All that being said, momentum markets tend to correct more in time than price, as bulls late to the party look to add on any dips.  So far that's been the case.  Too, when we have pulled back, there have been enough bears that we see evidence of hedging in the put-call data and in the elevation of implied volatilities relative to realized vol.

At the moment, VIX has come down and we're not seeing the same level of hedging as earlier in the rally, so it may take more corrective action to shake out those late bulls and suck in the hopeful bears.  I have to say, however, that the number of traders I speak to who hold the view that we're moving to all-time new highs in a fresh bull market is close to zero.

Who dis?

Further Reading:


Thursday, February 28, 2019

Taking the Risk of Accountability

SMB recently published top trading tweets from their prop desk.  There are good ideas there, but one jumped out at me.  It encouraged traders to post their report cards daily, not just their P/L.  Sharing P/L each day can be humbling, but sharing your report card is something different.  The report card includes everything we've done well and also the mistakes we've made.  If we've traded poorly from a process vantage point, it will show up dramatically on the report card, even if P/L is relatively flat.  Sharing our process grades makes us extra-accountable.  It's taking a risk.

It's very interesting:  one thing I've found predictive of a trader's success is the amount of detail they share with me in meetings.  Some traders are really upset about not doing well and provide exhaustive detail to track down what they might be doing wrong.  They have very specific goals and very detailed ways of tracking their progress on those.  They come to meetings with me with prepared questions and topics to discuss.  Very often, they have materials to share with me prepared as well.

Other traders breeze in and don't have a specific agenda.  They talk about what's going right and wrong in a very general sense, but there is no particular urgency in their presentation.  Their goals are broad; they are not tracked on a systematic basis.  Many times, they will use time with me to complain about market conditions, not to truly discuss their trading.

Bottom line is that some traders take real psychological risks when they meet with mentors or coaches.  The kimono is wide open.  Other traders stay comfortable.  They take few risks; they avoid uncomfortable realities.

If you can't take risk when you meet with team members, how will you effectively take risk when market conditions line up?

Comfort is the enemy of change.  The big risk is staying stuck in the status quo.

Further Reading:


Sunday, February 24, 2019

Primary and Secondary Problems in Trading

In this post, we'll explore a very important concept:  the difference between primary and secondary psychological challenges and why that difference makes an important difference in our trading.

A good place to start would be anxiety.  Suppose we experience panic symptoms where, out of the clear blue, we suddenly feel very high levels of anxiety.  Panic can be very scary for people because the anxiety seemingly makes no sense.  We can be resting in bed or walking on a street and suddenly experience overwhelming feelings of dread and fear.

Panic disorder would be considered a primary problem in our example.  It's treatable with cognitive-behavioral therapy and medication in a relatively short period of time.

Let's say, however, that we become so afraid of our panic symptoms that we stop doing normal activities.  The last time we had a meltdown was in a shopping mall, so now we'll avoid groups of people or public places.  Maybe the panic attacks have been when I've been alone, so now I try to avoid situations where I'm by myself.  Or maybe I feel as though I'm going crazy--there's something wrong with me--so I lose confidence in developing relationships and begin to feel lonely and depressed.

All of these are examples of secondary problems.  The fear of open places (agoraphobia) or the depressed feelings are the result of how I respond to the primary problem.  How I think and react to my problem can create entirely new problems.  That can make our situations seem quite complicated.

As Shakespeare's quote suggests, how we think about things creates our reality.  If we respond negatively to a primary problem, the odds are good we'll create a new, secondary problem.

Let's take an example from the trading world:

A young man I worked with was losing money in trading, largely by trading too often, sizing individual trades too large, and taking trades when not much was going on in the market.  As his losses mounted, he became frustrated and discouraged and stopped putting as much time and effort into his preparation.  His frustration spilled over to his relationship with his girlfriend and they were now talking about splitting up.  Nothing seemed to be going right in his life.  He was feeling pretty down when I met with him.  In fact, he had met with a trading mentor/coach, who encouraged him to calm himself, trade more patiently, and stick to his trading plans, but none of that seemed to help.

It turns out that the young trader's primary problem was attention deficit disorder (ADD).  The very thing that attracted him to markets--the stimulation and risk-taking--was the thing that got in the way of his staying focused in his trading.  The lack of focus led to impulsive trades and eventual losses, which then created secondary problems in his relationship and in his mood.

The trader addressed the primary problem through medication and with biofeedback exercises that train the mind for focus and this enabled him to trade in a disciplined manner.  He began to make money, felt better about his situation, and addressed the problems with his girlfriend by helping her understand what had been going on for him.  We worked on alternate ways of dealing with frustration, including ways of constructively engaging the relationship during times when trading didn't go well.  Had we not addressed the primary problem, however, no amount of "trading psychology" advice or techniques would have helped him.

Very often, what look like primary problems in trading--such as loss of discipline--are in fact secondary consequences of other, less recognized difficulties.  How we think about the actual primary problems creates the negativity and frustration that leads to the secondary overtrading, FOMO, etc.  The challenge facing us is to identify the problem underneath our poor trading.  

I recently suggested that a major primary problem affecting traders is using trading to meet psychological needs for which trading was never designed.  If we come to markets with self-esteem concerns; unmet needs for recognition; an inner sense of failure from previous efforts at achievement; or a lack of excitement and purpose in life, those primary problems will burden our attempts at trading with an open mind.  "It is amazing how much easier it is to tackle trading challenges, " I wrote, "when trading is not burdened with needs it was never meant to fill."

Take it to the bank:  people who trade out of unmet needs need to trade.

That is a common primary problem, and one that deserves priority.

Further Reading:


Wednesday, February 20, 2019

Using Your Body To Program Your Mind

One of the most common questions I get from traders is how to tune out thoughts and feelings that can sway our decision making.  Some of the common steps traders take to keep away fear, greed, and frustration include focusing exercises (including meditation) before the start of the trading day and taking breaks during the trading day to clear one's head.  What is interesting, however, is that, despite these steps, many traders continue to struggle with impulsive, reactive trading.

What is going on?

First, let's establish why this is important.  As the quote above suggests, when we quiet our minds, we gain access to our intuitive knowing.  There is nothing mystical about this.  Our pattern recognition represents a non-verbal level of knowing.  We engage in that form of information processing every time we drive a car or read a person in a conversation.  If we are busy talking to ourselves--engaging in inner chatter about missing trades, needing to trade bigger, losing money, etc--we by definition are not in our non-verbal processing mode.  We cover over our intuitive processing with our endless self-talk.  Quieting our minds provides us with access to what we know but don't necessarily know that we know.

So let's say we practice relaxation techniques prior to trading and teach ourselves to focus our attention and calm ourselves.  That way, when we become stressed and go into fight-or-flight mode, we can return to our exercises and regain our composure.

Sounds good, but it doesn't work that way.

The problem is that the state we are in when we are doing our exercises is miles apart from the state we're in when we're experiencing our fear and frustration.  We can't prepare for the heat of battle off the battlefield.  The skills simply don't transfer.  That is why behavioral therapists try to recreate stressful situations through imagery and gradual exposure while engaging in the self-control exercises.  We need to program our minds for when our bodies are going haywire. Otherwise, we perform the exercises fine prior to trading and during our breaks and then fall back into reactive processing when the fight/flight mode is upon us.

A technique that behavioral psychologists have found helpful is known as interoceptive exposure.  What this means is that we simulate the physiological state that is associated with the stress and then learn effective coping methods.  For example, someone with a panic disorder might go round and round in circles making themselves dizzy and lightheaded.  This simulates some of the physical sensations of panic.  In that state, the person practices their coping techniques, so that they can stay calm and centered despite those sensations.  When panicky feelings actually hit, they now are prepared for them and don't become stressed by their own anxiety.

It turns out that many of our problems are not due to initial stress and anxiety reactions, but to our getting stressed out about our stress!  This is known as secondary anxiety.  Through interoceptive exposure, we literally program our minds to stay focused and relaxed during those initial periods of stress.  Then, sure enough, the stress passes without causing us distress.

So how does this relate to trading?

I've recently begun a creative exercise that has been greatly helpful not only in trading but across a number of challenging life situations.  Each morning I do an aerobic workout on my treadmill.  The idea is to keep myself in an elevated, target heart rate zone for a certain period of time.  My Fitbit tracks my progress on that.

The unique part of the exercise is that, while I am working out on the treadmill, I practice my deep, regular breathing and focused imagery.  In other words, I get myself "in the zone" by quieting my mind while I'm sustaining an elevated heartrate.  Through daily practice, I've become quite good at entering that flow state during my time on the treadmill.  A side benefit is that the workout seems to go much quicker, and I more quickly find my second wind.  Once in the flow, I don't really feel fatigue.

The greatest benefit, however, is that the daily repetition literally trains and programs my mind to stay focused and calm--i.e., stay in the zone--while my body is aroused.  That fight or flight state begins with elevated heartrate and a speeding up of physiological functions.  By training ourselves to stay relaxed through the initial arousal, we can make that fight/flight state completely non-threatening.  There is no snowballing into secondary anxiety/stress.  Now, when a stressful event occurs in the market, I very naturally slow my breathing and enter the focused rhythm from the treadmill.  

This turns interoceptive exposure into a peak performance tool.

Most of the problems of trading psychology are state-dependent.  They are triggered by particular states of mind and body.  By training ourselves to engage in our best information processing while we are in the states that trigger us, we gain a level of control over ourselves and our trading that simply is not possible with casual self-help techniques.

Who knew?  Your aerobic workouts could become your best trading psychology workouts!

Further Reading: