Friday, April 17, 2009

A Most Important Lesson for Traders

Who is in your market will determine how--and how much--your market moves. This is one reason the Twitter posts note relative volume during the day: whether we're likely to get much movement or very little depends crucially on the level of participation of large traders in that market.

I decided to illustrate this with a different market: USO, the oil ETF. Notice (top chart) how the average daily high-low range has been cut about in half during 2009. That's half the movement--and for active traders, half the opportunity--over the course of just a few months.

Now take a look at what's happened to volume (bottom chart): that, too, has been cut by more than half.

If the institutions are not actively participating in your market, your market--on average--won't be active. Adapting to this reality by either trading other symbols/markets or by adjusting one's expectations for the slower market is an essential ingredient of trading success.


BAB said...


I have been a regular reader of your posts. Much appreciate your insights into trading.

My question is related to "fear of execution"
Generally I have a good plan and know when to exit if the trade is going against me. But while trading, when the trade is actually moving against me, I fail to execute on the trade, i.e get out.
It's almost like "too scared to act, deer in the headlights syndrome" and end up taking a huge loss, while in hindsight I know my plan was correct if only I had executed.

I do not want to set predefined stops since my indicators tell me when to get out and not the price so there is no 1:1 correlation.

Any advice on how to rectify this situation?

Thanks and much appreciated


Damien said...

If you don't have a predefined set stop, then you are entering trades without knowing your risk. If you don't know your risk before entering a trade, then you can't know your risk-reward ratio. If you don't know that, then you are gambling and will end up with side effects like the one you have. Stop losses are the key to removing anxiety, and anxiety is a big part of what's causing your problem.

Trading is exactly like poker: you know what you wager on each hand otherwise how are you valuing what you are willing to pay for the potential reward?? Imagine if a poker player just started throwing more money into the pot waiting for an indicator to tell them to fold. Sucks because you can never get back your money once in the pot (Cf. getting money back trading when a position goes against you and NEVER comes back).

IMHO, find a new system with predefined risks so you don't fall prey to your weaknesses.

joachin said...

I think The-deep-Pockets are the only ones buying/selling because in the last days trade size has been rising [Volume divided Trades].

Less contracts but much lesser orders, for the CLM9, and open interest rising.

Think it's time to test "never short a quite market" statistically and execute the signal, of there is any.

BAB said...


Thanks for the reply. Makes a lot of sense.

Since I deal primarily in index options (mostly SPY, any suggestions on setting stops on these. Options make it tricky..


Brett Steenbarger, Ph.D. said...

Hi Babs,

I've found that exposure techniques, such as those described in the Trading Coach book, have been especially helpful in dealing with performance anxiety. They literally train people to stay calm and focused in stressful situations.


Brett Steenbarger, Ph.D. said...

Good point, Damien. Proper stops and position sizing can go a long way toward reducing trading related stresses.


Dharmendra said...

Hello Sir,

I just got your blog and very much excited by reading all the articles you've posted. I am feeling psychology as a trader. Though I am not very aggressive and hard hitter but I want to learn systematic trading.