Monday, August 31, 2020


Most recent blog post - How Overconfidence Can Derail Our Best Trading

Most recent Forbes post - Why Our Goal-Setting Doesn't Get Us to Our Goals

Most recent podcast:  Improving the Odds of Trading Success

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.


Tuesday, November 13, 2018

How Overconfidence Derails Our Trading

Here's an observation I've made of both traders and investors--those with little experience and those who have been doing this all their lives:

They are at their best when they treat their ideas as hypotheses and continually update their hypotheses as price action, news, and fundamental data emerge.  Their focus is on what they would need to see to disconfirm their hypotheses.  That allows them to exit quickly and limit risk in adverse conditions.  It also enables them to take the opposite side of a trade should they observe a meaningful disconfirmation of their ideas.

The traders are at their worst when they treat their ideas as conclusions and dig in their heels in these views in the name of "conviction".  This leads them to interpret market information with confirmation bias, looking at data that support their views and minimizing information that might not support their ideas.  Such an approach leads to a loss of flexibility and a situation where the only effective stop level is pain.

One way we turn confidence into overconfidence is by crystallizing our observations into narratives.  Among portfolio managers trading global markets and strategies, this is sometimes pejoratively referred to as "macro story telling."  The trader observes information--perhaps fundamental, perhaps monetary, perhaps intermarket, perhaps price-action based--and turns these observations into a narrative.  "Stocks are going higher because economic conditions are improving and sentiment is bearish."  That could be a simple narrative.  It is not a tested set of relationships, and it is not treated as a hypothesis.  It is a conclusion drawn from limited pieces of information.

It's surprising how often traders with bullish or bearish biases can find information to weave into bullish or bearish narratives!  

Once the narrative has crystallized, it organizes our perception.  We see the world through the lenses of our narratives.  That makes us less sensitive to other, possibly more relevant lenses and information.  Seeing the world through our story-telling--and then justifying that in the name of confidence--is the height of overconfidence.  What we want instead are multiple hypotheses, each with shifting odds as information comes out.  At some point, the odds shift sufficiently that we can put on a trade.  But we are always updating those odds, and we are always aware of what would lead us to reverse that trade.

A great exercise is tracking your self-talk during the course of a trade.  Is your internal dialogue information-based, or are you grounded in a single narrative?  Are you flexibly assessing odds and possibilities, or are you looking for information to support your fixed view?  Or are you so self-focused and P/L focused during the trade that you never get the chance to update your thinking?  That often occurs when our "conviction" views suddenly prove vulnerable.

This is one of the great ironies of trading:  It takes unusual confidence to believe that we can outperform the world's most experienced money managers.  Taken too far, however, that confidence can ensure our failure.

Further Reading:  


Sunday, November 11, 2018

The Role Of Creative Insight In Trading Success

In the Trading Psychology 2.0 book, I outline several new frontiers for improving trading performance.  One of the most interesting and promising is the enhancement of creativity.  Simply put, the success of traders and investors rests on their ability to perceive unique, distinctive market opportunities that are not apparent to others.  For the faster, shorter-term trader, this means detecting patterns in price action that reflect shifts in supply and demand.  For the slower, deeper-thinking investor, it means piecing together information about companies and economies and arriving at original theses that ultimately will drive the behavior of other market participants.

Having worked with very successful market participants who operate in both the faster and slower modes, I can attest to the role of creative insight in the trading process.  This not only pertains to the generation of ideas, but also their management.  During the life of a trade there are many decisions to add to positions, take them off, or hold them.  For the discretionary trader, all of these decisions are more or less informed by creative insight. 

Here are a few ideas relevant to the role of creative insight in trading success:

1)  Few trading processes--from market preparation to research/idea generation to risk management--are designed to maximize the creativity of the trader.  Indeed, common trading behaviors, such as discussions on trading floors and ongoing following of price action on our screens, actively interfere with creative outcomes.  When traders talk about "process", they often mean the repetition of helpful practices.  This is valuable, but the following of routines via habit patterns, will not in itself maximize the creativity of a trader's thought process and, indeed, may work against it.

2)  Maximizing creative thought requires an unusual degree of flexibility.  What we know about creativity suggests that multiple brain centers are at work in processing information, reflecting multiple cognitive processes.  Processing multiple, different sources of meaningful information and processing all that in different cognitive modes (analytical, reflective, etc.) aids the insight process.  Sitting in one place and staying in one dominant mode of analysis/thought is a great way to stifle creativity.

3)  Creativity is never maximized in our normal, routine states of consciousness.  Research into creativity suggests that a variety of moods and levels of cognitive focus/awareness impact creative thought.  There is a very strong case to be made that many of the commonly noted psychological problems experienced by traders--from performance anxiety and overtrading to frustration and lack of discipline--stem from states that actively inhibit creative thought. 

In short, a major problem with trading performance is that traders focus on what they perceive to be their "edge" in markets when in fact "edge" is the result of a process, not a static set of market relationships.  Where there is no creativity, there can be no edge.  Reducing "edge" to a rote series of patterns virtually ensures that the trader will fail when market regimes change.  It is the ongoing creative process that fuels our adaptation to evolving market conditions. 

The implications of this perspective are profound.  The most useful self-coaching traders can do is reverse-engineering their best trades and especially the processes that led to the relevant decisions.  A solution-focused perspective suggests that all experienced, reasonably successful traders already are tapping into creativity at various points in the trading process.  The key is distilling *your* ingredients of creative insight and turning those into robust routines that can provide you with an actual, ongoing edge.

Further Reading:


Thursday, November 08, 2018

Strategies For Overcoming The Big Losing Days

It's not uncommon to find traders who make money more often than they lose it, only to wind up with negative P/L due to the presence of a relatively small percentage of big losing trades.  Bella of SMB recently wrote a post on five ideas of how to minimize the damage on your worst trading days.  These same principles apply to longer time frame managers, who can see many portfolio gains erased by a single outsized loss in one position.  Let's see if we can build upon Bella's insights and figure out ways of overcoming large losing days.

1)  Risk Management - I'm convinced that one of the great advantages of trading at a hedge fund, prop firm, etc. is the presence of external risk management.  A good risk manager will not only hold you to loss limits, but can catch you in the process of losing too much.  Even better, a risk manager can play a proactive role by letting you know when you might be vulnerable, perhaps by holding multiple correlated positions or by holding a large position going into a major news event.  As I've mentioned in the past, no baseball pitcher is expected to take himself off the mound.  That is the job of the pitching coach.  Sometimes it's not your day, but that can be tough to recognize in the heat of battle.  The risk manager is your pitching coach.

So what do you do if you don't have a dedicated risk manager?

Substituting for the risk manager, as Bella notes, are hard and fast rules for how much you can lose in a single position; how much you can lose in a day/week/month; how much you can lose across positions.  It is important to make these rules explicit--written down and in front of you--and it is important to size all positions so that, if they are stopped out, they will not exceed the limits you set.

For portfolio managers, that means knowing your risk per position and acceptable risk across the portfolio.  For day traders, it means knowing your risk per trade as well as your risk per day.  For active day traders, I like the idea of having separate risk limits for the morning trade and then again for the afternoon, effectively breaking the day into two trading days.  For active portfolio managers, I like having risk limits for each month or quarter.  

The idea is to never lose so much in one period that you can't come back in the next one.

2)  Psychological Management - The big losing days are typically the result of snowballing.  One loss leads to another leads to frustration leads to imprudent trading.  Or, overconfidence and directional bias leads to oversizing trades, which leads to vulnerability and frustration.  At such points, the problem is not just the shift of mindset, but the lack of awareness of this shift.

Look, we expect competitive people to not like losing, to have periods of frustration.  And, for all of us, the ego can sometimes get in the way of doing the right things.  We are fallible; that we can't control.  What we can do is become better and better at *recognizing* our fallibility.  This is why preparation before we begin trading is so important, allowing us to identify in advance what would tell us our positions are the wrong ones.  On my trading screens, overlaid on charts are various indicators, including short-term RSI, moving averages, regression lines, etc.  Do I think those are predictive?  Not really.  They are there because, if I'm trading directionally, those weather vanes should be pointed in my direction.  If we dip below a key moving average while I'm long, I want to mentally rehearse my stop scenario.  The idea is to anticipate loss and cement in your mind what you'll do about that loss.

Why is that effective?  It is difficult to become frustrated about an outcome you've rehearsed many times.  It's difficult to go on tilt and trade poorly if you've clearly laid out your plans for a losing position.  This is why, when a position is on, I want to rehearse my exits in detail.  I want to know where to take profits, where to get out.  That becomes a kind of mantra while the trade is unfolding.

I generally find that, if I start the day flexible and open-minded, rehearsing a variety of trading scenarios, I don't get too caught up in any one idea.  Excitement is just as much of a risk factor as pessimism and negativity.  I recently went in for routine surgery.  The surgeon was all business, clearly planning out the procedure with the team.  Do I want a surgeon who is excited about the procedure?  Do I want a surgeon who is full of "conviction" over his plan for the procedure?  Hell no.  As it turns out, the surgery discovered a couple of unexpected growths--fortunately nothing dangerous--that needed to be removed.  That's why they call it exploratory surgery.  All trading should be exploratory trading.

If you have firm risk limits and a process that keeps you aware of your thought processes and the unfolding of your trades, you'll have plenty of losses--but none that have to be debilitating to you or your account!

Further Reading:


Sunday, November 04, 2018

Becoming a Baby Bear: How We Can Do A Better Job Of Reaching Our Goals

As this video of a baby bear from @ziyatong graphically depicts, there is a lot to be said for motivation as a path toward our goals.  When the situation is urgent and the endpoint remains in front of us, we can summon great drive to achieve the seemingly impossible, just like that baby bear.

The problem is that situations are not always *so* urgent and goals are not always so clearly visible.  We make resolutions and goals in one state of mind only to find that urgency waning when our attention is taken elsewhere.  That is why motivation is necessary to reach challenging goals, but not sufficient.  

In the latest Forbes article, I outline two key factors that help us reach our goals.  In that article, I link excellent research resources that highlight ways in which we can move from the daily leading of our lives to becoming actual leaders of our lives.

A key, per Zig Ziglar's quote above, is turning motivation into a habit.  That is, we create routines--processes--for tapping into the values and visions that animate our lives.  This is why a religious person will start their day with prayer.  The morning prayer, at one level, is a habit.  At another level, it is a way of connecting with what is meaningful and motivating.

When we have habits that tap into motivation, suddenly our goals become urgent and visible--and we can be like that baby bear.  It's not enough to wake up our bodies in the morning; we also have to awaken spirit.  Without the habit of motivation, goals become little more than wishes...entries in our trading journals that show good intentions, but little more.

What is *your* process for becoming a baby bear?

Further Reading:


Friday, November 02, 2018

Finding Resources That Make Your Trading Better

An insightful market old-timer explained to me early in my trading career that technical indicators were more like weather vanes than weather forecasts.  In other words, they tell us how the wind is blowing; they don't necessarily tell us what the weather will be.  That doesn't diminish the value of a weather vane.  If we're flying a kite or sailing a boat, the weather vane is quite relevant!

As with sailing, traders make an implicit assumption:  the environment that has characterized the recent past will continue into the immediate future.  This is true whether we are anticipating trend continuation or the continuation of cycles/reversals.  Tools that provide unique information regarding recent regimes are useful weather vanes for guiding trades going forward.

At the recent Trade Ideas conference in San Diego, I was impressed with the VWAP tools introduced by Brian Shannon of Alphatrends.  Volume-weighted average price (VWAP) is a way of tracking the behavior a market or stock by placing the greatest weight on the prices that transact the greatest volume.  It's a true weather vane, telling us if we are staying consistently above or below VWAP or if we are cycling around an average price.  It also tells us if that average price is rising or falling--and if the rate of rising/falling (slope) is changing.  

Brian makes creative use of VWAP in two ways:

*  By anchoring the calculation of VWAP to key price levels, such as points of breakout or points of earnings releases (see here).  

*  By looking at VWAP at multiple time frames, to identify degree of convergence and divergence among the VWAP values (see here). 

If we think of it, the convergence of VWAPs across time frames is a nice way of visualizing the volatility of a market and anticipating possible breakouts.  The anchoring of VWAP tells us if a key level is truly acting as a key level:  for example, if a gap higher is truly leading to a trend.

The larger idea here is to continually grow your trading resources.  Physicians engage in continuing education; they keep up with new ideas and techniques.  Similarly, it's not enough for us to learn as beginning traders: we must continually learn and relearn to adapt to an ever-changing market landscape.

Further Reading:


Saturday, October 27, 2018

Reading the Psychology of the Market

Just as important as the psychology of the trader is the psychology of *other* traders!  The market itself has a psychology, defined by the moment-to-moment shifts in sentiment and behavior of participants.  There are three questions we need to ask about any market:

*  Who is in the market? - This is defined by volume and relative volume.  More market participation means more institutional participation and greater volatility of price movement.

*  What are they doing? - Are market participants leaning to the buy or sell side?  Is that leaning shifting over time?  As we shall see, the distribution of stocks trading on upticks versus trading on downticks is helpful in reading participant behavior.

*  Where are they doing it?  - We hear traders talk about "key levels" all the time.  Sometimes these are based on support/resistance; sometimes based on ratios and inferences from prior moves.  Whatever.  When we see significant shifts in "who is in the market" and "what they are doing", the price levels at which these shifts occur are meaningful.  If we break to the downside on significantly elevated volume and stocks trading on downticks, we should not revisit the level at which the break occurred if this is, indeed, the start of a market downleg.

Now let's add a fourth question to our ongoing monitoring of the market:

*  How well are they getting it done? - How much price movement are we seeing as a function of a given level of buying or selling?  Are buyers or sellers moving price meaningfully higher or lower, or are they having difficulty breaking to new highs or lows.  Very often, before the bulls take over from the bears or vice versa, we see one side failing to move price significantly.  That side becomes trapped when the other side takes over and needs to cover, contributing to a move in the other direction.

Above we see a chart of a two-hour moving average of the NYSE TICK (red line) versus SPY (blue line) from the start of September to present.  Note how, during the run up to highs in September, the distribution of NYSE TICK values was not meaningfully positive.  The amount of time spent below the zero line was as great as the amount spent above--and actually a bit greater as we moved closer to the highs.  This was one of the yellow caution lights that had me concerned about the quality of the market highs we were seeing.  

Notice how, at the start of the downtrend, we broke to significant new lows in the $TICK measure.  That shift in distribution told us that sellers had taken control of the market.  Note that this occurred relatively early in the decline, when SPY was about 289.  Stocks persistently traded on downticks.

In recent sessions, we have seen buyers come into the market, as we can see by the two-hour measure going into positive territory, but note that they are not "getting it done".  The buying bursts, mostly short-covering, are able to retrace only a relatively modest fraction of the prior price decline.  At some point--and I'm prepared for it to come soon--the selling pressure will have trouble making new lows and buyers will step in more aggressively, with higher $TICK readings.  That is how bottoming processes begin.  

Conversely, if we start the week lower on expanded volume and very negative $TICK readings, then we know we have not yet hit a downside equilibrium.  We can read market psychology by continually updating our assessment of volume, distribution of upticks and downticks, and the ability of both of those to move price.  This is not so much a matter of "predicting" what the market will do as identifying in real time what is actually occurring.

Further Reading:


Wednesday, October 24, 2018

The Role of Spirituality in Trading

I have been pleasantly surprised by the initial interest traders have expressed in the book I am writing on spirituality and trading.  

The key idea is that many trading problems spring from our failure to transcend the ego.  We identify with winning/losing, with overall P/L numbers, with being right or wrong in our ideas, and all of these identifications lead us to overreact to markets.

The world's great spiritual disciplines are tool kits for moving beyond our egos by connecting with larger realities.  The purpose of the book I'm writing is to acquaint traders with these tool kits and their potential for improving not only trading, but all of life.

One spiritual perspective is that all of our problems recur until we learn from them.  Life is a classroom and the problems we face repeatedly are the lessons we're meant to learn.  

What are your trading problems, and what are they trying to teach you?

Your problems are your curriculum.  Only when we embrace our problems do we learn from them and become more than we are.

Further Reading:


Saturday, October 20, 2018

How Our Physical Health Impacts Our Trading Psychology

Let's take a look at how the state of our bodies impacts our health and well-being and ultimately the mindsets we bring to trading.

Recent research suggests that a sedentary lifestyle--one without exercise--is more harmful to our health than smoking, diabetes, or high blood pressure.  The lack of aerobic fitness is a larger risk factor for mortality than having many medical conditions that we regard as necessary to treat.

*  Poor posture, such as sitting hunched over a screen for many hours per day, has been implicated in low blood oxygen levels.  Low blood oxygen levels are associated with higher stress levels and greater fatigue, both of which can negatively impact our executive brain functions and ultimately our performance.

Fascinating studies placing people in high altitudes (and thereby reducing their blood oxygen levels) find that low blood oxygen is responsible for declines in mood and worse cognitive performance.  Poor aerobic fitness interferes with our optimal processing of information.

Research finds that increased exercise is associated with lower rates of depression and greater levels of happiness.  Exercise also improves our sleep quality, which in turn is associated with higher levels of well-being and focus/concentration.

There is yet another way in which physical exercise can help our trading.  By training ourselves to tackle challenges, day after day, we build a mindset that encourages the tackling of challenges in other areas of life.  Quite simply, developing ourselves physically can be a powerful pathway toward developing our performance--in markets and in our personal lives.

Further Reading:


Wednesday, October 17, 2018

The Power Measure: How Is Volume Moving Price?

In the most recent Forbes article, I highlighted the importance of monitoring the amount of movement we get per unit of market volume.  When we look at normal bar charts, we see price as a function of time, with volume on the X-axis.  A large bar tends to be one in which we see increased volume (increased participation at that point in time), moving the market more than usual.

A different way of viewing market behavior is to look at volume bars (price where each bar represents an amount of volume traded) and see if bar size (volatility) is expanding on the upside or downside.  What this is telling us is not just how much volume is coming into the market, but how much each unit of volume is actually moving price.  When we see bigger bars coming in on market upmoves than downmoves, we can actually visualize where the market is finding its greatest ease of movement.

(This is a great example of the importance of creativity in trading.  Looking at price-volume-time through different lenses enables us to see fresh relationships that can illuminate what is actually going on in the market.  Looking at the same charts as everyone else is a great way of seeing the same things as everyone and becoming part of the proverbial herd.)

Above we see the full day's trade in the ES futures for 10/16/2018.  It's a great day to study, given the major turnaround in the overnight session and trend day during NY hours.  The blue line is the ES futures, with each bar representing a small unit of trading volume.  The red line is a running correlation of the size of the bars and the directional movement (open to close) of the bars.  Hence, when we get more upside movement per unit of trading volume, the correlation goes positive and vice versa.  

Shifts in this "power measure" tell us that volume is moving price more easily in one direction than another--a worthwhile heads up, though not a precise timing measure.  Notice, for example, how the correlation shifted positive and stayed positive during the period of the market's big turnaround.  Notice how subsequent moves lower in the correlation occurred at successively higher price lows--a great indication of the underlying strength of the market.

This is a relationship relevant to multiple time frames.  The illustration above, with over 500 bars per day, is clearly relevant to active day traders.  I maintain the measure for bars with much larger volume to examine multiday patterns.  The value of such measures is not as crystal balls, but as multiple lenses through which we can understand the dynamics between buyers and sellers.  There are many other such lenses, such as the shifts in distribution of upticks and downticks across all listed stocks.  Many trading problems occur, not because of emotional disruption, but because of cognitive poverty:  an absence of perspectives that yield fresh, valid insights.

Further Reading: