Sunday, December 27, 2015

Trading With Creativity: Finding Chocolate Markets

In the Trading Psychology 2.0 book, four themes capture what I see successful traders doing:

*  Adapting quickly to changing markets;
*  Building on their strengths as traders;
*  Cultivating creativity and becoming better at generating trading ideas;
*  Developing best practices into robust, best processes.

These ABCD themes are not so different from the factors that describe entrepreneurial success.  Indeed, I would argue that trading is less like an application of a fixed set of skills and more like running a startup business.  In fast-changing environments, the entrepreneurial firm constantly remakes itself.  Think of how Apple has changed from the company that made the original Mac personal computers--and how it continues to evolve with the Watch products and even ideas for cars.

One trader thinks about the stock market for 2015, pulls up a chart of the ES futures or SPY ETF, and declares the environment as hopelessly "choppy", with no good trends to trade.  Another trader breaks the market into sectors per the FinViz graphic below and sees a rotational environment during 2015, with plenty of trends when one sector is traded against another.  

"Choppy" is a word we use to describe a market without opportunity for sustained directional movement.  "Rotational environment" is a term we use when we break the market down into a collection of relationships, some of which can be very promising to trade.  We build creativity by looking at old things in new ways and by looking at new things.  That "choppy" market that looks impossible to trade might just make sense if we view it through the lenses of market cycles or if we view it through the lens of its relationship to other assets.

We need the wild mind to look at the world through fresh eyes and see what others don't see.  When daughter Devon was very young, we took her to a suburban playground and she saw a black child for the first time.  She became excited and exclaimed, "Look at that chocolate girl!"  She made a special effort to play with the chocolate girl and enjoyed herself.  Her world looked different through the lens of candy, and that opened the door to new actions.

There are no untradeable markets; only traders with limited lenses and tunnel vision.  There was no one for Devon to play with at the playground if she only looked for people like herself.  There are chocolate markets out there if we're willing to take a taste.

Further Reading:  Finding Your Mirrors: The Devon Principle