Wednesday, February 18, 2009

Trading and Mental Flexibility

One of the least recognized trading strengths is mental flexibility: the ability to keep an open mind to the evidence of the evolving marketplace and revise views and strategies accordingly.

Once a view becomes ours, we are prone to confirmatory biases, seeking information that supports our preconception. If, however, we can formulate multiple "what-if" scenarios, we're no longer attached to any one outcome.

A directional move that cannot hit the R1 or S1 profit targets is not a trending move on a day time frame. Failure to reach the first of the targets is a characteristic of range days.

At some point in time, a directional move will look like an uptrend or downtrend day. Evidence will accumulate that the move is not being sustained. The market will return to its prior range. Instead of trading for price continuation, you'll want to trade for reversals back to a volume-weighted price average.

The transition from directional trade to range trade often begins when buying/selling pressure cannot generate new price highs/lows and incremental volume. Look at the ES trade around 9:55 AM CT. The 9 AM market was directional; it looked like the start of a trend day. By 10 AM, selling pressure (very negative TICK) could not generate fresh price lows; volume tailed off.

Switching in an hour's time from a trend view to a range view, a continuation strategy to a mean reversion strategy: That is the mental flexibility required of the active trader.



nsl said...

I couldn't agree more that mental flexibility is a key attribute for trading. I'm very quickly coming round to the view that these potential intraday changes (whilst they perhaps cannot be anticipated) can be, and must be, prepared for.

E-Mini Player said...

Totally agree Brett! The timing of your post is also excellent. Here's what I posted on my blog today:
Every moment in the market is unique, and I don't know sh*t! Trading with that mindset helps manage expectations (as in, I have none). No expectations means little or no disappointment.

On a side note, how do you like Twitter? I was thinking of signing up on there to track my thoughts throughout the day.

IDkit aka Ana said...


The ES has been a good example for many and in fact, I have reproduced the lessons on continuation days by my mentor at:

The 'what if scenarios' is making use of our right brain, and that is the psychological aspect of trading which complements our left brain analysis.

E-Mini Player said...

Doc, when you have a moment, please check out this article on willpower:

Some of the connections to successful trading are obvious, but it would be great to get your insights on how this applies to trading success.

OKL said...

Good stuff Doc, this is the same as seeing as what you want to see, instead of seeing what is being shown.

Its almost the same as if someone asked you to spot in a room, anything that is red, you will scan hard for red items... in trading, if you're looking for reasons to get long/short, you will find those reasons, but the difficulty is amplified as things may not be really "red".

Besides, when looking for reasons to get long/short, its the same as wearing a pair of sunglasses- everything looks darker!

I know that, cos I got suckered twice; the fakeout rally on tuesday and the fakeout dive yesterday.... all that despite an inkling in the back of my mind that volume isnt quite as expected.... I jumped in either too late or too early.

Mark Wolfinger said...

I linked to this post with further comment.

Totally agree about flexibility being essential.

Trader M said...

I agree with this. However I think traders should "specialize" more in which trades they choose to put on, which might mean sitting out a range day if you are a trend specialist, or sitting out a gap fill opportunity if your most profitable trading is centered around finding the day's range and trading it.

Brett Steenbarger, Ph.D. said...

Hi E-Mini Player,

I find the Stock Twits site an interesting place to share thoughts within a community of traders--


Brett Steenbarger, Ph.D. said...

Thanks, all, for the excellent links and comments. Coming to the market with a flexible mindset of different what-if possibilities is different than coming in with a fixed view or no view at all. It's a real challenge to maintain--