Monday, August 31, 2020

BRETT STEENBARGER'S TRADING PSYCHOLOGY RESOURCE CENTER



Most recent blog post - Your life is being made into a movie. Will it be worth watching?

Most recent Forbes post - How we can access our strengths and become our best selves

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

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

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

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

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, April 19, 2019

Becoming Your Best Self

In coaching, counseling, and therapy, people typically try to change the "texts" of their lives: their thought patterns, habit patterns, etc.  But what if our greatest changes come from shifting, not texts, but contexts?

In the most recent Forbes article, Aries, the black tabby cat, poses an interesting thought experiment:  

Suppose a movie is going to be made of your life.  Is it a film you would go out of your way to watch?

The sad truth is that most of us are living good lives, but not adventuresome ones; not ones that we would be proud to have made as books or movies.  

The article poses a unique perspective:  perhaps we are operating at states of energy and in environments that fail to bring out our greatest strengths.  If you're trading and living with less than movie-worthy adventure, perhaps this is not because you lack discipline or proper self-talk. 

Perhaps, like Aries, you need a change of context.

Further Reading:  

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Tuesday, April 16, 2019

A Formula for Trading and Investing Disaster

Many problems of trading and investing have a simple source:  People follow the markets on a different time scale from their intended holding period.  Typically this means becoming psychologically attached to shorter-term movements up and down and not holding positions as initially intended.  The general rule is that, as pattern-recognizing beings, we will find patterns in whatever time frame we follow.  When our egos become attached to the patterns we perceive, we act on what we see at the moment and fail to maximize our trades and investments.

Imagine the same problem in relationships.  We could become very invested in each new, interesting person we meet and thus never follow through on cultivating any single relationship deeply.  In making short-term dating "trades", we would never truly invest in relationships.

Hanging on every tick in markets, making P/L a daily focus of attention, is a recipe for trading and investing disaster.  If we follow markets closely, that will be reflected in our actions.  Inevitably, we act upon what we see.

The answer to this challenge is not "discipline" or ever-louder exhortations to control emotions, follow plans, etc.  The answer is to not allow ourselves to become slaves to the screens and, instead, only follow markets when we have specific trading decisions to make.  Away from screens, we need to find fulfillment in a wide range of personal, social, and creative activities so that we don't try to impose those needs upon markets.

Too often, we "overtrade", not because our markets are full of opportunity, but because our lives are otherwise empty.

Further Reading:


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Friday, April 12, 2019

Four Essential Ingredients of Trading Success

One of the great experiences I've had as a trading coach at a variety of trading firms is the opportunity to witness, first hand, what goes into sustained success.  Here are the four success ingredients I've noticed among top performers across different markets, time frames, and types of trading:

1)  A big picture perspective that indicates opportunity - I refer to this as "the idea".  It could be one asset mispriced relative to another one; an asset mispriced relative to changing fundamental information; a shift in momentum and market flows; etc.  Very often, this idea has been backtested or at least has objectively demonstrated its value in real time trading.

2)  A near-term perspective that provides a bet with superior risk/reward - I refer to this as "the trade".  The trader sees an opportunity to act upon the idea in a way that has limited downside (risk) and greater upside (opportunity).  Very often the trade reflects the lining up of short-term (market flow) information with the longer-term perspective.

3)  A methodology for sizing and managing positions, providing risk management and the management of opportunity - This amounts to bet sizing, so that the trader is taking proper advantage of an opportunity without courting undue losses and risk of ruin.  Very often, the successful trader will update bigger picture opportunity and near-term risk reward during the life of the trade to size up positions and/or scale out of them.  This allows them to lose less when ideas and trades are wrong and make more when they play out.  The successful trader very often displays average win sizes larger than average losses.  

4)  A framework for adapting trading to changing market conditions - The successful trader views the opportunity set as dynamic and will typically run periods of higher and lower risk taking as a result.  There is a regular process of taking in new information and feeding that into both ideas and potential trades.  This requires an openness to new data and the capacity to make changes in trading approaches in real time.  For example, a trader may emphasize directional, momentum opportunities in one type of market and relative value or "mean reverting" opportunities at other times.

Very often, trading problems result from overemphasizing one or two of these elements at the expense of others.  For instance, a trader may place great emphasis on big picture fundamentals and longer-term market opportunities, but lack an awareness of near-term flows to obtain good risk/reward trading opportunities.  Or a trader may focus on short-term "setups", but lack coherent ideas regarding why the asset should move as expected.  Or the trader will see good opportunities, but will fail to adequately capitalize on them through proper sizing and position management.  And, of course, many traders keep doing what has worked well after market conditions change, failing to adapt to shifts in the opportunity set.

When traders don't have an adequate grounding in all four areas, their performance is impaired and this can create psychological frustrations that further interfere with decision making.  In such cases, traders often look to psychology for answers to their trading woes, when in fact they need to make process improvements in one or more of the four areas above.  This is why mentoring is so powerful:  you can see, first hand, how the successful trader blends these success ingredients.

Further Reading:


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Sunday, April 07, 2019

Can This Market Go Higher Still?

Well, I have to say that the current rising market has not felt orgasmically great for many participants.  It was a very challenging V bottom in late December and those hoping for a substantial pullback to enter an uptrend have watched the market move higher in January, then February, then March, and now early in April.  I speak with a number of traders, and I have to say I observe little euphoria.  If anything, the sense is frustration at not having participated in the rally.

So can this really continue?  Can the market go higher still?

My aim is to examine the evidence in as open-minded a manner as possible.  I want to be open to weakness and strength, bear and bull possibilities.  And, perhaps most of all, I want to openly acknowledge when my research shows little directional edge.

Back in September, we were seeing growing weakness across a number of sectors and a cumulative uptick/downtick line that could not make new highs despite fresh highs in the large cap indexes.  That led me to question the upside.  Conversely, in early March, I took a look at what happens after a year starts with consecutive strong months and found a surprisingly bullish outlook.  A couple of weeks later, my look at that uptick/downtick line reinforced the upside view.

Well, that line has continued to make new highs.  There are no signs of divergence as occurred at the 2018 peak.  Moreover, we're not seeing any expansion of short-term new lows, as happened late last year.  Indeed, fresh one-month new lows across all exchanges (as reported by Barchart.com) have been quite low, which historically has led to bullish returns on a next 20+ day basis.  Usually, if there is going to be significant weakness, we see some sectors lead the way down, as housing did in 2007.  That weakness just isn't present at this time.

I noticed an interesting event at the Friday close.  Over 80% of all SPX stocks closed above their 3, 5, 10, 20, 50, and 100-day moving averages.  (Data from the excellent IndexIndicators.com site).  That is very broad strength.  Going back to 2006, we've only seen 23 similar occurrences--and none since 2013!  Many of those occurrences were seen in 2009 and 2010 and then again in 2012 and 2013 during protracted rises following market weakness.  Indeed, if we examine those 23 occurrences over the next 20 and 50 days, we find 17 occasions up and 6 down for both time frames.  The average 20-day gain was about 1.5%.

What this says to me is that we're seeing significant upside momentum in stocks.  Historically, such momentum has led the market higher, though not necessarily at the same rate previously seen.  The main takeaway is that we can't conclude that we're heading lower simply because we're "overbought".  Whether we think the valuations are justified or not, whether we like macroeconomic forecasts or not, equities have found meaningful demand.  Perhaps that's not so surprising in a world of low interest rates and tepid growth:  U.S. stocks may offer some of the few havens for yield and growth.  It may also be the case that the stock market, which has been kindly disposed to the current U.S. administration ever since the 2016 election, could display similar behavior should odds of re-election increase.

In any case, we're seeing broad strength and few signs of weakness.  A normal correction, given low levels of volatility and volume and the fact that stocks making new 52-week highs are not expanding, is clearly a possibility.  If the mood of participants that I speak with is indicative of a more general mood, any such pullback may find interest from frustrated traders late to the party.

Further Reading:


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Friday, April 05, 2019

Reading the Relative Volume of the Market

Above we see a chart of SPY (five minute increments; blue line) over the past two trading days (4/3 and 4/4).  In red, we see the relative volume of SPY.  This is the ratio of the current trading volume to the average trading volume for that particular five minute period.  So, for example, the spike in relative volume at 13:50 PM for 4/3 tells us that the volume traded was five times the average volume that we've seen during that 13:50 - 13:55 PM period.  Conversely, during the prior topping period, note that volume was only half or so the expected volume for those time periods.

With relative volume, we can readily identify:

a)  Whether rising or falling prices are attracting trader interest;
b)  Whether larger institutional participants are active through the day;
c)  Price levels associated with unusually low and high volume;
d)  How the market behaves subsequently at those price levels.

It is not unusual to see cycles of varying duration in which falling prices attract volume (puking) and rising prices see volume dry up.  This pattern occurred on a large time scale during 2018 and during shorter time periods such as above.  Skilled traders can detect transitions in the relationships among price change and volume change to profit from cyclical movements that capture bull and bear psychology.

Further Reading:


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Wednesday, April 03, 2019

Why It's So Tough To Get Bigger In Your Trading

A common view is that our psychology is a prime determinant of our trading.  If we can master our psychology and follow our plans, we should be more consistent and we can trade larger.  Profits should flow.

I beg to differ.

What if the direction of causality is the reverse?  What if it's markets--and our trading of them--that impacts our psychology?  What if it's the markets themselves that make it difficult to get bigger in our trading?

One thing I've noted so far in 2019 is that many, many market participants are not doing as well as they might have predicted they'd do in a trending stock market environment.  That includes portfolio managers who invest in stocks, as well as traders who move in and out of stocks.

Why might that be?

I propose that the central challenge of recent markets has been the relative instability of market volatility. 

Here is a stark comparison:  During January, SPY averaged a daily volume of a little over 97 million shares.  During March, that average daily volume dropped to 80 million shares.  Daily volume ranged in January  from a high of 144 million shares to a low of 59 million shares.  Daily volume in March ranged from 122 million shares to 56 million shares.  Yesterday's volume was around 40 million shares.

Why is this important?

Since the start of the year, the correlation between daily volume in SPY and the daily true range of SPY has been .81.  In other words, well over 60% of all market volatility has been a function of volume traded.  Volume has been declining over time and this has helped account for a VIX that has moved from about 23 to 13 thus far this year.

But that's only part of the issue.

The standard deviation of daily true range in 2019 has been half as large as the average true range itself.  That creates a situation in which, during March alone, we can have days with ranges as much as 1.99%, 1.82%, 1.64%, and 1.52% and as little as .40%, .42%, .48%, and .49%.  In other words, volatility itself has been volatile.  Using recent history to gauge how much the market can move in the near term has been quite difficult.

But, wait, it gets worse.

I maintain my own measure of "pure volatility" which assesses the average amount of movement per unit of trading volume.  It tells us how much "juice" we can expect for every amount of volume traded.  So far in 2019, that pure volatility measure has been more than cut in half.  So not only are we getting less trading volume; we're getting less movement for each unit of volume traded.  This helps to explain why traders feel as if volatility has gotten "crushed".  It's a double-barrel effect:  less volume and also less movement for every unit of volume traded.

And it gets worse still!

During the past month alone, pure volatility has declined by well over 50%.  In the past month, we've had readings above 17 and readings around 10.  So not only is volume shifting quite a bit from day to day; the amount of movement created by that volume has been shifting.  That makes it very difficult to estimate how much a market can move going forward.

If we have instability of movement, it is extremely difficult to set rational stop out levels, price targets, place to add to or reduce positions, etc.  That makes it tough to manage positions and maintain favorable risk/reward--and it also makes it difficult to size up positions.  Just when traders think they have a stable environment and make some money, they size up their trades, only to have volume and volatility shift--and potentially work against them.  

Imagine a football quarterback playing a game on a field where the weather changes radically from quarter to quarter, minute to minute.  The running plays that worked well in the first quarter when conditions were dry now work poorly when the field is wet.  The passing plays that worked in warmer temperatures become harder when it's very cold.  Yes, the quarterback would get frustrated and lose confidence, but the fundamental problem is not one of psychology.  The quarterback needs a real time meteorologist, not a shrink.

Very few traders that I know have real time tools to help them gauge the volatility environment of the stocks, indexes, or markets they are trading.  As a result, they assume that patterns observed in the recent past will persist in the near-term future.  My analysis of volume, volatility, and pure volatility suggests that this is a faulty assumption.  The equivalent of the quarterback's real-time meteorologist would be real-time tools to assess who is in the market, what they're doing, and how that is impacting price movement.  From this regularly updated information, we could make more informed decisions about price targets, sizing, etc.  

It is not clear to me that staying calm, focused, and composed and sticking to pre-existing plans is a formula for success, either on changing football fields or in radically shifting markets.  In fast-changing circumstances, we need to develop the ability to think, plan, and execute on the fly--and we need the tools to help us make continuous adjustments.

Further Reading:


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Sunday, March 31, 2019

What Is YOUR Self-Talk?

The latest Forbes article makes the case that self-talk is destiny.  How we process the world--and how we talk to ourselves about ourselves and world--shapes our reality.  That, in turn, defines what we experience as possible and impossible and shapes our actions.  Nowhere is this more true than in trading, where we are constantly dealing with issues of being right and wrong, uncertainty, and making/losing money.

If you click on the above graphic, you'll see a matrix that describes four styles of self-talk.  These styles can be positive or negative in their emotional tone and they can either increase or reduce the energy available to us.  Let's take a look at the four styles and what they might mean for you:

Challenging - This is self-talk that pushes us to do better, do more, and tackle new and larger goals.  

Worrying - This is self-talk that anticipates negative outcomes in the future, triggering fight or flight responses.

Calming - This is self-talk that reassures and puts things into perspective, dampening negative feelings and keeping us focused.

Self-Blaming - This is negative self-talk directed against oneself, dampening initiative and generating depressed feelings.

Clearly, at different times we may engage in different self-talk.  Much of trading psychology talks about dealing with negative emotions (worry, frustration, self-blame) and ways of sticking to trading plans (calming, focusing).  That is an important shift.

The Forbes article adopts a different perspective, however.  Just as we are in danger of living lives that are too sedentary (creating health risks), we can adopt mindsets that are too sedentary.  Many of us can deal with adversity by calming ourselves and avoiding undue worry and self-blame, but not many of us consistently talk to ourselves in challenging and energizing ways.

Take a look at the work of Emilia Lahti and David Goggins cited in the Forbes article.  These are peak performing professionals who have used unusual physical challenges to push their mindsets to redefine what is possible.  A useful exercise is to listen to a David Goggins video clip and think of his talk as your self-talk.  This kind of challenging talk is often found in athletic settings and in the military, but rarely do we see it in office settings--and rarely do I find it on trading floors.

It's great to reassure ourselves, accept losses, and find learning lessons in our setbacks.  That is necessary for a solid trading psychology, but is it sufficient?  If our self-talk is not intensely challenging, how will we intensively tackle new challenges?  A calm mindset is helpful at times, but sedentary calm will never rouse us to do better, do more, and throw ourselves into challenges that expand who we are and what we can do. 

How inspiring and challenging is your self-talk?

Further Reading:

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Wednesday, March 27, 2019

Three Reasons It's So Difficult to Succeed at Trading

We all have heard the statistics:  the very low percentage of market participants who ultimately make their livings from their trading.  Here, from a trading psychology perspective, are three reasons why sustained success is so elusive:

1)  Markets are ever-changing - It is common for a trader to find success with a particular strategy (such as trend/momentum trading), only to lose money consistently when market conditions change.  The successful traders I've known find multiple ways to win, which provides them with diversification and ways of succeeding across market environments.  But that requires research and the ability to continually acquire new sources of edge.  Many people are interested in trading; not so many in continually learning and adapting.  The challenge is not just succeeding in trading, but sustaining success.

2)  Trading requires the ability to navigate a contradiction - Trading is all about making money, and yet it is the focus on money that leads to many of the behavioral mistakes of money management.  The more we focus on making more and trading larger, the more we can overtrade and trade reactively.  The best traders I've known are idea focused, not primarily focused on profits and losses.  What attracts many people to trading is precisely what needs to be put aside in order to succeed.

3)  Markets are more efficient than ever - Strategies described by great traders of the past simply do not work any more.  With so much computing power devoted to markets at every time frame, it's unlikely that one will find success by looking at the same charts, indicators, and data series as everyone else.  I'm seeing many traders succeeding by focusing on less efficient markets and more specialized trading strategies.  At some point in time, making a living from gold mining in California became very difficult.  The easily accessed ore was already mined.  That required going to new areas and utilizing new mining techniques.  Many traders seek success by doing what others are doing.  That's like digging for gold where everyone else has been digging.

There are many would-be pundits and gurus talking about sure-fire ways of making money in markets.  Very, very few provide verified track records of their success.  The reality is that it is quite difficult to succeed at trading, just as it's difficult to make a living from playing a sport or from singing and dancing.  It's fine for the developing trader to have eyes on the stars as long as they also have feet squarely on the ground.

Further Reading:


Friday, March 22, 2019

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

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

What can we infer from these time series?

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

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

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

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

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

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