Wednesday, August 31, 2022

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



RADICAL RENEWAL - The new blog book

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Most recent blog post - Is a Strong Market Due for a Correction?

Most recent Forbes post - How to Overcome Major Setbacks in Trading--And in Life

Recent YouTube Video:  Six Characteristics of Successful Traders (with SMB Option Group)

Recent Podcast:  New Perspectives in Trading Psychology with John Sinclair and Positive Trends

Recent Podcast:  Tools and Techniques for Minding the Markets with Optimus Futures

Recent podcast:  The Psychology of Performance with SUNY Upstate HealthLink

Recent podcast:  Trading Psychology and Spirituality with BearBullTraders

Recent podcast:  Ego, Trading, and Spirituality with Alpha Mind

Recent webinar:  How to improve your learning curve as a trader (with Bookmap)

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 over 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 coaching services to individual traders.  I do, however, welcome specific questions about the ideas in this blog.  You can email me at steenbab at aol dot com.  I'm also available via Twitter (@steenbab), where I link new posts and articles.

TRADERFEED TABLE OF CONTENTS











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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Friday, January 17, 2020

Is A Very Strong Market "Due For A Correction"?

I've been hearing a lot from people who loudly assert that a strong stock market such as we've recently witnessed is "due for a correction".  Those making the assertion have several things in common:  1) a strong conviction that a bearish move is on the horizon; 2) a total absence of any statistical evidence supporting their view; and 3) dramatic underperformance during the recent market period.  

So let's look at a little bit of evidence.  (Eye-opening evidence, by the way, was published overnight by Market Tells, SentimenTrader, and Quantifiable Edges).

We'll go back to 2005 and identify occasions in which more than 80% of stocks in the SPX have been trading above their 3, 5, and 10-day moving averages and in which more than 80% have been trading above their 100-day moving averages.  (Data from the excellent Index Indicators site).  So we're looking at short-term strength in a longer-term strong market.

There have been only 39 such daily occasions out of over 3300 trading days.  That alone tells you that such broad strength is rare, even in a market that has risen over the lookback period.  Out of the 39 occasions, 22 occurred in 2009 and early 2010.  Note that this was a new bull market period following an important bear market.  During such periods, as I noted back in March, we tend to see momentum conditions.  It's easier to see that we have emerged from a bear market when we look at weekly price charts for small caps and overseas stocks, both of which declined from early 2018 through well into 2019.  

After the strength noted above, in 33 of the 39 occasions we posted a lower daily close within the next three trading days.  So, yes, a pause in the rise after unusual strength has been normal.  However, if we look 20 days out, the average market gain has been +1.43% versus an average gain of +.61% for the rest of the sample.  Over that next 20-day period, 27 occasions were up and 12 down.

History is not guaranteed to repeat itself, but formulating strong views in the absence of any knowledge of history is not trading: It is malpractice.  History provides a rich source of hypotheses and an understanding of market flows can tell us if history is, indeed, playing out.  Markets dance to the rhythms of momentum and value; edges occur because so many participants can't hear the music.

Further Reading:

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Wednesday, January 15, 2020

A Fourth Dimension of Trading

The recent post tackled the topic of trading based on understanding what markets are doing, rather than trading based upon isolated patterns of variables.  For me, such understanding has always been a function of three variables:  who is in the market, what they are doing, and where they are doing it.  (See the "How to Trade" posts from October to see how I track these variables).  Where solid quantitative studies can be useful is in identifying occasions in history when these variables have behaved similarly to the present and seeing whether there has been any significant directional edge going forward.  It is by reaching a point of understanding and determining if there is an objective edge associated with current market conditions that we can generate genuine confidence in trading.  Conviction without understanding is mere dogma.  One thing you can count on in markets is that your dogma is always likely to get run over by your karma.

A fourth dimension that I have found valuable is how broadly a market behavior is occurring.  In other words, do we see the same behavior across different segments of the market (small caps, large caps); different market indexes (Asian, European, U.S., etc.); and different sectors within the market (technology, energy, consumer, etc.)?  The breadth of market behavior is key to identifying trending markets (ones in which the majority of indexes are behaving similarly) and rotational markets (ones which are dominated by sector and market reallocation).  For instance, suppose we see that the SPX is moving to a new high for the day.  Whether that move is likely to continue depends not only on who is in the market (volume) and where volume is transacting, but also on whether the movement is narrowly or broadly based.  It helps to think of a trend, not only as a directional move in one index, but as a directional move shared by the majority of market components.  

I have found the various TICK indexes (NYSE TICK, TICK measures specific to the SPX stocks, TICK for the Russell stocks, etc.) to be useful in identifying the breadth of market buying and selling.  To go back to the previous example of a market trading within a range and moving to a new high, the uptick/downtick (TICK) readings on that move will be an important measure of the sustainability of that breakout.  It is when we break out to a new distribution of the upticks/downticks that we can more confidently count on a new distribution of forward prices.  An index may move to a new high in a rotational environment because of the impact of one or two sectors.  That is very different from a scenario in which broad-based buying lifts all sectors.

An important takeaway is that the right trading psychology comes from looking at the right market information, assembling it the right way, and generating the right understandings.  As Mike Bellafiore emphasizes, we produce one great trade when we begin with a valid thesis, see that thesis set up in a way that we have studied (play booked) in the past, and then fight for the best price to execute the trade based on our idea.  We don't trade well because we have a good psychology; we cultivate a confident psychology when we learn to trade well.

Further Reading:

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Monday, January 13, 2020

Knowledge and Understanding in Trading

I've been teaching myself new approaches to trading and have learned many valuable lessons in the process.

One of the most significant changes I've made is trading from a place of understanding rather than a place of knowledge.  

As the quote suggests, knowing something and understanding it are quite different things.  I know a number of people, but I would not be so presumptuous as to pretend that I understand all of them.  Similarly, I might know a Bible passage or a poem, but that doesn't necessarily mean I understand them.

Much of what is taught in trader education is knowledge.  It might be knowledge about fundamental factors that influence the stock market, such as interest rates.  It might be knowledge about chart patterns, trends, and indicators.  It might be knowledge about potential catalyst events, such as shifts in monetary or fiscal policies.  From their knowledge, traders typically attempt to make predictions, such as whether the market will go up or down.  Sometimes the predictions made from the pieces of knowledge are quantified through backtests.  This is common among many of the services that I recently highlighted.

This knowledge-prediction paradigm of trading is what I have found to be limited.  "X is occurring; therefore the market should do Y" does not necessarily reflect any understanding of why that relationship might hold.  When we look for X-Y patterns in markets, it becomes easy to reach for so many patterns that the relationships we trade are spurious and not meaningful.  That is how overfitting occurs in backtests, for example.  We test so many combinations of variables that eventually we find the 1 in 20 that is significant at the p<.05 level!

In science, we first observe nature and develop theories about what is occurring and why.  Theory building is the hallmark of understanding:  a theory represents causal thinking, not just correlational thought.  "The market is going higher because we've formed a certain candlestick pattern on a chart" does not capture anything of a causal nature.  Conversely, if we look at the expansion of the Federal Reserve's balance sheet and their stance on rates and hypothesize that excess funds in a low rate environment will spur speculative activity, that could represent part of  understanding of why we're in a bull market.  Or if I break down volume that is transacted at market bid and offer prices and notice that institutions are predominantly lifting offers across different time frames, this could represent an understanding of market participant behavior and a theory of why we're seeing a market trend.

To be sure, once the scientist has a promising theory, it's important to put the ideas to the test--and that is where prediction comes in.  Ideally, a trade is a test of a market hypothesis derived from a trader's understanding.  When well-constructed trades are working out, they add confidence to our theory.  When they don't work out, they may lead us to revise our theory.  Ideally, our trading is our way of testing our understanding of the market.

Too often, however, traders assemble knowledge and immediately want to create trades out of what they have learned.  Bypassing the process of understanding leads to a shallow perspective on market behavior--one that does not merit true conviction.  Genuine conviction comes from deep understanding, not simple correlations and patterns.  "There is nothing so practical as a good theory," psychologist Kurt Lewin observed.  What traders need are frameworks for understanding how markets behave and why, not mere "setups" for the next trade.

Further Reading:


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Friday, January 10, 2020

Integrating Discretionary Trading Skills With Quantitative Strategies

There is a number of very good research services and platforms that allow traders to identify occasions when there is a directional trading edge in markets.  The common thread among these is that they identify a set of conditions that are present in today's market that are distinctive and meaningful.  They then examine past occasions when these conditions have occurred and determine whether the market has moved a particular way in the next time period with statistically significant odds.  This is known broadly as event research.

For example, if the SPX makes a new 12 month high for the first time in two years, we could explore whether, in the past, this has reliably led to future gains.  Or, if we have a Fed meeting on Day 1 and close that day weak, we can identify the odds of continued weakness over subsequent days.  Or, if the NYSE TICK hits a very strong level of +1000 during the opening 15 minutes of the trading, we can assess the odds of this being a trend day to the upside.

In all these cases, we're using historical research to see if there is a directional edge during the upcoming period in the market.

Seven providers of such research that I have found to be reliable and useful are (in alphabetical order):


We can also conduct our own event research, as my recent post illustrates.  Such studies do not require advanced mathematical or programming methods as one might need for a fully developed trading system.  The goal here is not to become a systematic trader, but rather to identify promising hypotheses for the coming trading period.  When experienced discretionary traders possess one or more valuable historical hypotheses for the coming day or week, they can then track news flow, price action, and overall market behavior to assess whether the hypothesized move projected from market history is actually playing out right now.  In other words, you look in real time to see when there is a reliable "setup" or catalyst that allows you to trade a historical edge with well-structured risk/reward.

History doesn't always repeat itself, but knowledge of history generally beats ignorance.  Understanding how markets have moved in the past under the conditions we see at present can keep us out of bad trades and help us focus on promising ones.  It's an important way that discretionary traders can make use of quantitative strategies without having to do the data collection and coding from scratch.  And it can become an important part of our market preparation.

Further Reading:


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Sunday, January 05, 2020

The Fatal Mistake Traders Make

The fatal mistake traders make is that they define themselves narrowly, and this artificially constrains their opportunity set.

For instance, a trader might define himself or herself as a "breakout trader", a "trend trader", or a "bear market trader".  All ensure that the trader will underperform when markets are not breaking out, trending, or moving lower.  The frequent justification for such limitation is that the trader is adapting trading to his or her personality.  But would that work in other performance fields?  Would a quarterback in football last long if he defined himself only as a running QB?  Would a baseball pitcher succeed if he declared himself to be a fastball pitcher?  How about an actress who only played one kind of character?  In every performance field, ongoing and elite levels of success require the ability to adapt to the opportunity set, not expect the game to adapt to the performer.

The trader who does one thing consistently in all situations is not a disciplined trader.  He is a one-trick pony.

Let's  take a practical example:

During 2019, the SPY ETF moved a total of nearly 73 points.  During the NYSE day session, total movement up and down was about 303 points.  Total movement overnight was about 272 points.  During all the day sessions, SPY gained about 39 points.  During all overnight sessions, SPY gained about 34 points.  In short, declaring oneself to be a daytrader effectively cut the opportunity set in half.  

Many daytraders work hard at improving their trading.  Less often do they work at broadening their trading.  As I mentioned in a recent post, there are many markets in which a demonstrated edge *is* present, but not on the day time frame.  Similarly, there are markets in which a demonstrated edge is present, but not directionally.  (For example, volatility may be in a very tradeable declining trend, but the market may not move a lot directionally during that period.  One part of the market may be moving higher, such as large caps, while another is moving lower, such as small caps.  A good long/short trade is present, but perhaps not an overall market trade.)

I consistently find that traders who develop multiple ways to win show the greatest career longevity.  As in the business world, long term success requires flexibility and innovation, not a stubborn insistence that the market adapt to our preferred edge.  In a coming post, I will share how I have been expanding my trading through the integration of quantified models and discretionary pattern recognition.

Further Reading:


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Tuesday, December 31, 2019

Where Can We Find Market Opportunity?

Here's an end-of-year musing about market opportunity:

As of Monday, we had fewer than 40% of stocks in the SPX trading above their 3 and 5-day moving averages, but over 70% trading above their 20, 50, 100, and 200-day averages.  That's a nice proxy for a market that is short-term oversold in a consistently rising market.  When that has happened in the past, what have we seen going forward?  (Data from Index Indicators).  

Going back to July, 2006, the start of my database and a period that covers many market conditions, we've only seen 14 occasions when this has happened out of well more than 3000 market days.  Right away, I find that interesting.  The kind of consistent strength we've seen of late is not common.  

Also interesting is that six of the occasions occurred in 2009 and 2010 (right after a major bear market) and six occurred in 2013 and 2014 (during the runup to the early 2018 high).  In other words, this pattern has tended to cluster during bullish periods following prolonged market weakness.  An important potential implication is that early 2018 to the 2019 lows was a bear market (much more evident in overseas stock indexes and small caps) and what we're seeing now is a fresh bull market.

So where is the opportunity in all this?

I note that when we've been short-term oversold in a consistently bullish market, there has been no consistent upside edge over the next five trading sessions (6 up, 8 down).  Over the next 20 sessions, there has been an upside edge (10 up, 4 down), with an average gain of twice the rest of the sample.  Fifty days out all 14 occasions were higher and significantly more so than the rest of the sample.

My guess is that the great majority of traders will get caught in the chop of no edge over coming days and fail to capitalize on the longer-term edge that is there.  This is for two reasons:

1)  People who identify themselves as traders feel a need to trade - What if the greatest edge in a particular market is buying and holding for a few weeks?  We're not talking about an eternity.  To the "daytrader", "swing trader", and "active trader", that is not who they are and what they want to do.  In an important psychological sense, they trade to feel productive and active, not to maximize returns.  I predict if you had a great system that was consistently profitable with excellent risk-adjusted returns and that traded a few times per year with holding periods of weeks to months, the majority of traders would not follow it.  

2)  Traders are universally overleveraged - This is true at hedge funds, which seek limited downside and large positions, and it is true at prop firms, which are allowed to highly leverage capital for intraday trading.  The result of this overleverage is that traders cannot take heat.  They can't participate in an edge of weeks to months, because there is no way they can hold through choppy price paths.  In short, they hit their pain thresholds (their stop out levels) well before their edges can be realized.  In theory, they hope to trade the longer-term edge with shorter-term trades in the direction of the edge, but this rarely works.  A longer-term edge is different from a sequence of shorter-term trades without demonstrated edge.

What if the greatest edges in the market come from playing a game that few traders want to or are able to play?

What if most of the psychological frustrations and emotional upheavals that traders face come from trading crowded time frames and strategies with limited edge?

What if success comes from trading the time frames that objectively present edge and not the time frames we're most comfortable with?

What if the path to success isn't sizing up shorter-term trades with fleeting edge, but staying modestly sized to participate in longer-term edges?

What if the great majority of trading that goes on, with shockingly small odds of ongoing success, is a massive waste of time and energy with a dead-end future?

No brokerage firms, self-anointed market gurus, trading firms, or trading coaches have a vested interest in contemplating the above questions.  They profit from the (hyper)active trading and the replacement of older, failed traders with starry-eyed rookies.

That's sad, because edges *are* there in markets.  But they're like gold:  best mined where the masses aren't digging.

I wish readers a Happy New Year filled with the activities that most bring happiness, fulfillment, and success!

Brett

Sunday, December 29, 2019

Three Ideas To Turn Your Trading Around

Over the holidays, I've received a number of positive comments and expressions of appreciation for the free blog-book that I wrote this year, Radical Renewal.  I wrote the book as a blog (each chapter is a separate post), so that it could be accessed anywhere at any time with an online connection.  I wanted the book to be a gift to the trading community that has been so supportive of my work over the years.  Amidst all the self-promotion and false claims that go on in the trading world, there are valuable people doing valuable things in the trading world.  I acknowledge some of those people and their contributions in the book's appendix.

There are three ideas in the book that could be particularly important to turning your trading around in the new year:

1)  Being a better trader means being a better listener - We fill our heads with what we think markets should do and how much money we should make.  That leaves little room for processing what markets are actually doing.  As a psychologist, if I filled my head with how much money I would make doing therapy and what I think my client will say next, I'm not fully attentive to what they are saying.  Without listening, there can't be deep understanding.  A great first step in improving our trading is improving our focus and immersion in market activity.  We're best able to perceive market patterns across different time frames if we're actively processing who is in the market, what they are doing, and when.  Trading can only hijack our emotions if it first hijacks our egos.

2)  Peak experiences are a key to peak performance - We typically operate within a narrow band of emotional experience.  That helps us get tasks done from day to day, but it doesn't bring out the best in us.  A wealth of research suggests that we perform at our best when we are inspired:  when we experience joy, fulfillment, and energy.  I read the journals of traders and talk with them about their trading and rarely do I hear inspiration and a sense of vision.  Too often, we run our lives to reduce stress, not to maximize well-being.  We achieve a fraction of our potential because we're operating at a fraction of our energy level.  We cannot achieve great things in our trading or in our lives if we're not doing something greatly each day.  We can't trade with inspiration if we're not doing something inspirational each day.  It's the absence of distinctive positives and not just the presence of negatives that keeps us from being who we are capable of being.  What we do outside of trading--our relationship lives, how we treat our bodies, how we learn from what we do right and wrong--are key to either inspiring us and giving us energy or draining us and keeping us on autopilot.

3)  Relationships are a powerful vehicle for growth - Being with the right people brings out the best in us.  Being with the wrong people--or being isolated from people--leaves our many of our strengths dormant.  Every relationship is a mirror:  a way of experiencing ourselves.  If we're with people we can learn from, who support us, and who inspire us, that stimulates our own development.  Many traders are in suboptimal learning environments:  they are not exposed to new ideas, new research, and people doing new and promising things.  Entrepreneurs love being around others starting new companies; there's a vibe to the startup mentality that isn't present in large, stodgy companies or solo, isolated enterprises.  Turning your trading around can't occur in a vacuum.  We gain from being parts of networks that make everyone better.

In short, reaching your trading potential is not simply adding more "setups" to your trading, writing more in a journal, or vowing ever-tighter "discipline".  How we live impacts how well we trade.  We cannot turn our trading around if we ourselves remain static.

Further Reading:

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Wednesday, December 25, 2019

The Importance of Your Trading Environment: Lessons From Aries

Well, our youngest rescue cat, Aries, has been with us for a year and has a new lesson to offer.  The last lesson from the black tabby was a thought experiment:  Suppose a movie was being made of your life.  Would you want to watch it?  The answer to that question tells us a lot about the path we're on.

Aries was in an apartment for the earliest part of his life, but didn't fare well.  He ran around, knocked things over, chewed through furniture and power cords, and otherwise created havoc.  We didn't want to see him placed in a rescue shelter if that could be avoided, so we took him in.

It was a total change of environment for Aries.  He now had three girl cats to play with and a house with four floors and more cat toys than we can count.  He still ran around and played actively, but no longer destroyed anything.  In one setting, he was disruptive and destructive; in an enriched setting, he has become a loving family member and a great companion.  (As I write this, he's sitting at my feet, listening to our favorite music).

Our environments can facilitate our needs or thwart them.  Our environments can either bring out the best in us or frustrate us.  Sometimes we focus on changing ourselves when the reality is that we need an interpersonal, work, and physical environment that helps us be the best possible versions of ourselves.  We spend far too little time on optimizing our environments at home and work.

Recently, there was an insightful Twitter stream on the topic of loneliness and trading.  The reality for many traders--myself included--is that trading can be fulfilling as an activity, but completely barren socially.  For others, the trading environment can be barren intellectually, leaving us dead from the neck up.  How many traders are like Aries, acting out of frustration, not because they lack self-control, but because they are in the wrong settings?  Might it be possible that a different, more enriched setting could bring out the best in you as a trader?

That's a great vision for 2020.

Further Reading:


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Sunday, December 22, 2019

Trading the Psychology of the Market

In the recent Forbes post, I discuss the importance of setting goals for the New Year that are truly effective, by engaging our motivation and providing us with an inspiring vision for our future.  Dry, laundry list goals may capture worthwhile "to-do's", but we rarely end up actually doing them, because they don't give us energy.  Ineffective goals are energy takers; effective goals inspire, drawing upon energy we never realized we had.

So here's one potentially effective goal for 2020:  Trading the psychology of the market and not your own psychology.

Many trading decisions are colored by the fear of loss, the need to make money, the impulse to be involved in each move, etc.  Those decisions are suboptimal because we're actually trading our psychology and not the psychology of market participants.

Above is a chart of the recent ES futures market.  In this post, we'll take a look at what's happening in terms of market psychology.

First, you might want to check out previous, related posts:

Getting Past Trading Illusions - This is what kicked all this off, with my going undercover and seeing what "trading education" sites were actually teaching.  Yikes.

Understanding the Psychology of the Market - How what we think of as "choppy" markets may display meaningful cyclical patterns.

Tracking the Psychology of the Market - How patterns of upticks and downticks across market sectors deepens our view of buyers and sellers.

The Importance of Context in Trading - How viewing the current market relative to longer time frames helps us see who is in control of price action.

What is Really Important in the Market - An actual example of recent market behavior and what it was telling us.

Learning to Trade:  Building Market Understanding - How we can integrate price, volume, and time into coherent views of the market.

Learning to Trade:  Understanding Cycles and Market Context - How we can integrate our views of the market over new and different scales to generate meaningful trading views.

Learning to Trade:  Tracking Market Cycles Using Breadth, Strength, and Momentum - How we can look at waxing and waning patterns of buying and selling to track market trends and cycles.

Learning to Trade:  Going From Market Analysis to Synthesizing Trade Ideas - A real time practical example of using market information to inform a trading view

All of these posts are relevant to understanding and trading the psychology that moves the marketplace.

Above we see the recent ES market with volume-based bars in the top panel; volume transacted at the market offer versus bid price in the bottom panel.  The left hand graphic captures the amount of volume transacted at each price, similar to Market Profile.  The price action represents the period of time from December 16th through the 20th. (Chart is from Sierra Chart).

Note how much of the price action occurs in a narrow range, from Monday morning (12/16) through Thursday morning (12/19).  If we look at price behavior alone, the market seems narrow and choppy.  More than one trader told me that "This market isn't tradeable!"  And, yes, if you impose your time frame and trading preferences on the market, opportunity may not be there.  But what if your job is not to trade your favorite time frames, but adapt to how the market is actually behaving?

Once we integrate the information from the bottom panel, we can see that there is net selling pressure throughout this narrow period.  The red bars (volume transacted at the bid) exceed the green ones (volume transacted at the offer) over that period.  Despite the selling pressure dominating, price is not moving meaningfully lower.  Sellers are there in the market, but can't get anything done.  These are the participants who are potentially trapped when buyers finally step in (blue arrows).  Moreover, when sellers take their turn after the upside break (yellow arrows), note that they cannot retrace much of the upside move at all.  Again the sellers can't get it done and will be trapped for the next round of buying (pink arrows).

Folks, this is a tradeable market, but not if you only look at price action, not if you don't see the auction process between sellers and buyers, and not if you are wedded to particular time frames.  These patterns of market psychology occur at multiple scales and require an openness to trading the patterns that actually set up.  Trading your psychology and not the market's will not be helped by doubling down on your self-focus with self-help techniques.  One of the best things we can do for our trading psychology is immerse ourselves in the market's psychology.

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