Saturday, February 06, 2016

Trading Performance: Getting To That Next Level

I recently spoke with the traders at SMB and shared a few best practices that had benefited my trading over the past several months.  The idea is not that any traders should mimic my trading; rather, traders need to learn from their successes, identify what they are doing well, and then become more consistent in implementing those strengths.

Here are a few of my trading performance observations that might spark some thought for your trading:

1)  My profitability has improved since I've focused on consistency rather than profitability.  I've honed in on what are good trades for me and where my profits have come from.  I just want to be consistent in trading those good trades.  If I can do that, the profitability will come.  And if I want greater profitability, I should size up the good trades, not take other, more marginal trades.

2)  A corollary of the above is that my best trading has been highly selective trading.  There are days and series of days when I don't place a trade.  I'm fine with that.  My aim is not to trade; my aim is to make money.

3)  The amount of time I spend staring at screens is not correlated with my profitability.  If you're a high frequency trader, you need to track each tick in the market.  If you're not a high frequency trader and you're staring at each tick in the market, you're either lacking confidence in your trade or you're sized too large and taking too much risk.  When I'm in a good trade, I can walk away for a while.

4)  I've found my own way of making sense of markets.  I think in terms of cycles, not trends.  (See above). When I assess shorter-term cycles, it's over event time, not chronological time.  When I look at volatility, it's by comparing the volatility priced into options versus the volatility recently realized in price action.  All of these are ways of thinking about markets that I've studied and that make sense to me.  I don't know how to have staying power in a trade if it's not an idea that makes deep sense.

5)  I've studied the trajectory of my profitable and unprofitable trades.  Many of the trades I enter will anticipate a market move following a period of compressed volatility.  I generally anticipate the ramping up of volatility pretty well.  If it ramps in the wrong direction, my trade goes wrong relatively quickly.  By entering the trade with a small core position, I ensure that a losing trade won't be a large trade.  If the volatility moves in my expected direction, I can use bounces against the move to add to the position.  I don't add to losing trades and I'm quick to take profits opportunistically on added pieces of trades.  Sound money management has been the best form of psychological management.

6)  One of my best predictors of making money is having fun with markets.  I have fun when I develop new tools, generate new ideas, and see them work in practice.  If I focus too much on making money or not losing money, all the fun goes away from trading.  That's when I'm likely to make bad decisions.  If I'm having fun with markets, I don't need to trade.  If I need to trade, I don't have fun with markets.  

7)  I'm best when I specialize.  I trade one thing and one thing only, the ES futures.  I study high frequency data on stocks (upticks/downticks, patterns of very short-term price and volume behavior); I study unusual measures of market breadth; I study cycles of various market sectors; etc.  I don't trade different individual stocks and I don't trade other asset classes.  My goal is to be a product specialist, not a trading generalist.  That has helped greatly in my pattern recognition.  If I were to look at different stocks and markets each day, I would not build up the database of patterns I would need to recognize opportunities.    

The big idea here is that getting to that next level of trading performance requires self-awareness.  You need to know what you're good at, what speaks to you, and where your successes come from.  You get to the next level, not by changing who you are, but by distilling the essence of who you are and becoming ever better in leveraging that.  

Further Reading:  Our Struggles Develop Our Strengths

Monday, February 01, 2016

Trading Notes for Week of February 1, 2016

Friday, February 5th

*  Despite a morning selloff after early strength, stocks finished the day on the firm side.  432 stocks across all exchanges touched monthly highs versus 293 monthly lows.  Over 50% of SPX shares are trading above their 3, 5, 10, and 20-day moving averages.  I am watching closely to see if breadth can expand in today's trade.  The response to the non-farm payrolls number will have a lot to do with that.

*  Interestingly, my cycle measures are near levels that have corresponded to market tops.  Should we be unable to surmount the highs reached on February 1st, that would invite the hypothesis that we've put in an intermediate-term top and are likely to retest recent lows.

*  Working off the oversold cycle readings with a relatively modest bounce from the lows is once again an indication that the 2016 market is different from those experienced in 2014 and 2015.  The weaker US dollar has added an interesting element to stock prices.  Note the recent strength of raw materials share (XLB).  The bounce in housing shares (XHB) has not been impressive.

Wednesday, February 3rd

*  Tuesday's trade in ES nicely illustrated the dynamics of a downside trend day, including an opening price near the high price for the day session; negative NYSE TICK dominating positive readings, with many readings < -800; a very negative advance/decline line; and a great majority of NYSE stocks trading below their VWAPs for the day.  Trend days often feature above average volume, as directional, macro participants express an intermarket theme.  In yesterday's case, we saw the resumption of the risk-off trade involving oil, stocks, high yield credit, and emerging markets.  I am watching those intermarket relationships carefully from day to day.

*  A useful short-term overbought/oversold measure is a five-day moving average of upticking vs. downticking among NYSE stocks.  Note how we reached a short-term peak recently.

Tuesday, February 2nd

*  After early weakness, we continued to move higher on Monday, hitting a new high for the recent rally off the lows.  Across all exchanges, we had 502 shares register fresh monthly new highs against 251 new lows.  That is a modest expansion from Friday's levels.  Oil continues to come well off its recent highs and we've seen selling in stocks in premarket trading.  Interestingly, stocks are lower in Japan following the BOJ action and we're down in Europe as well.  At least so far, the rally off the lows still strikes me as part of a bottoming process, not a fresh bull market leg.

*  Here's a look at one of my primary cycle measures.  My base case that this cycle will top out at a lower price high and lead to a test of the recent market lows.  Should we see waning breadth on the upside on future strength, that would add credence to this view.  As of Monday's close, we were short-term overbought, with over 80% of SPX shares closing above their 3, 5, and 10-day moving averages.  (Data from Index Indicators; it's a great site for breadth info).

*  A look at sectors from the excellent FinViz site finds that yield-sensitive utility and consumer staples shares have led market performance year-to-date.  Interestingly, financial shares are among the largest losers during 2016 thus far.  Given concerns over debt--China and high yield--this is not a bullish configuration of sector strength.  It's clearly defensive.


Monday, February 1st

Here's a valuable self-coaching technique to help prevent impulsive decision making in the heat of trading.

*  I was less than enamored with the bounce we had made off the lows when I wrote Friday's entry, but flows changed radically with the New York open, as we saw consistent strong buying in the wake of the BOJ's negative rate decision.  After a strong opening rise, we saw significant selling pressure late in the morning, which completely failed to take the market significantly lower.  From there buyers remained in control, as we completed a trend day.  One of the important takeaways from the session is the importance of viewing each major time period (Asia; Europe; US) as a distinct "day", with its own set of market participants.  When we see discontinuity from one time period to another, that is important information and requires quick adjustment.  

*  Breadth expanded significantly with Friday's strong rise.  Across all exchanges, we saw 436 fresh monthly highs against 296 lows.  It was the first time since December 30th that monthly highs have outnumbered lows.  Similarly, Friday saw over 80% of SPX stocks close above their 3 and 5-day moving averages and almost 80% above their 10-day averages.  This was not only a strong rally, but a broad one.  If, indeed, the BOJ decision was a game-changer for stocks, we should not revisit the post BOJ lows from Friday.  A return to that 1880 area would be an important reversal from a longer-term perspective, and one that would be consistent with the topping view outlined last week.

*  We've pulled back in overnight trade, with a sharp decline in oil.  I am watching carefully to see if that correlation between stocks and oil reasserts itself.  I'm also watching closely to see if we can stay above that 1880 level in the ES futures outlined above.

Sunday, January 31, 2016

Mental and Emotional Preparation for Trading

An important implication of the recent post on how to avoid bad trading decisions is that it is not enough to plan trades, write in a journal, or review performance.  If we make decisions in cognitive, emotional, and physical states that are different from the ones we occupied during our preparation, we're likely to find that the decisions we plan won't always be the ones we act upon.

Experienced traders don't just create a plan for a trade; they often plan a variety of possible scenarios for their positions based upon how markets behave, news that comes out, central bank decisions, etc. By anticipating a variety of events, these traders enable themselves to respond quickly in the face of surprise.

This mental preparation is most effective if it is also emotional preparation.  In other words, we want to not only anticipate a scenario, but also the thoughts, feelings, and physical states likely to accompany that scenario.  If a market is topping, for instance, and my short position starts to go my way, I know that I may feel uncomfortable on a bounce, and I know I'll have thoughts about stopping out of the trade.  I also know, however, that if it's a weaker bounce consistent with the broader topping action, it could be an attractive level for adding to my position.  If I plan the trade mentally but not emotionally, I increase the likelihood that I could act on the feelings and impulses of the moment and scratch out of a trade just when I really should be adding to my risk.

When we anticipate the thoughts and feelings that can nudge us from our best intentions, we make ourselves more resilient.  We're more likely to respond to stress with "been there, done that."  The idea is to make our planning as broad as possible so that we're anticipating a wide range of scenarios--and responses to those scenarios.  If there's one thing we want to minimize in trading, it's surprise.  Surprise--whether positive or negative--will shift our states and nudge us from trading plans.  When we prepare for a wide range of scenarios in which positions go our way or against us, we take the surprise out of market events and keep our responses more stable.

We cannot--and should not--eliminate emotion from trading, but that is also not necessary.  Preparation puts emotion into perspective; we gain control, not by staying Zen, but by anticipating situations that are likely to take us out of calm focus and preparing our responses to those.

Further Reading:  How to Trade Your Plans Once You've Planned Your Trades

Saturday, January 30, 2016

The State of Our States: Trading With Self-Awareness

The recent post on burnout emphasized an important--but often unrecognized--point: We derive energy not just from the state we're in, but from shifts in our physical, emotional, and cognitive states.  Too much exercise; too much concentration; too much rest and we become fatigued: we lose energy.  Variety in our states enables us to be serious and to have fun, to be active and to have moments of quiescence.  When life becomes too routine, we paint ourselves into a psychological corner in which we occupy only a fraction of the healthy, vital states available to us.

Why is this important to trading?  

What we know--and therefore what we can act upon--is in part a function of our state of mind.  We recall something important in one mindstate; we become distracted and forget it in another mode.  We study diligently for a test--and then can forget it all if we become test-anxious.  We know our trading rules and are committed to them when we're focused--and then we abandon all discipline when frustration strikes.

So much of trading boils down to pattern recognition.  We recognize how short-term price behavior fits into a longer-term picture; we see how fundamentals line up with price action; we observe how volume behaves around certain price levels.  If what we know is in part a function of the state we're in, an essential challenge of trading psychology is to sustain the states that are optimal for pattern recognition.  Are those energized states, or are they quiet and focused ones?  Are they happy, positive states, or are they ones in which we dampen emotion?  Are they states in which we're actively engaged with people, or are they ones in which we sustain an inward focus?

The fact of the matter is that each of us processes information differently and so best apprehends patterns in different ways.  The introverted and analytical person likely requires different states for information processing than the extroverted and intuitive person.  Only our successful life experience--and especially our successful trading--can tell us how we best perceive and act upon patterns.

We can practice race car driving for years, but we'll lose on the race track if our car is badly out of tune.  The problem with many traders is that they are out of tune: they fail to sustain the cognitive, emotional, and physical states associated with their unique success.  There is more to market knowledge than self knowledge, but without self knowledge we cannot make use of even the best market insights.  Self-awareness facilitates market awareness.

Further Reading:  Burnout as the Absence of Emotional Variability

Monday, January 25, 2016

Trading Notes; Week of January 25, 2016

Friday, January 29th

Easy to get burned out sitting in front of screens all day and trying to stay disciplined.  Here is an important antidote to burnout.

*  I've been offline for a couple of days, swamped with coaching work with traders.  Whenever that happens, it's a sure sign that markets are tricky and people are having trouble making money.  We had a real risk off start to the year, with oil, stocks, and emerging markets lower and firmness in the U.S. dollar.  Late last week we saw a sharp rebound and these posts talked about having put in a momentum low for this market cycle.  Evidence was also suggesting that this cycle was not like ones we had seen in 2014 and 2015, with far more persistence of weakness in stocks.  This week we have generally continued the bounce, but in a highly choppy fashion, making it difficult to make money from either the bull or bear side.  Hence the recent frustration of traders.

*  A momentum low implies the possibility that further price lows could remain ahead, albeit with breadth divergences.  That is what we saw in the trade following May, 2010; August, 2011; and certainly January, 2008.  Thus far, this has been a low Sharpe ratio bounce; not the kind of resumption of uptrend that we saw following, say, the October, 2014 low.  That uneven bounce increases the likelihood in my estimation of those retests of lows.

*  Which brings us to today's trade.  With the move to negative rates in Japan, we saw a sharp rally in stocks, followed by a sharp dip, followed by more rangy behavior in the ES futures.  Oil has rallied significantly from its lows; VIX has remained above 20.  I'm concerned that we're having trouble making fresh highs in ES in pre-market trade even with the Japan easing and oil strength.  That has me looking to sell strength as long as we can remain below the post BOJ highs.

*  Note that there is a difference between a retest of lows and the start of a fresh bear market leg.  When we had extended bottoming processes in May, 2010; August, 2011; and even that January, 2008 period, there was a two-way trade and rallies interspersing the declines.  My leaning will be to take profits opportunistically on short trades and not necessarily assume a resumption of a high Sharpe downtrend.

Tuesday, January 26th

*  After failing several times to stay above the 1900 level, we saw a selloff in the ES contract that featured numerous very negative NYSE TICK readings.  The inability of buyers to get the upticks much above +500 for any sustained period was a clear indication that we had put in a top and that sellers were in control.  Prices continued to weaken during Asian hours and now have rebounded in premarket, with a bounce in oil.  All of this is consistent with a market that has made a momentum low and is early in a bottoming process.  Note that such a process took months in early 2008, mid-year 2010, and fall 2011, with multiple rallies and pullbacks.  This two-way action can be frustrating for bulls and bears alike and highlights the importance of not assuming that moves will extend.

*  Note the significant weakness in KRE, the ETF for regional banks.  Some of those banks have exposure to energy-related loans, which could be in jeopardy if oil prices continue weak.  That's a dynamic I am watching closely.  I'm also watching the big banks (XLF) to see how global economic weakness, particularly among emerging market countries, might affect loans and market exposures.

*  Note that we continue to be significantly oversold on most breadth measures.  I expect further working off of this oversold level in the next couple of weeks.  My cycle measure has turned up, but is not at levels that have corresponded to intermediate-term highs.  As noted before, we've made a lower low in that cycle measure, which opens my thinking that what we're seeing is more than the kinds of corrections that we experienced in 2014 and 2015.

Monday, January 25th

*  Friday saw a continuation of the rebound from momentum lows, with breadth finally touching short-term overbought levels.  Over 80% of SPX shares closed above their 3 and 5-day moving averages; that's the first time we've seen that since December 24th.  (Data from Index Indicators).  The rally took the great majority of stocks off their lows.  Across all exchanges, we had 139 monthly highs against 208 lows.  Compare that with 44 monthly highs and 3250 lows just two days previous.  (Data from Barchart).

*  One sign of continued strength on Friday was that significant negative readings in the uptick/downtick measure (NYSE TICK) could not stop us from making higher price lows and higher price highs.  I will be watching for that dynamic in early trading today.  A drop below the Friday afternoon and overnight lows would likely break that pattern and signal fresh selling interest.

*  I will also be watching this week to see if the bearish market themes (weak oil; weak emerging market shares; strong dollar versus EM and commodity currencies) reassert themselves.  I'm also watching to see if we can print fresh price highs for this rebound with continued strong breadth.

*  A nice view of the market's cyclical behavior is provided by the number of NYSE shares giving buy vs. sell signals for the Parabolic-SAR measure.  That cumulative total has tracked market cycles well over the past two years.  (Data from Stock Charts).  As you can see from the chart below, we've bounced, but are not yet near levels that have corresponded to intermediate-term cycle tops.

Sunday, January 24, 2016

The Key To Overcoming Frustration In Trading

Dale Carnegie was right; many times it's not our work that runs us down, but our emotional responses to the work.  Fear and greed often get first billing in discussions of traders' emotions, but it's frustration that I encounter most commonly.  Traders become frustrated when they feel they miss moves; they become frustrated with losses; they become frustrated if they make money and feel they should have made more.  This is why changing the dynamics behind frustration is the single greatest psychological improvement traders can make.  

To be sure, frustration can serve as a motivator.  After all, we become frustrated when our desires and goals are thwarted.  Learning from what is holding us back can give us the motivation to overcome those obstacles and ultimately succeed.

We can't channel frustration constructively, however, unless we're first aware of the frustration.  It is the mindful awareness of frustration than enables us to pull back, assess the situation, and move forward in a positive way.  If we're not aware of the frustration, we can't pull back, and we're most likely to act impulsively out of that frustration.  Those decisions are rarely good ones.

"I'm really frustrated right now; this is not when I should be trading," is something I've told myself more times than I can count.  I'll take a short time out; I'll take the rest of the day off--I'll do what it takes to address the frustration and re-enter markets with a fresh mindset.  I can only guess how much money those decisions have saved me.  When I act out of frustration, I'm placing the trade because of me--not because of genuine opportunity offered by markets.  When we plan trades and rely upon best practices, we trade mindfully and proactively.  When we act on frustration, we trade reactively--and often violate those best practices.

To stay proactive, we need to use frustration as a cue to stop and reflect, not as a spur to act.  Frustration can become our friend if it becomes our prod to improve who we are and what we do.

Further Reading:  Turning Around Your Trading

Saturday, January 23, 2016

Going Back To School For Your Trading

Well, it's a snowy Saturday in the next station to heaven, so Mia and I are listening to love songs and going back to school.  There's no better formula for a full life than to live meaningfully and learn constantly.  That way, you're always growing: in your heart and in your head.

Going back to school is an exercise I return to periodically that keeps me fresh as a trader.  It's really a return to the process by which I learned trading.  For well over a year, at the end of the day I printed out charts of the market (price/volume) and charts of every indicator that I believed could have value in anticipating market moves.  I knew that, for any limited period of time, indicators could randomly appear to have value.  Over the course of weeks and months, however, patterns recurred that helped me focus on the measures that added true value.  It was through those initial explorations that I discovered trading patterns in NYSE TICK (upticks/downticks among all NYSE stocks) and breadth divergences.  Those remain staples of how I look at markets to this day.

When I returned to trading after a five year hiatus during which I worked full time at a hedge fund and was not allowed to trade for compliance reasons, one of my first steps was to get back to school.  I observed new patterns, including the relationships among macro markets and how movements in currencies, rates, and commodities were related to moves in stocks.  Carefully reviewing market behavior minute by minute, day by day, gave me a fresh appreciation of volume and volatility and the ways in which large institutional participants help to move the market.  This led to new ways of viewing the uptick/downtick and breadth data, as well as new ways to measure buying and selling pressure to be on the right side of the market movers.

Still later, I felt my trading results were not what they should be.  Specifically, I became disenchanted with my quantitative models and looked at why they occasionally broke down.  I began focusing on the question of whether cycles exist in the market and whether those could aid the identification of relative highs and lows.  Once again, I made a day to day study, minute by minute, and returned to school.  What I found was that measuring cycles in chronological time was not particularly effective.  More properly, I found that cycles are better identified in event time than chronological time.  That led to new ways of measuring overbought and oversold markets, as well as new ways of assessing volatility.    

So now it's back to school.  I'm reviewing recent markets and the most meaningful recurring patterns among  the measures I track.  What I'm finding is that I follow a lot of things that ultimately are not crucial to decision-making.  I could be much more efficient by tracking a more limited set of unique data.  I'm also finding real value in looking at how shorter-term cycles are nested within longer-term ones; i.e., viewing cycles in context.  This was particularly helpful in identifying the market turn this week.

There are three important lessons in all this:

1)  In getting back to school and looking at markets through fresh eyes, we can adapt to changing markets and we can continuously grow as traders. If you merely have a passion for trading, you'll overtrade.  It's a passion to understand and master markets that can keep you going through the ups and downs of your equity curve.

2)  None of the most important information that shows up in my reviews is a traditional technical market measure, such as a chart pattern or canned oscillator.  None.  The value is in new data and new ways of organizing the data.  If you're tracking the information other people are tracking and if you're assembling the information the way others are, you're just not going to achieve distinctive returns;

3)  The best way to improve your trading psychology is to improve your trading.  People hope they'll trade better if they improve their mindset, control their emotions, etc.  All that can be useful, but cannot substitute for genuine insight and information.  When you go back to school, you cement your own learning.  That is what gives us the confidence to take risk and stay with trades when the odds are with us.  

OK, Mia and I are finishing the last song and heading to the basement.  That's where the exercise room is located and where we work on body after working on mind.  That's a different school, but one that is equally important. 

Keep growing.

In all respects.

Further Reading:  Learning From Our Trading

Tuesday, January 19, 2016

Trading Notes, Week of January 18, 2016

Friday, January 22nd

*  Yesterday's post noted the possibility that we had put in a momentum low for the recent market cycle.  Price action on Thursday was supportive of that hypothesis, as we saw very significant selling pressure in the afternoon, with multiple NYSE TICK readings below -1000.  That was similar in selling intensity to the puking we saw at the price lows, but now we were holding higher in price.  The market's ability to make higher price lows and higher highs is what we look for if we've indeed put in a momentum low.  Meanwhile, we've moved higher overnight, again consistent with the momentum low notion.  (Note the recent significant strength in oil prices, as well).  Bottom line is that, short-term, we appear to be transitioning from a "sell the bounce" to a "buy the weakness" mode. 

*  Here's a nice view of breadth among SPX stocks, which tracks the number of stocks making 5, 20, and 100-day new highs vs. lows.  Note how we've stayed oversold far longer than during recent declines; also note how we're still in oversold territory despite the recent bounce.  I expect stronger breadth numbers before we see a test of recent market lows.

*  Yesterday was the first day in 11 sessions in which we registered fewer than 1000 stocks across all exchanges registering fresh monthly price lows.  Still, only 46% of SPX shares are trading above their 3-day moving averages and only 31% above their 5-day averages as of yesterday's close (data from Index Indicators).  Those short term breadth measures should continue to strengthen if we've indeed seen that momentum low.

Thursday, January 21st

*  We saw concentrated selling early in the day followed by a vigorous rally with significant buying strength that erased much of the day's losses.  The breadth numbers were particularly extreme with 44 stocks registering fresh monthly highs against 3250 new lows.  The depth of the oversold condition, combined with the vigor of the buying, opens to the door to the hypothesis that we've put in a momentum low for this downward cycle.  With the reaction to the ECB meeting most recently, we've moved higher in trading.  We should see further upside follow through and divergences in the breadth data on further weakness if, indeed, we've put in a momentum low.

*  That being said, to reiterate a point made for a while now, this cycle has been deeper on the downside than cycles over the past two years and is more consistent with downward moves in 2010 and 2011 than 2014 and 2015.  These deeply oversold declines in 2008, 2010, and 2011 eventually went on to make further price lows well after the momentum point at which we'd maxed out the number of shares making new lows.

*  Here is an overbought/oversold measure that I track based on event bars rather than time-based bars.  What I look for in a bear market is overbought levels at lower price highs; those are often good regions for shorting.  In a bull market, you look for oversold levels at higher price lows.  Those are often good areas for buying.  In a range market, you'll see successive overbought and oversold levels at similar price extremes.

Wednesday, January 20th

*  Stocks came well off their highs during trade Tuesday with accompanying oil weakness and that weakness has continued in overnight trading.  That has taken us to new price lows and pretty well negated whatever divergences we were seeing in the data, as noted yesterday.  The important tell in Tuesday's trading was the inability of rallies to sustain either in time or price, as we made successive lower highs.  If we were coming off a momentum low, we'd expect to see value buyers sustain buying.  When buying is not sustained, there's a good likelihood that it's more short-covering than initiative interest.

*  Meanwhile, whether you look at VIX, volume, or the pure volatility measure that I follow (volatility per unit of trading volume), all are elevated, but none of seen the kinds of capitulation spikes that have characterized past sharp declines.  A break of the 2014 and 2015 lows may help yield such spikes; it's something I'm watching for.

*  Once again, to emphasize the themes from last week's notes, there is every evidence that this decline is different in character from the corrections we've seen during the past two years.  Oversold levels that had led to sustained rallies--characteristic of a range trade--are no longer finding buying interest.  It is difficult to imagine sustaining a move higher until we can find a bottom in oil and related commodities.  

*  It is also difficult to imagine the Fed sustaining a program of rate hikes in the face of deteriorating financial conditions.  The market decline is getting to the point where it will dent consumer confidence.  Note the superior relative performance of utility shares.  Yield becomes attractive as a flight to safety, but yield is also more attractive if rates are likely to stay lower for longer.

Tuesday, January 19th

*  Everyone wants to trade with confidence and conviction, but that means that we have to keep mind and body in peak conditioning, especially during busy markets.

*  We traded to new lows for this move on Friday, but interestingly we saw the first evidence of divergences in the new lows data for SPX stocks.  For example, we had 129 more new 100-day lows than new highs on Friday, surprisingly short of the 167 differential on Wednesday.  Only 8.96% of SPX stocks traded above their 10-day moving averages on Friday, but that was still higher than Wednesday's level of 4.98%.  (Data from Index Indicators).  Among SPX sectors failing to make new lows on Friday were XLU, XLE, and XLV.  The relative strength of the XLE shares is notable, given the recent weakness in oil.  We've bounced well off Friday's lows in holiday and pre-market trade. 

*  Last week's trading notes observed evidence that the current market downturn has been more persistent than recent corrections.  When we've had significant declines in August, 2011 and May, 2010, we saw follow-through weakness even after a momentum low was reached.  I am open to that possibility in the present market.  If, however, we have indeed put in a momentum low, we should see more of a two-way trade going forward than what we've seen thus far in 2016.

*  My intermediate term strength measure, which takes into account 5, 20, and 100-day new highs vs. lows among SPX shares, opens the week in unusually oversold territory.  With VIX closing above 25 on Friday, we should continue to see meaningful volatility.

Monday, January 18, 2016

How To Be Your Own Trading Coach

Here is a coaching exercise that can make a meaningful difference in your trading:

At the end of the day or week (depending on your frequency of trading), identify your best trade and your worst trade.  Then dissect each one:

*  How did you prepare personally during the time leading up to your best trade?  Your worst trade?  What was your state of mind?  Your physical state?  

*  How did you research the idea that went into your best trade?  Your worst trade?  What information did you rely upon?  What information did you disregard?  What was your edge going into the trade?

*  How did you enter and size your best trade?  Your worst trade?  How did you manage the position while it was on?  What information did you process and rely upon during the trade to add to the position, scale out, or stay in the position?

*  What was your state of mind while the trade was on?  What were you doing during the life of the trade?

*  How did you exit your best trade?  Your worst trade?  What information did you process to aid the exit?

Your best trades are your role models.  By reviewing your best trades, you ground yourself in your best practices.  If you are mindful of your best practices--if you know how you make money--you're more likely to be consistent in drawing upon those best practices.

Your worst trades are role models also, but in a reverse way.  By reviewing your worst trades, you become mindful of the mistakes you make and the patterns of your poor trading.  It is much easier to interrupt our negative patterns if we're aware of them in the first place.

How would your profitability look if you could just eliminate one bad, losing trade and replace it with one good losing trade each week?  I suspect it would be a meaningful difference.

The successful role models you need to study are not gurus.  You at your best are the best role model you can have.  You can be your best trading coach.

Further Reading:  Best Practices of Best Traders

Sunday, January 17, 2016

Money Management in Trading: Gaining the Upper Hand by Playing Your Hand Correctly

Yesterday's post on how to renew yourself after a challenging market week is an important one.  It's easy to become so caught up in short-term market action that we fail to pace ourselves through the market year.  Many times we make poor decisions, not because we lack effort or discipline, but simply because we've depleted our resources and no longer have the concentration and energy level to properly identify and pursue opportunity.

A measure of a trader's wisdom and experience is the amount of thought they put into money management.  I've emphasized in the past that you should never lose so much in one trade that you cannot be profitable on the day.  Similarly, you should not lose so much in a day or week that you can't be profitable on the week or month.  You will always lose money, you will always have losing trades, you will always have drawdowns, and you will always have periods in which you're out of sync with markets.  Good money management allows you to stay in the game--emotionally and financially--during those periods of downturn.

There's another facet of good money management, however, and that's maximizing opportunity when it is present.  My general experience is that losing trades usually become losers early in their life.  If I'm not stopped out within minutes of my entry, the odds are good that I have a winning trade.  At some point, buyers can't push the market higher or sellers cannot push us to fresh lows and I recognize that my trade is working out.  That recognition is important--and I rarely see it discussed as a topic in trading psychology.  It's not the issue of being right or wrong, and it's not the issue of being confident or fearful.  Rather, it's the insight that comes from a kind of Bayesian reasoning in which we continuously update the odds of our trade working out.  At some point, we're not just right in the trade, but we recognize that the odds have tilted greatly in favor of this being a profitable trade.

That experience of not just being right but recognizing that we're most likely right can be a powerful cue to add to the trade.  If our Bayesian updating is accurate, that added piece should have a high hit rate, which more than makes up for the fact that the add is closer to the target than the initial entry.  Adding to the trade when the odds of success have risen is a way of ensuring that you'll be smallest when you're wrong and largest when you're right.  A good add is as good as a good fresh trade.

Sound money management places us in control of our finances.  We cannot control markets, but we can control the size of our betting and we can control our bet sizing as we draw cards and our hand unfolds.  A good trader trades with the odds.  The great trader recognizes how the odds shift during the life of the trade and bets accordingly.

Further Reading:  The Importance of Playing the Right Game