Sunday, February 02, 2025

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER


Below are resources to help traders become their own trading coaches, improve their trading processes, and develop a positive work-life balance.  All the TraderFeed posts also contain links to valuable resources and perspectives.  


RADICAL RENEWAL - Free blog book on trading, psychology, spirituality, and leading a fulfilling life

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The Three Minute Trading Coach Videos

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Forbes Articles:


My coaching work applies evidence-based psychological techniques (see my background and my book on the topic) to the improvement of productivity, quality of life, teamwork, leadership, hiring best practices, and creativity/idea generation.  An important part of the "solution-focused" approach that I write about is that we can often best grow by focusing on what we do well and how we do it--and then doing more of what works for us.  The key is to know our cognitive, interpersonal, and personality strengths and leverage those in the pursuit of performance. 


FURTHER RESOURCES




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.

Brett
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What Goes Into An A+ Trading Opportunity?

 
2/7/25 - Two ideas go into an A+ opportunity in my own trading.  The first is a lining up of time frames.  As I've shared in the past, following the work of Marcos Lopez de Prado, I construct my charts on event time, not chronological time.  These charts utilize open-high-low-close, but the bars represent an amount of volume traded, not units of time.  For instance, with the MES contract, I follow three periods, with bars of 5000, 15,000, and 50,000 contracts traded.  Each chart then tracks overbought and oversold levels based upon the adaptive moving averages created by John Ehlers.  These averages track crossovers of short- and longer-term lines, but the lines adjust their speed based upon how markets are moving at that time.  When we have all three event time periods oversold at once or overbought at once, we have a lining up of time frames.  Trade opportunities may present themselves based upon overbought/oversold levels of individual adaptive moving averages at a particular event time period, but the A+ opportunities occur when we're stretched at multiple periods.

The second thing I look for once the market is stretched across periods is what I call inefficiency.  I use indicators of buying and selling pressure, such as the NYSE TICK, to tell me what traders are doing in real time.  When we see buying/selling pressure that cannot move the market higher/lower, that tells us that the buyers/sellers have become exhausted.  Their buying/selling is being absorbed by larger market participants.  

When we see buying/selling inefficiency in markets that are stretched on multiple time frames, the ingredients are there for major unwinds.  I want to take advantage of the buyers/sellers who are trapped.  Because a large amount of volume is trapped, as measured by the volume bars, the resulting move is generally significant--not a quick scalp.  My experience is that the batting average on these trades when all the variables line up is quite high.  In my next post, I'll outline ways of making the most from these A+ opportunities.

The key here is to find a way of understanding market action that makes sense to you and that plays into your information processing and personality strengths.  When you trade the unique patterns that reflect your best understanding of markets, you can then achieve unique returns.     

2/6/25 - What goes into an A+ trade for one trader is often quite different from what goes into the best trades for others.  This is because each of us brings unique talents to markets and varied skills that help us make us of these talents.  Studying your best trades over a period of time can help you figure out how you best detect and exploit opportunity.  Too often, developing traders are interested in trading and making money and not interested enough in figuring out who they are in markets and what they do well.  Those traders have emotional disruptions of their trading, not because they are so emotionally troubled, but because they are pursuing something important to them without drawing upon their greatest strengths.  The best way to be calm, focused, and secure in trading is to stay connected to what we do really well.  That is what ultimately gives us the energy and enthusiasm to persevere and succeed.  What do you see most clearly in markets?  What interests you the most in trading?  What are you doing well when you're making money?  What kind of markets bring you the greatest opportunity?  In relationships, we date before we commit.  It makes sense to date markets--try out different markets and styles of trading--before figuring out what you will commit yourself to.  Premature commitments yield failed marriages--in all areas of life.  Next, I'll share what I do best and worst as an illustration of building trading success on what we do most successfully--  

Over the years, I've been struck by how many top performing discretionary traders don't have win percentages of much over 50%.  Most of their trades are relatively small winners and relatively small losers.  They are *very* good at risk management and so they have very few large losers.  But they are also good at recognizing their best opportunities--what we might call their A+ trades--and making the most of these.  In his book One Good Trade, Mike Bellafiore of SMB Capital stresses that, "Consistently profitable traders obsess about making One Good Trade and not money.  Your job is to make One Good Trade and then One Good Trade and then One Good Trade" (p. 31).

From this perspective, One Good Trade includes losing trades that one manages well.  One Good Trade also refers to profitable trades that follow one's trading rules.  If my above observation is correct, however, trading success also requires awareness of One Great Trade:  one's A+ opportunity.  It's the relatively few big winning trades that account for the difference between most good traders and the great ones.  It's the (all too rare) combination of disciplined risk management and aggressive pursuit of special opportunities that define the great trader.

Having met with many traders over the years, I can confidently say that the great majority don't know--in detail--what goes into One Great Trade.  They might have a sense for good opportunities, which they might call A trades, but they haven't truly studied their A+ trades:  those few trades in a month or year that account for a large share of total profitability.  What goes into an A+ trading opportunity?  If you don't study those One Great Trade occasions in detail, replaying them and analyzing them intensively, how can you find the conviction to pursue them with aggressiveness?

I've been studying my own A+ trades and opportunities and will share them in an update to this post.  But my unique opportunities are unlikely to be yours.  Anything great cannot be copied from someone else, whether it's a painting, musical work, or writing.  The odds are good that your A+ opportunities are hiding in plain sight.  They are among your standout winners, even though you may not have fully exploited their potential.  Much of the time, we become so immersed in solving trading problems and controlling trading emotions that we never fully study our trading strengths.

One Good Trade keeps you in the game and can make you consistently profitable.  If you can identify One Great Trade, you'll have a template for success that you can build upon.

More to come.

Further Reading:

Finding Our Greatness

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Sunday, January 26, 2025

Trading as Warfare

 
1/29/2025 - How can we do a better job of integrating our trading tactics into a broader trading strategy?  In the book that will be coming out later this year, Positive Trading Psychology, I collaborate with Jeff Holden at SMB Capital to identify best mentoring practices used in the SMB teams.  As research for the book, I sat in on Jeff's mentoring sessions with developing traders and saw first hand how he integrated strategy and tactics.  The sessions began with looking at the broad market indexes and by focusing on longer (multi-week and multiday) perspectives.  This view included overseas equity indexes as well as the U.S. stock market.  This provided a big picture of whether money was flowing into or out of stocks globally and whether money was rotating to some countries from others.  The chart review then proceeded to sectors within the U.S. stock market on different time frames again to see if money was flowing in or out of the market or whether funds were rotating capital to some sectors and out of others.  Finally, the review focused on the individual stocks "in play" within these strongest and weakest sectors and the tactics for participating in their moves.  By the end of the review session, traders had a good sense for what they were trading, why they were trading it, and how they would trade it.

A number of these traders came up with questions during the session and many posed their questions to me in the chat area of the Zoom and later in emails.  Almost all of these questions pertained to how they could improve what they traded and how they traded it.  Very, very, very few questions were about emotional overreactions to the day's trade and destructive patterns of trading.  The reason for this was that the time spent in systematic preparation--understanding what the market, sectors, and stocks were doing; formulating a strategy for what to trade; and elaborating tactics for implementing the strategy--kept them grounded and focused.  Solid preparation reduced uncertainty and nurtured a sense of understanding and mastery.

Trading is like warfare.  If you stick troops into the field without a clear mission and tactics, they will panic at the first skirmish.  The best trading psychology emerges from the best preparation:  clearly elaborated strategies and tactics and ongoing practice and review.  

1/27/2025 - In the overnight weakness in the US stock market, we can see a reversal of recent strength.  This highlights yet another aspect of strategy and tactics in trading:  the need to be flexible.  Intelligence is not infallible in warfare and in trading and often it can be murky or incomplete.  Notice that, in the days leading up to this decline, the SP 500 made a new high, but many averages--and many sector indexes within the SPX--stayed well below their highs.  When we see the vast majority of stocks and sectors moving higher or lower, we can anticipate a degree of momentum/trend.  When we see breadth waning on an upmove or downmove, that is when we're particularly at risk of reversal.  That means that we must have the flexibility to assess new market information, determine whether it's a game-changer, and respond with fresh tactics and perhaps with a revised strategy.  We put effort into generating our ideas; equal effort is needed to update those ideas as fresh data come into view--  

In warfare, you assess the enemy's strengths and weaknesses and you develop a strategy for exploiting the vulnerabilities and avoiding the strengths.  That strategy is implemented with a variety of tactics, from ground assault to air and sea attacks; from spycraft to guerilla warfare to coordinated amphibious actions.  Similarly, a football team will assess their own strengths and weaknesses and the strengths and weaknesses of the opponent and will develop a game plan--a strategy for victory.  That strategy will be carried out tactically through specific plays and defenses designed to maximize the team's strengths and exploit the opponent's vulnerabilities.  Tactics are what put strategy into action.  Strategies without carefully designed tactics are at best good intentions.  Tactics without underlying strategy are uncoordinated--and often incoherent--action.

In trading markets, strategy defines bigger picture opportunity.  Tactics implement the strategy on a here-and-now basis.  Many of the psychological challenges of short-term traders occur because they operate tactically, without an underlying strategy.

Here's a simple example.  I have created a daily database of the percentage of NYSE stocks trading above their various moving averages, from 3-day MA all the way up to 200-day MA.  Each day, this produces a momentum curve, a measure of how breadth has behaved over short, medium, and longer terms. The database goes back to 2006, so I can see how breadth behaves in various market conditions.  (These data can be found on the Market Charts site).  

This is another way in which trading is like warfare.  Superior intelligence--more and better information--fuels superior strategies and tactics.

Across the entire database, if we divide the percentage of stocks trading above their 3-day MAs into quartiles (roughly 1150 days for each of the four groups), we find something interesting.  Over the next few days, average returns following the strongest breadth quartiles have been significantly weaker than after the weakest breadth quartiles.  In other words, on average, three-day periods of broad strength lead to short-term underperformance; three-day periods of broad weakness lead to short-term outperformance.  We see mean reversion tendencies over the short term.  The exception to this rule occurs when there is a breadth thrust:  very high levels of breadth momentum.  Then we see strength leading to more strength; weakness yielding further weakness.

The day trader who is unaware of such patterns may see a bullish or bearish setup, but can easily be run over by the mean reversion and momentum tendencies playing out over a multiday period.  That leads to frustration, which can further impair trading.  The cause of the frustration, however, is not a psychological conflict or weakness; the cause is due to pursuing tactics in the absence of strategy.  The same problems affect investors, who trade "catalysts", only to lose sight of multi-week patterns playing out in market breadth.  

Trading is like warfare.  The difference is that the trader is both a general and a soldier:  one who frames strategy and one who implements it.  There is always a bigger picture that defines edge and a more immediate picture that guides the execution of the tactics that exploit that edge.  Confidence comes from well-grounded strategies, implemented skillfully.    . 

Sunday, January 19, 2025

What If You Could Only Trade Once Per Day?

 
1/23/2025 - On Monday, January 27th at 4:30 PM ET, Agnieszka Wood and I will conduct a free hour long "ask me anything" (AMA) session.  One thing that will make the session unique is that Agnieszka and I will approach questions from different, complementary angles:  how our mindset can improve our trading and how improved trading practices can fuel our mindset.  Should be a great opportunity to pick up best practices all the way around!  One thing I'll discuss is how bigger picture thinking can improve our short term trading and how honing short term trading skills can help us get the most out of our higher time frame views.  Registration will be limited; hope to see you soon!

1/22/2025 - We can approach trading from a bottom-up perspective (watching for real time shifts in buying/selling pressure) as a scalper or from a top-down perspective (watching for backtested patterns and catalysts over longer time horizons) as a swing trader or active investor.  One approach is grounded in the talent of fast thinking and acting and pattern recognition.  The other approach is grounded in the talent of analysis and bigger picture thinking.  Success comes from knowing where your greatest talent lies and then developing the skills to apply that talent consistently.  Many seeming psychological challenges of trading stem from the fact that we're not utilizing our greatest talents--

Suppose you could only trade once per day, but at any time of the day?

With only one bullet to fire, you would have to make sure the opportunity was outstanding.  

What information would you gather to identify the one good daily trade?  Knowing this constraint, you'd have to study, study, study the best trades that could have been placed each day and generate a creative plan for exploiting the single best opportunity. 

How would you size the daily trade?  What would you need to see to add to your position?  What would you need to see to take profits?  What would stop you out of the daily trade?

If you only traded once per day, what do you think your win percentage would be?  How do you think your profitability trading once per day would compare to your current profitability?

What would be your greatest psychological challenge if you only traded once per day?  Knowing that you're limited to one trade, what constructive activities would you engage in while the one good trade was setting up?

What if anything more than one best trade per day makes minimal money on average?  What if all your time and effort watching screens and trading in and out of the market does not add significant value to your trading?  To your life?

This will be an experiment I pursue in 2025.  Discoveries come from asking new, different, and difficult questions.

Further Reading:

Expanding Our Trading By Imposing Constraints

Sunday, January 12, 2025

How to Achieve Quiet Confidence in Our Trading

 
1/15/25 - Understanding markets is not just about the big picture macroeconomic trends impacting price action.  It's also about identifying the kind of markets we're in:  trending/momentum; cycling/mean reverting; or a combination of the two, where cyclical moves occur within trends.  The kind of market we're in determines the kinds of trading strategies we employ.  Much frustration and loss in trading occur when we impose our strategies on the market, rather than trade the conditions we see.  I find that I'm best able to trade market cycles by constructing charts based on volume, not time, and by tracking crosses of adaptive moving averages (moving averages that automatically adjust their parameters based upon identified cyclicality).  Very promising trades occur when moving averages are behaving similarly on shorter, medium, and longer time scales.  When cycles line up, the result is a sense of understanding that fuels our confidence in trading.      

1/14/25 - The below post suggests that our optimal frame of mind when trading is not positive or negative, but focused and open-minded.  As a psychologist, when I meet a new person in counseling, my first step is to connect with them and listen, listen, listen.  If I stay open-minded and keep listening, the themes in what they are telling me will jump out at me.  I don't try to intervene in the person's life until I have a clear thematic understanding of what they are going through.  Similarly, I want to connect with the market I'm trading and listen, listen, listen to all going on within and around my market.  That requires a focused, quiet mind--and most of all a curious, interested mind.  We achieve quiet confidence when we achieve understanding and we achieve understanding by listening and listening for the themes connecting markets and time frames.  Our optimal mindset is curious, interested, and focused.  If we spend too much time looking for trades, we stop listening to markets and that leads to frustration.  How we approach markets shapes our trading psychology, not just the reverse.  

By transforming our trading, we can transform our trading psychology.

So much effort goes into trying to predict what markets will do next.  Confidence, however, comes from understanding.  When we understand what is going on in markets, the right trades come to us.

In a recent video for SMB Capital, I explained how the perspectives of active investors--such as those managing capital at hedge funds--can benefit short-term traders.  This is because portfolio managers don't just look for trades:  they identify themes that connect a variety of markets.  A good example of this can be found in my recent post, which tracks recent moves in the U.S. dollar, U.S. interest rates, the U.S. and overseas stock markets, and commodities.  There are themes underlying these moves (such as the potential impact of tariffs), which show up as relative strength in certain stock market sectors (such as the growth areas of technology) and relative weakness in other sectors (such as interest-rate sensitive shares).  When we can step back and see the themes connecting movements among markets, it becomes easier to participate in significant market developments, such as the weakness in stock and bond prices on Friday.

Much of what we call "overtrading" occurs when we don't step back and achieve understanding and instead react to every market move that catches our eye.  There can be no quiet confidence when we overtrade and when we are more interested in finding trades than in understanding market behavior.  An experienced psychologist knows that people don't have dozens of problems; they typically have just one or two issues that show up in dozens of areas of life.  Once we can step back and see the themes connecting our life challenges, we open the door to responding to old challenges in new, constructive ways.  So it is in trading.  When we stand back from the moment-to-moment ups and downs of markets and perceive the themes driving the trading from large institutional participants, we place ourselves in a fresh position to ride those waves.

Success in markets comes from turning themes into solid risk/reward trades.  Confidence comes from seeing a bigger picture and knowing how to turn that into short-term opportunity.

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Sunday, January 05, 2025

What in the World is Going On

 

1/7/25 - Just a quick addition to the below post:  If you take a look at the popular equity ETFs in U.S. industries on the Barchart site, you can quickly see strength and weakness among sectors of the market.  Notice that yesterday was generally seen as a strong day in the market, but strength was focused on technology and communications stocks--two important areas of growth.  The value areas, such as consumer staples, were actually down on the day, as were the interest rate sensitive areas, such as utilities and real estate (see below).  Trading success hinges on quickly identifying whether we are in trending or rotational markets.  Is money flowing in or out of stocks, or is money flowing from certain areas of the market and into others?  In the rotational markets especially, what we trade is just as important as when and how we trade.  We can work on timing all we want, but if we're trading the wrong things, our returns will be suboptimal at best--

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This post will summarize what is happening across financial markets and economies--what is sometimes called the "macro" picture--and explain how that understanding can help our short-term trading. 

I've begun work with new portfolio management (PM) teams at hedge funds, and I have been impressed by the unique research undertaken by each team.  One thing that makes these teams distinctive is that they first seek to understand what in the world is going on and only then do they explore trades that might provide them with good reward relative to risk to exploit this understanding.  Because they are driven by intellectual curiosity and the desire to understand, they are not following every tick in the market and they are not going on tilt, trading on FOMO, and experiencing all the common problems we hear about.  When PM teams meet with someone like me, it's to expand their understanding, improve their teamwork, and translate conviction about what's happening in the world into portfolios of trades that best leverage their distinctive strengths.

In my upcoming book, Positive Trading Psychology, I explain how a knowledge of short-term trading can help active investors achieve better reward relative to risk for their trades.  I also explain how an understanding of macroeconomic fundamentals can help short-term traders identify unique areas of opportunity and align their trades with bigger picture trends.  It is when we blend the tactical identification of opportunity (our fast-thinking, pattern recognition skills) with the deeper, strategic thinking that provides us with an understanding of market trends and patterns that we achieve the positive mindset that accompanies a sense of mastery.  Optimal trading psychology comes from understanding, and understanding comes from preparation.  Notice how the relationship among preparation, mastery, and mindset occurs in every performance field, from sports to chess to professional dance.

OK, so what is going on in the world?  Here are a few observations from macro markets, with a shoutout to Barchart.com, which provides a wealth of data (found in the following links) regarding performance across asset classes and regions of the world:

1)  The US Dollar is outperforming other currencies:  Note the uptrend in DXY since early October.  During that same period, note the relative weakness of the Japanese Yen, the Canadian Dollar, and the Australian Dollar, and the relative strength of the US Dollar to the Chinese Yuan.

2)  The yield curve has been steepening:  Remember how, not so long ago, we were talking about inverted yield curves and forecasts of recession?  No longer.  Since September, long-term fixed income prices have fallen more than medium-term fixed income prices and both have fallen more than short-term fixed income prices.  That means that interest rates are rising as we go out on the curve.  Note that high-yield bonds have performed relatively well.  We don't seem to be anticipating defaults in the fixed income world.

3)  Many commodities have weakened:  The commodity index is down since early October, with notable weakness in metals and mining, agribusiness, and the shares of raw materials companies.   

4)  US stocks have outperformed overseas averages: Note the relative underperformance of European shares since late September and, indeed, in the relative underperformance of non-US stocks in general.  Shares in China have held up better than shares in Australia, South Korea, and Brazil

5)  Performance among US stock sectors has been very mixed:  We've seen relative strength in NASDAQ shares and Consumer Discretionary stocksGrowth shares have outperformed value stocks lately and small cap shares have recently underperformed the overall market.  Note the particular weakness in interest-rate sensitive sectors, such as real estate and utilities, as well as raw materials and healthcare.  We hit a peak in stocks making fresh new annual highs on November 6th and, since December 10th, the number of stocks making fresh one month lows have exceeded the number of monthly highs every single day and the number of shares registering three month lows have exceeded the number of three month highs almost every day.  Only 6.45% of real estate stocks are trading above their 20-day moving averages as of this past Friday and only 7.14% of raw materials shares.  By comparison, despite the recent correction, over 30% of technology stocks are above their 20-day averages.  

Conclusion:  The bottom line is that performance in financial markets has become narrower and narrower.  Rising long-term rates in the US, falling commodities, and weak overseas equity markets speak to the potential impacts of economic policies that seek to place America first.  The prospect of broader trade wars and diminished trade due to possible retaliatory tariffs weigh on many segments of equity markets.  Trading success has hinged on identifying the relative winners and losers in the emerging financial landscape.  Short-term traders should be alert to the patterns of relative strength and weakness.  

So far, in the big picture, strength is relatively concentrated in the US (US dollar; US stocks) and, within the US, strength is relatively concentrated in growth segments of the market.  A Goldman Sachs report observes that concentration of value among US stocks is at historic highs.  They observe that we have only seen similar levels of concentration prior to the Great Depression, at the peak of the dot-com bubble, and during the early 1970s.  Right now, themes of relative strength and weakness dominate the macro investing landscape.  It will be important to watch the segments of greatest strength to see if this period also turns out to be a bubble that bursts, perhaps as the  stagflationary result of tariff wars fueling inflation and restraining growth.

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Sunday, December 29, 2024

Wrapping Up 2024 and Preparing for the New Year

 
1/3/2025 - A wise friend once said to me, "Love never dies; it has to be killed".  We don't lose our love for markets and trading; we have to kill that love by attempting to trade in ways that don't genuinely draw upon our greatest strengths, talents, and skills.  One strength that brought me to psychology is the ability to listen to people over time, relate to them, identify what they're going through, and help them craft strategies for change.  If I had to conduct an entire therapy in 30 minutes, I would quickly lose my love for psychology.  It would be a frantic process, devoid of the fulfillment of truly getting to know someone and make a positive difference in their life.  Similarly, I've found that my talent in trading is listening to markets over time, discerning themes, and participating in those once I have a solid understanding of what is going on.  If I attempt to conduct trading on a scalping basis, coming up with trades every few minutes, trading no longer becomes an expression of who I am.  My love for trading doesn't die; by attempting to be someone I'm not, I've managed to kill that love.  Lots of gurus out there; it's great to learn from them.  Ultimately, however, we have to synthesize what we learn from mentors with who we truly are.  The challenge is to figure out how to be the best version of you.  Whatever is going to make you very successful in trading will draw upon what has made you successful in other areas of life.  That's an important lesson for development in the new year--

12/31/2024 - To stay fresh and opportunity-focused in markets, it's important to always learn and do new things that sharpen your craft.  When we continually grow in our trading, there's an ever-present learning P/L, fueled by the excitement of discovery.

In coming posts, I'll elaborate on an approach to trading that I'll be refining in 2025.  The approach makes use of charts, where each bar represents a given amount of volume.  I typically look at four "time frames" simultaneously:  high frequency, short-term, medium-term, and longer-term.  The high frequency chart might draw bars every few hundred shares or contracts traded; the longer-term chart might capture bars of tens of thousands of shares.

Once you have displays of volume bars, interesting questions emerge:  What does it mean when the range of the bars expands or contracts?  What does it mean when bars open at their high or low and close at their opposite extreme?  What does it mean when the volume bars form a tight/narrow range?  My observation is that, when we view markets with volume-based bars on multiple scales, we can capture the real-time unfolding of supply and demand.  Instead of simply trading chart patterns, we can look within and across patterns to identify when bulls and bears are in control and when they are in balance.

The goal of such an approach is understanding: flowing with evolving market activity, not locking ourselves into fixed views.  Over time, it becomes clear that volume bars behave a certain way when the market is topping or bottoming, when it is trending, etc.  The patterns derive their significance across the multiple time horizons.  

In the new year, may you always innovate, always expand your understanding!

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How will you make 2025 a new beginning?

How will you track your performance in 2025 to ensure that the new beginning is truly powerful?

What will challenge and excite you in the new year to bring out your best efforts?

Too many New Years begin with lofty resolutions that quickly fade away as the days pass.  How will you keep your vision alive so that each day, each week, each month is a new beginning?

There is much more to change than setting goals.  

We become what we consistently do.

What we focus upon grows.

What will you do consistently in 2025?  What will be your focus?

Happy New Year--

Brett

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Sunday, December 22, 2024

The Most Important Lesson in Trading Psychology

 
12/26/24 - To change a behavior, anchor that behavior to a distinctive state of mind and body.  For example, let's say I want to work on sizing up my positions by a fixed percentage.  During my workout before trading, while I'm lifting weights and jogging, I mentally rehearse the mindset of getting bigger.  I focus on the feeling of fitness and how I'm making my trading more fit.  When the market opens, I immerse myself in the thoughts and feelings of fitness and mentally lift the weights of my trading size.  Over time, the link between my physically fit mindset and my trading mindset grows stronger, creating new pathways in my mind and in my behavior.  This is but one example of how we can catalyze change by shifting our state of mind.  

12/24/24 - Albert Einstein famously observed that "We cannot solve our problems with the same thinking we used when we created them".  In other words, to solve a problem, we have to remove ourselves from the box that created the problem in the first place.  "Thinking outside the box" is the hallmark of creativity.  A parallel psychological principle is that we cannot solve our personal problems in the same state of consciousness that gave rise to the problems in the first place.  Our states of mind and body constrain what we perceive and how we process what we perceive.  All lasting psychological change occurs in unique, enhanced states of mind and body.  This is creativity of consciousness.  A major limitation of our trading psychology is that we try to change what we do but never escape the mindset that gave rise to our problems.  My next post will describe how we can reprogram mind and body to create new ways of thinking, feeling, and acting.       

We all know about the old joke where we tell someone to try as hard as they can to not think about a pink elephant.  Of course, the harder they try, the more the image of the pink elephant intrudes in their consciousness.  What we focus on grows.  What we think about expands.  What we dwell upon shapes our destiny.  That's the lesson from Robin Sharma.

So why, then, do we focus our attention on our trading problems, our trading mistakes, and our most negative trading patterns?  Much of trading psychology is telling traders to not think about pink elephants.

Each of us has unique strengths.  Each of us finds our greatest potential as traders by leveraging our talents and building skills around those.  What if we simply focused on what we understand, what we do well, what makes sense to us?  What if we're meant to break down, in exquisite detail, what we do during our best trades?  

What we focus on grows.  When we focus on our successes, our successes can expand and shape our destiny.  Without that positive focus, can we truly hope to grow as risk-takers?

Further Reading:

Mastering the Positive Psychology of Trading

Sunday, December 15, 2024

The Psychology of Handling Large Drawdowns

 
12/19/24 - Yesterday's massive drop in the stock market in the wake of the Fed news taught an important trading psychology lesson.  Earlier in this post, I discussed replacing frustration with focus.  By mentally rehearsing drawdowns in a calm, focused state, we can normalize inevitable losses.  But the lesson from yesterday was different.  We want to replace uncertainty with understanding.  What happened following the Fed news?  Relative volume in stocks exploded:  the volume each time period was *much* greater than the average volume for the same period.  At the same time, the NYSE TICK completely changed its distribution of readings, consistently hitting very negative levels.  When we put these two observations together, we can appreciate that large market participants were bailing out of stocks.  Only aggressive selling of baskets of shares could account for such negative TICK and such high volume.  

Why was this happening?  Yes, investors were disappointed in the limited outlook for rate cuts, but just as important, they were locking in their gains for the year.  With only a couple of weeks left to go, money managers who are compensated on their annual returns can't afford to sit through a drawdown.  Once we see what was happening, we could entertain the idea that we would see a trend move lower:  the selling was pronounced.  Uncertainty is replaced with understanding.  We don't just trade better because we reach a better mindset; we achieve a positive psychology by understanding what is happening in markets and turning fear into opportunity.  

12/18/24 - A TraderFeed reader asks a question about fear of losing money and how it's affecting his trading.  A great book on this topic is Best Loser Wins by Tom Hougaard.  He explains how planning for (inevitable) losses normalizes them in our experience and gives us control over the downside.  Another good book in this regard is Mastering the Mental Game of Trading by Steven Goldstein.  He highlights the importance of "letting go" of the outcomes of trades and instead focusing on the processes of sound trading.  When we set stop losses, we can mentally rehearse them while we're in a calm, focused state and literally train ourselves to take the emotion out of drawdowns.  This exposure method can be practiced as part of our daily routines, making losses expected and thus less threatening.  

Every successful trader is passionate about making money and even more passionate about protecting their money.  When you read the interviews of the great traders in Market Wizards, you find that many of them started their careers with a passion to make money, then lost significant capital, and only then recognized the importance of managing their losses and taking the right bets.  

Recently, I've received a number of emails asking me about how to handle large drawdowns.  Of course, the answer is to limit drawdowns in the first place:  with prudent stop losses, by keeping bet sizes reasonable to weather inevitable losing streaks.  But if you have already gone through a large loss, how do you move forward as a trader?

Here are three steps you need to take:

1)  Treat financial losses as emotional losses - If you've drawn down significantly, a piece of your dream has flown out the window.  Lose 20% of your capital, and you need to make 25% on the remainder simply to break even.  Lose 50% and now you need to double the remaining capital just to get back to even.  A big loss of money is like a big loss of a relationship.  Research in psychology tells us that the best way to get through those painful losses is to give ourselves time to express our emotions and seek social/emotional support.  We heal more quickly when we go through a grieving process and especially when we are in the company of people who understand us and care about us.  Put trading aside temporarily and make time for healing.

2)  Let yourself feel the suck - It's tempting to want to put losses out of our minds and get back to normal.  But that doesn't help us learn from the losses.  It is the pain of drawdown that gets you to hit bottom and find the determination to never let that happen again.  The only way the drawdown will be worthwhile is if it transforms you.  The only way it will transform you is if the pain of the loss is so great that you will return to markets a new person, dedicated to managing P/L and making risk-taking sustainable.  Hitting bottom can be the first step in rising up.  The losses will only be worthwhile if they're an investment in making you better.

3)  Return slowly - Small capital, small bets:  crawl, walk, run.  You're learning a whole new game of money management and risk control.  Your first priority when you return to trading is to trade with consistency and to follow prudent rules for sizing positions and limiting losses per trade.  In my own trading, I want to make sure that I can easily handle five consecutive losing trades.  I know that, if I trade regularly and actively, such a losing streak will eventually occur due to pure chance.  Start small, get consistent, slowly grow the risk taking, get consistent at the new level of risk, then bump up again, etc.  When you hit a pothole in your trading due to changing markets, hold risk levels down until you figure out the new market patterns.  

The first step in winning the game is staying in the game.  

Losses are only a total loss if they don't make us better.

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Further Reading:

Three Best Practices for Dealing With Drawdowns

The One Question to Ask When You're in Drawdown

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Sunday, December 08, 2024

Three Challenging Questions For Traders

 
12/12/24 - All good work on improving ourselves increases our capacity to sustain work on ourselves.  Just as in a gym, our workouts build our ability to sustain work:  when we grow our trading, we grow ourselves, and that is growth of our free will:  our capacity to grow.

12/11/24 - Here is a formula for making positive changes going into the new year:  Think big, implement small.  What that means is that it's important to have a vision and mission that inspires and energizes you, but it's equally important to implement that vision with concrete activities, goals, and plans every single day.  Add one positive action to your routine each day that implements your big picture vision.  Incorporate that new action every single day in the same way for a month and then add another positive action in the same way.  Step by step, you move toward your ideal.  Change requires inspiration; change requires consistency.  What you do shapes your mindset.  Each day, be a little more of the person you're ultimately meant to be.

As we get to the end of the year and you review your performance, here are three tough questions to ask yourself (and answer!):

1)  If a basketball or football team prepared for its next opponent with the intensity and thoroughness that I bring to my daily preparation for trading, how well would they do?

2)  If I entered an elevator and saw a famous venture capitalist riding with me, what pitch would I make for my trading business and how likely would it be that he/she would invest in my trading?

3)  What have I been truly successful at prior to my trading career and how, specifically, do I leverage that talent in my current trading to achieve positive and unique returns?

Mindset will never, by itself, make you a successful trader.  What you do to pursue your distinctive trading success  empowers your mindset.

Further Reading:

Three Questions to Ask About Your Positive Trading Psychology

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Sunday, December 01, 2024

Our Losses Are Our Lessons

 
12/6/24 - This video from SMB is one of the best I've watched in quite a while.  It highlights the psychology of winning:  how traders responded to a big trading day.  How we respond to losing makes us good; how we respond to winning can make us great.  It's important to be happy with success; it's equally important to not be satisfied with success.

12/4/24 - Yes, our losses can be lessons that guide our improvement, but our wins are also our windows on what we do well.  Yesterday I had a good trade, selling morning inability to move higher in ES and covering when the selling pressure, as measured in NYSE TICK, could not push stocks lower.  It wasn't a big trade in the size of the move, but it was a window onto what I do well in reading the market.  What was particularly encouraging was that I didn't let my bigger picture view (see below) interfere with the proper management of the trade.  Our wins are windows onto our distinctive talents and skills...when I trade well, I clear my mind and listen to the market the way I listen to a person I'm helping as a psychologist.  Very important lesson:  we're successful in markets when we're doing what makes us successful in other areas of life.    

12/2/24 - Here's a great real time example of how a process orientation to trading can also provide a positive trading psychology:  My breadth research, tracking the percentage of all NYSE stocks over various moving averages since 2006, shows that over 75% of stocks are trading above their short, medium, and longer-term moving averages.  When this has happened in the past, returns 10-20 days out have been subnormal.  I then examined the historical periods most similar to the current one in terms of breadth and volatility and two periods stood out:  early 2018 and early 2007.  Both led to intermediate-term corrections, but not outright bear markets.  Such research provides hypotheses grounded in history--not absolute conclusions.  Now, however, the hunt is on.  I will be looking for evidence to see if the historical pattern is playing out in real time or if this time is truly different.  Either way, there could be a good trade out there and, either way, the hunt for opportunity will keep me in an opportunity-focused mindset.  Good quantitative analysis feeds the brain, but also nurtures a positive trading psychology. 

I'm pleased to announce that the manuscript for my next trading psychology book, tentatively titled Positive Trading Psychology, has been completed and sent to the publisher.  It represents an important paradigm shift, taking trading psychology beyond the usual focus on the challenges facing market noobs and instead identifying the best practices of successful traders.  In the new year, TraderFeed will track my own trading and ways in which I'm applying the lessons of positive psychology.  

To maintain our optimal mindset, every trading day must be a win--either in terms of P/L, in terms of ideas generated and opportunities created, or in terms of lessons learned and applied going forward.  Nothing is more important in your daily and weekly reviews than identifying what you've done that will make you better going forward.  We achieve our best performance when we are enthusiastic about what we are doing.  The best traders are the ones that are always learning, always growing, always trying new things, always adapting to changing markets, always discovering new opportunities.

We can't make money every day, but every day we can be entrepreneurs building our trading businesses.  A growth mindset fuels our trading growth.  When we surround ourselves with other trading entrepreneurs, enthusiasm becomes contagious and we find ourselves with the energy to focus harder and longer, dig deeper, and work harder to exploit opportunities.  

Further Reading:

Mastering the Positive Psychology of Trading

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